Ark. Racing Commission v. Hot Springs Kennel Club, Inc.

Citations: 232 Ark. 504; 339 S.W.2d 126; 1960 Ark. LEXIS 442Docket: 5-2177

Court: Supreme Court of Arkansas; October 3, 1960; Arkansas; State Supreme Court

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The central issue is whether the Racing Commission acted legally in canceling the temporary franchise of the Hot Springs Kennel Club, Inc. A timeline of events highlights key developments: Arkansas authorized dog racing on March 8, 1957, leading to the Kennel Club's incorporation on December 6, 1957, and a temporary franchise application filed on February 6, 1958, with the requirement for voter approval in Garland County. Voter approval for dog racing was confirmed on May 20, 1959. By July 1, 1959, internal disputes within the Kennel Club were evident, prompting the Racing Commission to warn the club to resolve these issues. On August 12, 1959, the Commission revoked the franchise due to non-compliance. Following a hearing on September 4, 1959, the revocation was upheld. The Kennel Club then petitioned the Circuit Court, which reversed the Commission's decision, citing lack of notice and due process violations. The Racing Commission's appeal contends that, despite potential notice issues, the Kennel Club had been warned 40 days prior and had the opportunity for a full hearing, which included extensive testimony and findings. Thus, the Kennel Club received adequate notice and due process.

The Circuit Court's ruling that property was taken from the Kennel Club without due process is refuted by the recognition that a state-granted franchise for dog racing is a privilege, not a property right, which the state can revoke. The Kennel Club invested approximately $70,000 before its temporary franchise was revoked, but Arkansas law (Ark. Stats. 84-2826) allows for cancellation of the franchise if legal requirements are not met, potentially even after a million dollars is spent. The Kennel Club had access to due process through hearings with the Racing Commission, the Circuit Court, and this Court. The justification for the Commission's cancellation of the franchise is still under examination, despite the Circuit Court's reasons for reversal. 

Key arguments from the appellee include: 
1. The franchise could only be revoked for specific statutory causes.
2. The hearing testimony did not justify revocation.

However, it is argued that the franchise's revocation is not limited to the two causes cited in the statute. Ark. Stats. 84-2826 stipulates forfeiture conditions related to site acquisition and construction timelines, indicating the Commission has no discretion in certain revocation scenarios. Limiting the Commission’s power would undermine its regulatory authority and public interest protection obligations as outlined in Ark. Stats. 84-2819. The Commission has the duty to investigate the integrity of individuals involved in dog racing and can revoke a franchise if undesirable personnel are involved, maintaining the distinction between temporary and permanent franchises.

The Commission's authority to exercise discretion in revoking a temporary franchise is affirmed, yet the review process by the Circuit Court is critical. The Circuit Court cannot conduct a de novo trial on a Writ of Certiorari; its role is limited to reviewing for legal errors, as established in prior cases. The court cannot substitute its judgment for that of the Commission unless evidence shows the Commission's decision was arbitrary. The burden of proving arbitrariness lies with the appellees. 

In examining the Commission's justification for revoking the franchise, it is noted that the Kennel Club was incorporated when the application for the franchise was filed on February 6, 1958. Key directors included Charles S. Harriman, Alex T. Jamieson, and Milan S. Creighton, who were the main promoters. Notably, six other directors later resigned or were removed from the board. The initial application indicated that two million shares were authorized and sufficient stock had been sold to support the corporation's goals. However, it was later revealed that at a stockholders meeting in December 1951, the board authorized the issuance of an additional 500,000 shares, half of which had no voting rights, a detail not disclosed in the original application. This context is crucial as it leads to the controversies that prompted the Commission's actions following a court decision in May 1959 that authorized dog racing.

Four promoters, led by Creighton, requested the Board to approve an additional 59,000 shares for promotional purposes, without disclosing the specific reasons for this request. Creighton claimed the shares were necessary for promotional expenses. The meeting also proposed hiring Mr. Harriman at an annual salary of $18,000 with an unlimited expense account, which led to significant controversy and the removal of six directors. This turmoil prompted litigation and a warning from the Commission on July 1, 1959, about the potential revocation of the temporary franchise if the issues were not resolved.

Witness J. O. Bennett expressed concern over the stock allocation, asking Creighton if the arrangement would benefit the people of Arkansas. Creighton assured him it would, indicating that he and Harriman would take about 20% of the stock. However, Bennett later found little stock had been allocated for promotion and objected to Harriman's salary, stating he would resign if the proposal proceeded. He retained ownership of 5,000 shares despite not being listed in the books.

Witness Bruce Streett, who also held 5,000 shares, voiced his disagreement with Creighton and Harriman's policies. He testified that Creighton had assured him only a small amount of promotional stock would be necessary. Streett was alarmed by the request for 500,000 shares, believing it would disproportionately benefit the promoters financially, as it could yield them a million dollars. He noted discrepancies in the minutes of the stockholders' meeting and mentioned that the stock was intended to compensate the promoters for both past and future services. Streett is no longer a Board member.

Jim Evans and Leon Kuhn, both former Board members, each held 5,000 shares of stock valued at $2,500 and objected to the issuance of 59,000 shares for promotional purposes. Kuhn expressed frustration during a directors meeting about the need for additional stock and the subsequent financial mismanagement, indicating a serious decline in the organization's integrity. Richard W. Hobbs, the organization's attorney, testified that he followed instructions from Mr. Creighton when filing for a temporary franchise, which did not mention promotional stock. He noted that the application claimed sufficient stock had been purchased to fulfill corporate purposes, with unsold stock to be offered to Arkansas citizens. During the directors meeting, Hobbs expressed his disapproval of the promotional stock and distanced himself from the discussions. Creighton, under questioning, failed to clarify the use of promotional stock and the funds contributed by stockholders for election and litigation expenses, revealing that over $50,000 had been paid for stock while only about $11,000 remained in the treasury. Creighton’s group now controlled over 90% of the stock, raising concerns among original stockholders, leading some to leave the Board to protect their investments. The court found that the Commission's actions were justified given the evidence presented, resulting in the reversal of the Circuit Court's judgment, with dissenting opinions from Justices Rose Smith and Robinson.