## Facts

- Pigeons’ Roost, Inc. was a Kentucky nonprofit corporation that received a charitable-gaming license in 1994.
- For the license period April 1, 1996, through May 1, 1997, Pigeons’ Roost conducted bingo and sold pull-tab games.
- Kentucky Revised Statutes (KRS) 238.550(4) required charitable-gaming licensees to retain at least 40% of adjusted gross receipts over a rolling two-quarter period (the “40% rule”).
- After a standard regulatory review of Pigeons’ Roost’s charitable-gaming activity for the third and fourth quarters of 1996, the Division of Charitable Gaming in the Justice Cabinet determined that Pigeons’ Roost failed to meet the 40% rule.
- Based on Pigeons’ Roost’s records, the Division found that the organization retained no receipts from its charitable-gaming operations during the two quarters reviewed.
- The Division filed an administrative complaint seeking revocation of the charitable-gaming license.
- A hearing officer issued a recommended order revoking the license, and the Secretary of the Justice Cabinet entered a final order revoking it.
- Pigeons’ Roost appealed to the Franklin Circuit Court, which upheld the constitutionality of KRS 238.550(4) and affirmed the administrative revocation.
- Pigeons’ Roost then appealed to the Kentucky Court of Appeals, arguing that the 40% rule was arbitrary and unreasonable and violated substantive due process under the Fourteenth Amendment and Section 2 of the Kentucky Constitution (and also relied on Section 226).

## Issues

1. Whether KRS 238.550(4)’s 40% retention requirement, and revocation for failing to satisfy it, violates substantive due process under the Fourteenth Amendment and Kentucky Constitution Sections 2 and 226 because the requirement is arbitrary and unreasonable.

## Decision

- The Kentucky Court of Appeals affirmed the Franklin Circuit Court.
- The court held that KRS 238.550(4) did not violate substantive due process and was a constitutionally valid condition on the privilege of conducting charitable gaming.
- The court concluded that the 40% rule bears a rational connection to the legislature’s aim of ensuring charitable gaming yields meaningful proceeds for charitable purposes rather than being consumed by expenses.
- Because Pigeons’ Roost did not dispute that it retained no receipts during the relevant two-quarter period, the court upheld the revocation as an authorized and constitutional consequence of noncompliance.

## Legal Principles

- Economic and social welfare legislation that does not affect a fundamental right or use a suspect classification is reviewed under a deferential rational-basis standard for substantive due process.
- A statute satisfies substantive due process if it is reasonably related to a legitimate governmental purpose and is not arbitrary or unreasonable.
- The General Assembly may impose quantitative thresholds and other conditions on state-issued licenses, including in regulated gaming activity, to ensure the activity serves the public purpose for which it is authorized.
- Kentucky Constitution Section 2’s bar on arbitrary government action is not violated where the statute has a reasonable basis and is applied according to its terms.
- Kentucky Constitution Section 226 does not bar the Commonwealth from regulating charitable gaming; it permits legislative control over gaming activity within the bounds of the Constitution.
- Revocation of a charitable-gaming license may be a permissible sanction when the licensee fails to meet statutory conditions tied to the use and retention of gaming proceeds.

## Conclusion

The Kentucky Court of Appeals upheld the constitutionality of KRS 238.550(4)’s requirement that charitable-gaming licensees retain at least 40% of adjusted gross receipts over a rolling two-quarter period and affirmed the Justice Cabinet’s revocation of Pigeons’ Roost’s license after the organization retained no receipts during the third and fourth quarters of 1996, rejecting substantive due process challenges under the federal and Kentucky constitutions.


Pigeons' Roost, Inc. v. Commonwealth, 10 S.W.3d 133 (1999)