NYRA To Court: Throw the Bums Out

NYRA's motion in the U.S. Bankruptcy Court in the Southern District of New York to throw out NYCOTB's bankruptcy petition is a two front assault - a highly technical and legal argument that OTB is not eligible to file for Chapter 9 protection; and a more subjective and skeptical view of its motivation to do so. And it would seem as if NYRA got its moneys worth (though the Comptroller will no doubt want to know where it came from); the citations of precedent-filled 23 page filing by the law firm Weil, Gotshal & Manges systematically and meticulously seeks to shred OTB's contentions to pieces on both counts.

I won't go too far into the Chapter 9 argument, which is far beyond my pay scale. Suffice to say that it lays out the criteria required to achieve such protection and, other than accepting the fact that NYCOTB qualifies as a "municipality," proceeds to explain why it fails to satisfy each of the other required precepts. A couple of key points: NYRA contends that legislative action is necessary for OTB to file for Chapter 9, and that Governor Paterson's Executive Order which specifically authorized it to do so is invalid.

Critically, however, there was and is no statute that empowered Governor Paterson to authorize — pursuant to Executive Order or otherwise — NYC OTB to file for bankruptcy protection under chapter 9. Therefore, the Executive Order could not provide the express written authority required for NYC OTB’s chapter 9 filing.

NYRA also claims that OTB did not, as required, negotiate with its creditors prior to the bankruptcy filing, disputing its claim that such negotiations were "impracticable" (impossible to do or carry out). NYRA argued that OTB's creditors were neither too difficult to identify (in fact, the entities that NYC OTB considers its principle creditors are statutory distributees, like NYRA..), and that such negotiations would have posed no risk of significant loss of NYC OTB's assets.

More interesting to me is NYRA's second line of attack; the notion that the filing was not made in good faith, and was rather "merely a tactic" to, among other things, delay further payments to creditors (payments which, as it notes, are statutorily mandated, and, as it does not note, are desperately needed by an entity fast running out of cash); and that OTB has no "reasonable prospects" for a reorganization.

First, NYC OTB’s business plan hinges on the State legislature’s “swift and decisive” action to modify the legislative distribution scheme..

That has to be by far the most self-explanatory statement in the entire filing; and perhaps a veiled swipe at Albany's failure to name an operator at the Big A. And here, in this section, lies the crux of the whole matter, and what was likely the main impetus behind this whole action - the fact that OTB is seeking to have its already low-by-comparison payments to the industry reduced even further.

Second, the most critical of the legislative changes NYC OTB seeks is modification of the legislative distribution scheme to allow NYC OTB to pay its operating expenses before it calculates its mandatory distribution to the State horse racing industry, as well as State and local governments (i.e., payment on the "net" rather than the "gross". However, it is likely that, if distributions are made on percentages of revenue after NYC OTB satisfies its hefty overhead costs, there will be insufficient funds to distribute to the State horse racing industry.

Ironically, this could put the State horse racing industry out of business, which would, in turn, put NYC OTB out of business. This result casts doubt on NYC OTB’s ability to “effect a speedy, efficient reorganization on a feasible basis.”

(Sarcasm here was not added by me.)

Finally, NYRA contends that OTB did not consider its alternatives to a bankruptcy filing, and saves one of its most effective points in my view for last.

For example, NYC OTB intends to incur $250 million of debt to finance its reorganization. However, it is unclear why, prior to coming into bankruptcy court, NYC OTB did not use its authority to issue bonds to raise revenue to pay its obligations, fund operations, and grow its business. NYC OTB's failure to make such an effort to raise revenue before filing points to its lack of good faith in this proceeding.

What would OTB chairman Sandy Frucher say about that? Perhaps he'll return Matt Hegarty's call and explain. And while he's at it, he can tell us what happened to his statements of this past September, when he spoke in far more profound terms then the simplistic survival plan of simply paying less to the industry which is OTB's lifeblood, actually questioning the dysfunctional structure of OTB in the state.

"There is no reason, candidly, to have seven totes, more than seven totes. Every track has its own tote. Every OTB has its own...it’s done seven times and it has to be done identical."

"It really comes down to a bit of redundancy. I mean, how many presidents of OTBs do you want to pay for?"