Bankruptcy judge approves reorganization plan of horse track owner Magna Entertainment Corp.

Judge approves Magna reorganization plan

WILMINGTON, Del. — Horse track owner Magna Entertainment Corp. won approval of its Chapter 11 reorganization plan Monday after a Delaware bankruptcy judge rejected a challenge from unhappy shareholders.

Judge Mary Walrath agreed with Magna and its committee of unsecured creditors that the reorganization plan and a legal settlement upon which it is based were fair and reasonable and in the best interests of the bankruptcy estate.

“I clearly find that the settlement is well within the range of reasonableness,” said Walrath, who nonetheless agreed with shareholders that third-party releases contained in the settlement were too broad.

The reorganization plan is based on the dismissal of a lawsuit in which the creditors committee accused Magna’s parent company, Ontario-based MI Developments, of propping up Magna with equity infusions disguised as secured loans to ensure that MID chairman Frank Stronach retained control of Magna assets. The lawsuit claimed that Magna fraudulently transferred more than $125 million in loan payments to a subsidiary of MID in the two years leading up to Magna’s Chapter 11 bankruptcy filing last year. It sought to recharacterize MID’s loan claims of $412 million as equity interests, and to subordinate them to other claims.

In defending the settlement, Kenneth Eckstein, an attorney for the creditors committee, noted that Walrath had indicated that its lawsuit was “a close call,” and that the committee would have had difficulty proving its allegations.

“We knew that there was significant legal risk as to whether or not we would achieve a result,” Eckstein said, adding that the settlement is the best option for unsecured creditors.

“This was not a token settlement or an incidental settlement,” he said.

But the shareholders complained that the settlement allows MID to acquire valuable assets, including the Pimlico track in Baltimore and its Preakness Triple Crown race, for a fraction of their value while avoiding potential legal liabilities.

In exchange for the lawsuit being dropped, MID has agreed to pay $89 million to holders of allowed general unsecured claims against MEC and its debtor affiliates, except the Maryland Jockey Club, whose assets include Laurel Park and Pimlico.

MID also will pay more than $100 million to satisfy claims held by other creditors, including those with claims against the Maryland Jockey Club, which MID will acquire. The jockey club creditors include PNC Bank, which holds a lien on Magna’s Maryland horse racing assets and has a secured claim of about $13 million. MID also has agreed to pay about $6 million to fully satisfy holders of unsecured claims against the jockey club, and $4 million to the former owners of the Maryland tracks to settle a dispute over future slot machine gambling rights at Laurel Park.

In addition to the jockey club, MID will acquire Gulfstream Park in Florida, and the Santa Anita and Golden Gate tracks in California, all at prices that shareholders claimed were severely undervalued and failed to account for future revenue from slot machines and development projects.

“MID is getting more than what its claim is worth, a lot more than what its claim is worth,” said Donna Harris, an attorney for shareholders who hold about 10 percent of the equity in MEC and stand to get nothing under Magna’s reorganization plan.

Harris also objected to the broad legal releases for MID officers and directors in the settlement, arguing that the shareholders should have the opportunity to present their own independent claims for breach of fiduciary duty.

“They are not getting any value out of this settlement and don’t believe releases for MID should be applied to them,” she said.

Walrath agreed with the shareholders that the releases contained in the settlement were too broad and should not extend beyond officers and directors of MID to “related parties” without their consent.

But the judge rejected asset valuations provided by the shareholders, saying they were unfounded and speculative.

Walrath determined that MID was forgiving or satisfying more than $700 million in claims under the reorganization plan, but that the assets it was gaining, even at valuations higher than those Magna asserted, are worth far less.

“It’s clear from all of these that they do not even approach the $700 million,” the judge said. “… Contrary to what the shareholders are suggesting, I don’t think MID is getting any trophies here.”

Lee Attanasio, an attorney for MID, said the company agreed to the settlement only reluctantly, but that the litigation created substantial business risks, and that the financing MID has provided to see Magna through bankruptcy runs out April 30.

“There simply is no more funding available,” she said. “These cases needed to be wrapped up.”