In re N.Y. Racing Ass'n Inc., Case No. 06-12618-JLG

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
PartiesIn re: The New York Racing Association Inc., Debtor.
Docket NumberCase No. 06-12618-JLG
Decision Date01 March 2019

In re: The New York Racing Association Inc., Debtor.

Case No. 06-12618-JLG


March 1, 2019


Chapter 11

Memorandum Decision and Order Resolving Dispute Regarding New NYRA's Termination of Retainer Agreement


767 Fifth Avenue
New York, New York 10153
By: Robert S. Berezin, Esq.

Counsel for The New York Racing Association, Inc.

521 Fifth Avenue
33rd Floor
New York, New York 10175
By: Neil V. Getnick, Esq.


1407 Broadway, 39th Floor
New York, New York 10018
By: Andrew B. Eckstein, Esq.

Counsel for Getnick & Getnick LLP

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On November 2, 2006 (the "Petition Date"), The New York Racing Association, Inc. ("NYRA" or the "Debtor") commenced a voluntary case in this Court under chapter 11, title 11 of the United States Code (the "Bankruptcy Code"). At that time, it was operating certain Racetracks in New York State pursuant to a thoroughbred racing Franchise that was scheduled to expire on December 31, 2007. As of the Petition Date, NYRA was competing for the award of the Franchise going forward. In support of those efforts, NYRA retained Getnick & Getnick LLP ("G&G") as its "business integrity counsel" under sections 327(e) and 328 of the Bankruptcy Code, and pursuant to the terms and conditions of the parties' Retainer Agreement, and the Court's Retention Order. Briefly, the Retainer Agreement vests G&G with "maximum independence" in "performing its function as business integrity counsel." It calls for NYRA to retain G&G for five years (beginning in July of 2007) at a monthly rate of $125,000, but states, in substance, that it will terminate on the date, if any, during that period on which NYRA no longer holds the Franchise. The Retention Order provides that post plan confirmation, "the Retainer Agreement may only be terminated in accordance with the terms and provisions of the Retainer Agreement."

NYRA won the Franchise and on or about September 12, 2008, the effective date of NYRA's Modified Plan, the State awarded the Franchise to "New NYRA," as the reorganized debtor. It did so through legislation that is reflected in amendments to New York's Racing, Pari-

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Mutuel Wagering and Betting Law (the "Racing Law"). Under the Modified Plan, NYRA assumed and assigned the Retainer Agreement to New NYRA. It did so to ensure that New NYRA complied with section 206(5) of the Racing Law that calls for the holder of the Franchise to retain "an independent business integrity counsel." See N.Y. Racing Law § 206(5). In March of 2009, the Court closed NYRA's chapter 11 case.

In March of 2011 - within the five-year term of the Retainer Agreement - New NYRA purported to terminate that agreement and G&G's services thereunder, even as it was in possession and control of the Franchise.2 At that time, G&G contested New NYRA's alleged termination of the agreement, and asserted that in purporting to terminate it, New NYRA violated the agreement, the Retention Order, and section 206(5) of the Racing Law. In addition, G&G contended that New NYRA was obligated to pay it both the fees and expenses then due and owing under the agreement, and the monthly $125,000 fee for each of the roughly 16 months then remaining under the five-year term of the agreement.

Approximately one year after it purported to terminate the agreement, New NYRA moved the Court for an order reopening the case for the limited purpose of (i) "clarifying," or, if necessary, "amending" the Retention Order, and (ii) addressing claims associated with the order (the "Motion").3 Briefly, and in substance, as support for the Motion, New NYRA contends that under the State's so-called "discharge rule" applicable to attorney-client relationships, it had an implied unqualified right to terminate the agreement at any time (without financial penalty), and

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that the Retention Order should be clarified or amended to acknowledge that right. G&G consented to reopening the case but denies that New NYRA is entitled to any relief from the Retention Order, or otherwise. In substance, G&G says that under the Racing Law, and as reflected in the terms of the Retainer Agreement, it had a "special" attorney-client relationship with New NYRA, as the holder of the Franchise, that is not subject to the discharge rule. It says that the plain language of the Retainer Agreement and Retention Order clearly provides that during the five-year term of the agreement, New NYRA could terminate the agreement only if it lost the Franchise. G&G says that since that did not happen, New NYRA is not entitled to any relief herein, because it violated the terms of the Retention Order and Retainer Agreement in purporting to terminate the agreement and G&G's services thereunder.

After the Court reopened the case, the parties attempted unsuccessfully to resolve their dispute out of Court. Thereafter, they returned to this Court and conducted discovery regarding the nature of their attorney-client relationship. In addition, they supplemented their pleadings to flesh out their respective positions relating to, among other things, New NYRA's right under the Retention Order to terminate the Retainer Agreement. The issue that the parties have put before the Court is whether in March of 2011, New NYRA had an unqualified right under the Retention Order to terminate the Retainer Agreement and G&G's performance thereunder. The order is clear that the resolution of that issue turns on whether the Retainer Agreement vested New NYRA with an unqualified right to terminate it. As fully explained below, and without limitation, the Court finds that by application of the discharge rule, New NYRA had an implied, unqualified right under the Retainer Agreement, and therefore pursuant to the Retention Order, to terminate the agreement, and G&G's performance thereunder.

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The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 1334(a) and 157(a), and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A).


On the Petition Date, NYRA was operating thoroughbred racing and pari-mutuel wagering at the Aqueduct Racetrack, Belmont Park, and Saratoga Race Course (collectively, the "Racetracks") under franchises (collectively, the "Franchise") controlled by New York State (the "State"). See Motion ¶ 4. The State legislature (the "Legislature") granted the Franchise to NYRA in 1955, and, thereafter, renewed it from time to time. As of the Petition Date, the Franchise was scheduled to terminate in accordance with State law on December 31, 2007.

Whether NYRA would control the Franchise after 2007 was one of two open issues central to the resolution of its chapter 11 case; the other was whether the State or NYRA owned the Racetracks. Id. ¶ 3. To address the former, as of the Petition Date, NYRA was competing for the award of the Franchise. As to the latter, promptly after commencing this case, NYRA sued the Governor4 and others, essentially for a determination that NYRA, not the State, owned the Racetracks (such action, the "Adversary Proceeding"). NYRA had to conclude both issues before it could propose a reorganization plan, and the successful resolution of those issues was dependent upon political action being taken among the Governor, the Speaker of the New York Assembly (the "Assembly") and the Majority Leader of the New York State Senate (the "Senate"). Id.

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NYRA Is Among Several Entities Competing for The Franchise

The Governor's office was overseeing the process for selecting the future operator of the Racetracks under the Franchise, and that process was well underway as of the Petition Date. On June 13, 2006, the State's Ad Hoc Committee on the Future of Racing (the "Ad Hoc Committee") released a request for proposals (an "RFP") to solicit bids from entities interested in operating the Racetracks under the Franchise. See Retention Application ¶ 14.5 Under the Ad Hoc Committee's procedures, one of several factors that it considered in assessing the fitness of an applicant for the Franchise was the applicant's "integrity." NYRA was among the entities that responded to the RFP. Id. On February 21, 2007, the Ad Hoc Committee recommended that the Franchise be awarded to Excelsior Racing Associates, LLC ("Excelsior"). However, that recommendation was not binding on either the Governor or the Legislature and, ultimately, the Governor did not adopt it. Id.

Instead, in 2007, the Governor announced a new RFP process and convened a panel to publicly solicit and review proposals from prospective Franchise operators. In doing so, he made the prospective operators' integrity a gating issue. That is, he pledged to make integrity a prerequisite for an applicant to be considered for the Franchise, not merely one of the factors that the State considered in awarding the Franchise. Id. ¶ 15. The new RFP process called for the Office of the Inspector General (the "IG Office") to assist the panel in its selection process by reviewing the integrity of each applicant (the "Integrity Review"). Id. ¶ 16. On or about March 13, 2007, Richard Rifkin, the Governor's Special Counsel, sent a letter to each of NYRA, Excelsior, and others outlining the procedures the State would employ under the new RFP in

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awarding the Franchise. Id. ¶ 15. NYRA responded to the new RFP and timely submitted a proposal (the "Franchise Proposal") to the panel. Like the other applicants, NYRA was subject to an Integrity Review. On June 1, 2007, the IG Office released its Report to the Governor on the Integrity Of Those Seeking To Operate The Racetracks At Aqueduct, Belmont Park and Saratoga (the "IG Report"). Id. ¶ 17. That...

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