In Re New York City Off-track Betting Corporation

Decision Date05 August 2010
Docket NumberNo. 09-17121 (MG).,09-17121 (MG).
PartiesIn re NEW YORK CITY OFF-TRACK BETTING CORPORATION, Debtor.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

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Richard Levin, Esq., Cravath, Swaine & Moore LLP, New York, NY, for Debtor New York City Off-Track Betting Corporation.

Michael S. Fox, Esq., Herbert C. Ross, Esq., David Y. Wolnerman, Esq., Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, NY, Marvin Newberg, Esq., Law Offices of Marvin Newberg, Monticello, NY, for Empire Resorts, Inc.

Deborah Piazza, Esq., Hodgson Russ LLP, New York, NY, Steven W. Wells, Esq., Michael E. Reyen, Esq., Hodgson Russ LLP, Buffalo, NY, for Finger Lakes Racing Association, Inc.

MEMORANDUM OPINION AND ORDER DENYING IN PART AND ABSTAINING IN PART TO MOTIONS TO COMPEL THE DEBTOR TO COMPLY WITH THE REQUIREMENTS OF THE NEW YORK RACING, PARI-MUTUEL WAGERING AND BREEDING LAW AND MAKE CERTAIN STATUTORY DISTRIBUTIONS

MARTIN GLENN, Bankruptcy Judge.

Finger Lakes Racing Association (“Finger Lakes”) and Empire Resorts, Inc. (“Empire” collectively the “Tracks”) move the Court to compel New York City Off-Track Betting Corporation (“OTB”) to immediately pay certain post-petition statutory distributions currently owed and which will allegedly come due under the New York Racing, Pari-Mutuel Wagering and Breeding Law (the “Racing Law”). The Tracks argue that these payments must be made because (i) state law mandates the payments and OTB is required to conduct its ongoing business as a chapter 9 debtor in compliance with state law; and (ii) the payments are “actual, necessary costs and expenses of preserving the estate” entitled to administrative expense treatment under Bankruptcy Code § 503(b). OTB, for its part, admits it owes the Tracks amounts under the Racing Law, but contends that the Racing Law does not require that the payments be made immediately or on any particular schedule, and the amounts due cannot be treated as bankruptcy administrative claims.

On July 13, 2010, the Court held an evidentiary hearing and heard argument on these motions. Following the hearing the Court requested briefing on whether the bankruptcy court should resolve the state law issue of when the Racing Law requires the payment of statutory distributions, or whether the bankruptcy court should lift the automatic stay and require the parties to seek a determination of this state law issue from the New York State Racing and Wagering Board (Racing and Wagering Board). The parties filed the requested additional briefs on July 21, 2010. (ECF #s 128 & 129.)

For the reasons discussed below the Court determines that the post-petition statutory distributions OTB owes the Tracks are not administrative expenses under section 503(b) of the Bankruptcy Code. The Court further concludes that the bankruptcy court is not the appropriate forum to resolve the state law issue of when these statutory payments must be made. This issue involves important legal and policy questions involving many stakeholders in the horse racing business in New York State, and not simply the concerns of OTB and the Tracks that are parties to these Motions. The Court therefore abstains from deciding the state law issue, lifts the automatic stay and directs the parties to commence an appropriate proceeding within seven (7) days from the date of this Order to obtain a determination from the Racing and Wagering Board.

I. BACKGROUND1

OTB is a public benefit corporation, established and governed by the Racing Law, that operates an off-track pari-mutuel betting system within New York City. (Joint Pre-Trial Stipulation at ¶¶ 4, 7.) OTB was created to earn money from horse betting activities and halt illegal wagering and bookmaking on horse races. ( Id. at ¶ 7.) OTB is operated by a board of directors consisting of five persons appointed by the Governor of New York. ( Id. at ¶ 8.) Lawrence S. Schwartz is currently Chairman on OTB, having succeeded Meyer Frucher, who was Chairman at the time this case was filed. Shortly after his appointment, Schwartz hired Greg Rayburn, a former employee of FTI Consulting, as the new CEO of OTB. ( Id. at ¶ 86.)

OTB operates under the Racing Law and is heavily regulated by the Racing and Wagering Board, which governs all off-track and on-track pari-mutuel betting in New York, as well as all entities engaged in those activities. ( Id. at ¶ 9.) Pari-Mutuel betting is a system where particular types of bets on a single race are pooled together. ( Id. at ¶ 12.) The pool of total bets OTB receives on a race is called the “Handle.” Approximately 80% of the Handle is set aside for the benefit of winning bettors. The Racing Law requires OTB to distribute certain percentages of the Handle to the state, local governments, horse breeding funds, and certain race tracks including those operated by Empire and Finger Lakes. ( See id. at ¶ 13.)

As discussed in this Court's March 22, 2010 opinion, OTB has faced economic troubles for years. In re New York City Off-Track Betting Corp., 427 B.R. 256, 262 (Bankr.S.D.N.Y.2010). Despite cost-cutting efforts and an eventual state takeover, OTB could not avoid filing for bankruptcy on December 3, 2009. See id. at 262-63. OTB's financial troubles have been caused, at least in part, by the Racing Law's requirement that OTB make distributions of its Handle to stakeholders in the New York racing industry. OTB has lobbied for the past five years for changes to the Racing Law's mandatory statutory distributions. Id. at 262; (Joint Pre-Trial Stipulation at ¶¶ 59-65). As of today, no legislative action appears imminent and the New York Legislature may wait as much as a full year to make any changes. ( See Minutes of the Meeting of the Board of Directors of OTB, Apr. 17. 2010 (Ex. S to Joint Pre-Trial Stipulation).)

OTB's financial results demonstrate its troubles. In fiscal years ending June 30, 2006, 2007, 2008, and the nine-month period ending on March 31, 2009, OTB had operating deficits of approximately $121 million, $30 million, $76 million, and $25 million respectively. (Joint Pre-Trial Stipulation at ¶ 58.) Due to these losses OTB has repeatedly requested that the state legislature change the payments required by the Racing Law. ( See id. at ¶ 59.) The legislature has recently made clear that it now favors a “short-term” solution to OTB's woes. Any permanent resolution will likely be deferred for as much as a year. ( Id. at ¶¶ 73-74.)

A. Statutory Commissions

The Racing Law sets certain fees OTB must pay to tracks based on the total betting Handle OTB receives for races held at those tracks. For purposes of this motion, these required statutory payments are deemed “Direct Commissions.” ( Id. at ¶ 15.) OTB also simulcasts and accepts bets on races from tracks outside of New York as well as on races from tracks inside of New York but outside of OTB's region. The Racing Law requires OTB to make payments from the Handle received on these races to certain tracks within New York State. These sums, deemed “Indirect Commissions” for purposes of these motions, differ for harness racetracks and thoroughbred racetracks. ( Id.) In addition to the Direct and Indirect Commissions, OTB has select contractual agreements with certain New York State thoroughbred racing tracks. OTB continues to make payments as required by these contracts (the “Contractual Payments”). ( Id. at ¶ 16.)

1. OTB's Direct Commissions to the Tracks

Empire owns and operates Monticello Casino and Raceway (“Monticello Raceway”), which conducts approximately 200 harness race programs a year. ( Id. at ¶ 5.) OTB simulcasts races held by Empire and other New York State harness racing tracks. Thus, pursuant to the Racing Law, OTB owes Direct Commissions to these tracks. The Racing Law does not specify when these Direct Commissions must be paid, but post-petition OTB pays these commissions within 30 days after the month they are incurred. ( Id. at ¶ 17.)

Similarly, Finger Lakes owns and operates Finger Lakes Gaming and Racetrack which holds numerous thoroughbred horse races and provides employment opportunities for New York's racing and breeding industry. ( Id. at ¶ 6.) As OTB does with the harness tracks, OTB simulcasts races held at New York State thoroughbred racing tracks and accepts bets on those races. The Racing Law requires OTB to pay Direct Commissions to the thoroughbred tracks. Direct Commissions to thoroughbred tracks accrue at rates set by the Racing Law and are only paid to the track that hosts the races on which the bets are taken. Since filing for chapter 9 protection, OTB has paid Direct Commissions to the thoroughbred tracks 30 days after the month they were incurred. ( Id. at ¶ 29.)

2. OTB's Indirect Commissions to the Tracks

In addition to the Direct Commissions, the Racing Law also requires OTB to pay Indirect Commissions to harness racing tracks, including Monticello Raceway, for simulcasting and taking bets on out-of-state harness races. ( See id. at ¶¶ 19-20.) The Racing Law requires OTB to pay a fixed percentage of the Handle it receives on out-of-state harness races it simulcasts to certain New York State harness racing tracks. ( Id. at ¶ 20.) The calculation of the precise amount due varies on a number of factors including whether the New York State harness tracks run races on the day the out-of-state races are simulcast. ( Id.) The Racing Law also requires OTB to pay Indirect Commissions to harness racing tracks within its region (Monticello Raceway, Yonkers Raceway, and Tioga Downs (the “Regional Harness Tracks”)), on the Handle OTB collects on New York State harness races it simulcasts that occur outside of OTB's region. The Indirect Commissions the Regional Harness Tracks are due on these races are based on a formula within the Racing Law. ( Id. at ¶¶ 14, 21.)

Similar to the harness racing tracks, the Racing Law also requires OTB to make Indirect Commission payments to New York State thoroughbred tracks based...

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