In re New York City Off-Track Betting Corp.

• Decision Date: 22 March 2010
• Docket Number: No. 09-17121 (MG).,09-17121 (MG).
• Citation: 427 B.R. 256
• Parties: In re NEW YORK CITY OFF-TRACK BETTING CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

427 B.R. 256

In re NEW YORK CITY OFF-TRACK BETTING CORPORATION, Debtor.

No. 09-17121 (MG).

United States Bankruptcy Court, S.D. New York.

March 22, 2010.

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Richard Levin, Esq., Antony L. Ryan, Esq., Paul E. Rosenthal, Esq., Cravath, Swaine & Moore LLP, New York, NY, Attorneys for Debtor.

Brian S. Rosen, Esq., Bruce A. Colbath, Esq., Weil, Gotshal & Manges LLP, New York, NY, Attorneys for New York Racing Association, Inc.

Ardith Bronson, Esq., Weil, Gotshal & Manges LLP, Boston, MA, Attorneys for New York Racing Association, Inc.

Jordanna L. Nadritch, Esq., Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, NY, Attorneys for Monticello Raceway Management.

Robert J. Brown, Esq., Wyatt Tarrant & Combs, LLP, Lexington, KY, Attorneys for Churchill Downs.

Sherry Millman, Esq., Abigail M. Beal, Esq., Stroock & Stroock & Lavan LLP, New York, NY, Attorneys for DC 37, Local

2021, DC 37 Benefits Fund Trust, and DC 37 Med-Team.

Phillip John Nichols, Esq., Gerard Uzzi, Esq., White & Case LLP, New York, NY, Attorneys for Yonkers Raceway.

Andrew G. Lipkin, Esq., New York City Law Department, New York, NY, Attorneys for the City of New York and the New York City Employee Retirement System.

Brian S. Masumoto, Esq., Andrew D. Velez-Rivera, Esq., Diana G. Adams, New York, NY, United States Trustee for Region 2.

OPINION AND ORDER OVERRULING OBJECTIONS OF NEW YORK RACING ASSOCIATION, INC., NEW YORK THOROUGHBRED HORSEMEN'S ASSOCIATION, INC., AND NEW YORK THOROUGHBRED BREEDERS, INC. TO DEBTOR'S BANKRUPTCY PETITION AND STATEMENT OF QUALIFICATIONS UNDER SECTION 109(C)

MARTIN GLENN, Bankruptcy Judge.

New York City Off-Track Betting Corporation ("NYC OTB") filed a voluntary petition (the "Petition") for the adjustment of debt under chapter 9 of the Bankruptcy Code on December 3, 2009. In support of the Petition, NYC OTB filed declarations from Raymond Casey, President and Chief Executive Officer of NYC OTB and Robert J. Garry, Executive Vice President and Chief Financial Officer of NYC OTB. Pursuant to 11 U.S.C. § 921(b), the Honorable Dennis Jacobs, Chief Judge of the United States Court of Appeals for the Second Circuit assigned the Petition to this Court on December 4, 2009. (ECF # 10.) The Court held a hearing on NYC OTB's requests for interim relief on December 7, 2009. Following the hearing, the Court entered an order setting January 4, 2010 as the deadline for filing objections. (ECF # 19.)

New York Racing Association, Inc. ("NYRA") objects to the Petition. NYRA argues that NYC OTB cannot satisfy the requirements to be a debtor under chapter 9 of the Bankruptcy Code. NYRA further claims that NYC OTB did not file the Petition in good faith. (See NYRA Obj. 2-3.) The New York Thoroughbred Horsemen's Association, Inc. ("NYTHA") and the New York Thoroughbred Breeders, Inc. ("NYTB") join in NYRA's objections (collectively, the "Objectors"). The Court held an evidentiary hearing to resolve these objections on February 22, 2010. This Opinion sets forth the Court's findings of fact and conclusions of law pursuant to FED. R. BANKR.P. 7052. For the following reasons the objections are overruled.

BACKGROUND

NYC OTB is a public benefit corporation which operates a pari-mutuel betting system. (Decl. of Raymond Casey ¶ 4, NYRA Ex. P.) Pari-mutuel betting is a "system of gambling in which bets placed on a race are pooled and then paid (less a management fee and taxes) to those holding winning tickets." BLACK'S LAW DICTIONARY (8th ed.2004). The New York State Legislature created NYC OTB on April 22, 1970. Goals for NYC OTB included raising revenues for the state and certain municipalities as well as fighting the role of organized crime in horse-race gambling. (Decl. of Robert J. Garry ¶ 5, NYRA Ex. T.) As of November 30, 2009, NYC OTB had 66 different locations and employed 1,343 people. (Id. ¶¶ 6, 12.) Over its existence, NYC OTB has contributed approximately $2 billion to New York State's racing industry, $1.4 billion to New York City, and almost $600 million to New York State. (Id. ¶ 9.)

NYC OTB's financial troubles did not recently materialize. For the past nine years, NYC OTB has been caught in a downward spiral, based in large part on its statutory business model. Nearly all of NYC OTB's revenue is earned from its gambling operations. The total dollar amount wagered through NYC OTB is called the "Handle." (Decl. of Robert J. Garry ¶¶ 7, 9, NYRA Ex. T.) NYC OTB receives a percentage of the Handle while winning betters receive approximately 80% of all amounts wagered on each race. (Id. ¶ 7.) Pursuant to section 527 of the Racing, Pari-Mutuel Wagering and Breeding Law, NYC OTB must make payments to New York State's horse racing industry, including different tracks and breeding funds, plus certain distributions to the state and local governments, based on NYC OTB's total Handle (the "mandatory statutory distributions" or "required statutory payments"), not on NYC OTB's net revenues. (Decl. of Raymond Casey ¶ 14, NYRA Ex. P; Decl. of Robert J. Garry ¶ 7, NYRA Ex. T); see also N.Y. RAC. PARI-MUT. WAG & BREED. LAW § 527(1)(a)-(c) (delineating mandatory statutory distributions). The result is that mandatory statutory distributions frequently outpace NYC OTB's earnings after paying operating expenses. (Decl. of Raymond Casey ¶ 17, NYRA Ex. P.)

Increased operating costs, plus the legislature's changes to required statutory payments have further stressed NYC OTB's financial situation. For example, between 2003 and 2005 the New York State Legislature increased NYC OTB's mandatory statutory distributions by, on average, $7.8 million each year. (Id. ¶ 20.) As a result, NYC OTB has run annual deficits of tens of millions of dollar since 2006. (Decl. of Robert J. Garry ¶ 10, NYRA Ex. T.) As of September 30, 2009, NYC OTB's total Handle for fiscal year 2010 was $441.4 million. Total revenue after paying pari-mutuel bets was $108.7 million. Operating expenses, including financing the operations of each branch, administrative fees, and advertising costs totaled $68 million. After covering all operating expenses and adding other payments, NYC OTB earned $42.4 million before making its mandatory statutory distributions. The total required statutory payments to New York State's horse racing industry and state and local governments, however, were $51.1 million, leaving NYC OTB with an $8.7 million shortfall for the current fiscal year. (See NYC OTB Unaudited Financial statements for the Six Months Ended Sept. 30, 2009, NYC OTB Ex. 6.)

NYC OTB has cut costs in an attempt to remain viable. Since February 2004, NYC OTB has reduced personnel, closed branches, cut overtime, and reduced energy expenditures. These efforts resulted in an aggregate cost savings of approximately $45 million through 2008. (Decl. of Robert J. Garry ¶ 12, NYRA Ex. T.) In addition to typical cost cutting efforts, NYC OTB also repeatedly asked the New York State Legislature, in 2005 and again in 2007, to change the mandatory statutory distributions to assist it in returning to profitability. (Decl. of Raymond Casey ¶¶ 23, 25, NYRA Ex. P.) NYC OTB also commissioned Boston Consulting Group to complete a study analyzing ways to bring NYC OTB back to fiscal health. A key conclusion of the study was the need for the State Legislature to change the mandatory statutory distributions. (Id. ¶ 24.) NYC OTB also requested assistance from the New York City Council to convince the New York State Legislature to make the required changes. (Id. ¶ 26.) By December 2007, no legislative fix had materialized. New York City, to which NYC OTB reported at the time, was unwilling to use taxpayer funds to ensure its continued existence. Thus, NYC OTB enacted a plan to cease operations in 2008 (the "2008 Closure Plan"). (Id.)

The 2008 Closure Plan contemplated ending all NYC OTB operations on June 15, 2008. This included the layoff of all employees, closing all locations, and ceasing all operations. (Decl. of Robert J. Garry ¶ 13, NYRA Ex. T.) On June 16, 2008, while shutdown efforts commenced, Governor David Patterson announced that New York State was taking over NYC OTB from New York City, and instructed employees to report to work as scheduled. The next day, the State Legislature passed Chapter 115 of the Laws of 2008, codifying New York State's takeover of NYC OTB and increasing certain revenue streams, such as the amounts retained from the Handle, in an effort to sustain NYC OTB. (Decl. of Raymond Casey ¶ 30-31, NYRA Ex. P.) This amendment, however, did not change NYC OTB's mandatory statutory distributions. Compare N.Y. RAC PARI-M § 527(1)(a)-(c) (effective June 17, 2008) with N.Y. RAC PARI-M § 527(1)(a)-(c) (effective Feb. 19, 2008 to June 16, 2008).

Following the state takeover, NYC OTB's operations limped along for another 17 months. NYC OTB was still hampered by the required statutory payments and had no funds to invest in capital improvements. Prior to filing for chapter 9 protection on December 3, 2009, NYC OTB estimated that it would run out of cash by the end of 2009. (Tr. 93:7-11.)¹ Filing its Petition enabled NYC OTB to further delay certain payments, stretching its available cash and enabling operations to continue at least to the end of March 2010. (Tr. 79:13-16, 93:16-19.) NYC OTB maintains that it needed to file for chapter 9 protection to delay shutdown so the New York State Legislature could enact the legislative changes required, including changes to mandatory statutory distributions, to ensure the health and continued operation of NYC OTB. (Decl. of Raymond Casey ¶ 35-36, NYRA Ex. P.)

DISCUSSION

Objectors argue that NYC OTB is (i) not eligible to be a debtor under chapter 9 of the Bankruptcy Code; and (ii) the Petition was not filed in good faith.

A. NYC OTB's Eligibility to File a Bankruptcy Petition Under Chapter 9

Bankruptcy Code § 109(c) sets forth the requirements to file...