WILMINGTON, DEL. -- Creditors of horse-track owner Magna Entertainment Corp. (MEC) can pursue claims against the firm's parent company and its chairman, Frank Stronach, a U.S. federal judge ruled yesterday.
Bankruptcy Judge Mary Walrath authorized MEC's committee of unsecured creditors to prosecute claims against Mr. Stronach, his Ontario-based MI Developments Inc., and other individuals on behalf of MEC's bankruptcy estate.
Lawyers for MEC and MI indicated they would file a motion to have the lawsuit dismissed.
In its complaint, the creditors' committee alleges that instead of selling certain assets to keep MEC afloat and out of bankruptcy court, current and former directors allowed MI and Mr. Stronach, chairman of both companies, to prop up MEC with equity infusions disguised as secured loans, ensuring that he retained control of MEC assets.
The committee also alleges that MEC fraudulently transferred more than $125-million (U.S.) in loan payments to a subsidiary of MI Developments in the two years leading up to MEC's Chapter 11 filing in March.
"It has proven to be an extremely complicated web of related-party transactions," Kenneth Eckstein, a lawyer for the committee, told Judge Walrath.
Magna Entertainment, based in Aurora, Ont., is the largest horse-track owner in the United States. Its holdings include Remington Park in Oklahoma City, Golden Gate Fields in northern California, Gulfstream Park in Florida, Lone Star Park in Texas and Baltimore's Pimlico racetrack, host of the Preakness Stakes, the second leg of the Triple Crown.
Mr. Eckstein argued that the creditors' committee was forced to file the complaint on behalf of MEC's bankruptcy estate because the company itself had no intention of doing so, adding that the committee is the only entity looking out for the fiduciary interests of the creditors.
Glenn Kurtz, a lawyer representing former MEC board members Jerry Campbell and Anthony Campbell, and current board member William Menear, said the committee had not established any basis for bringing breach of fiduciary duty claims against his clients.
"You have to have a complete and total abdication of responsibility," he said, adding that company officials acted properly.
But Timothy Harkness, another lawyer for the committee, said Mr. Kurtz's clients failed to take appropriate action even after concluding that MEC and MI officials were withholding information and not acting in good faith.
"They passed some resolutions and made some phone calls; that's not exercising the duty of loyalty," he said.
Mr. Kurtz and Lee Attanasio, a lawyer representing MI, indicated that they would file motions to dismiss the lawsuit.
"MI[D] disputes all of the claims that have been filed and that may be filed if this motion is granted," Mr. Attanasio said before Judge Walrath declared that the committee could proceed with its lawsuit.
The judge said: "I'm going to grant the motion and allow them to file the complaint and allow the defendants to file a motion to dismiss."
The committee is asking the court to re-characterize the loan claims of an MI subsidiary, MID Islandi, as equity interests, and to subordinate them to other claims. The committee also is seeking to recover the alleged fraudulent transfers on behalf of MEC's bankruptcy estate and its creditors.
© The Globe and Mail
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