Judges denies motion to dismiss creditors committee complaint in Magna bankruptcy

Judge denies dismissal of Magna creditors lawsuit

WILMINGTON, Del. — A Delaware bankruptcy judge on Tuesday denied a motion from the parent company of Magna Entertainment Corp., the largest horse track owner in the United States, to dismiss a lawsuit filed by Magna creditors.

The ruling means Magna’s committee of unsecured creditors will be allowed to pursue claims that instead of selling assets to avoid bankruptcy, Magna officials allowed parent company MI Developments and billionaire Frank Stronach, who is chairman of both MID and MEC, to prop up Magna with equity infusions disguised as secured loans.

The committee, which contends the scheme was meant to ensure that Stronach retained control of MEC’s most valuable assets, also alleges that Magna fraudulently transferred more than $125 million in loan payments to a subsidiary of MI Developments in the two years leading up to Magna’s Chapter 11 filing in March. It is asking the court to recharacterize the loan claims of the MID subsidiary, MID Islandi, as equity interests, and to subordinate them to other claims. It also is seeking to recover the alleged fraudulent transfers on behalf of Magna’s bankruptcy estate and its creditors.

On Tuesday, an attorney for Ontario-based MID argued that the claims are baseless and should be tossed out.

“If claims like this are not dismissed on this factual record, parent companies will be discouraged from making loans to distressed companies, knowing they will have to confront claims of this nature,” warned MID attorney John Hutchinson.

Hutchinson said documents clearly spell out that the transactions involved secured loans, and that they were scrutinized and approved by independent directors sitting on special committees of both companies, as well as legal advisers.

“Every ‘I’ was dotted and ‘T’ crossed so no one could have a different opinion about these loans,” he said.

“The loans are called loans. They were made in every respect in the form of loans, and the committee concedes that.”

Tim Harkness, an attorney representing the creditors committee, argued that the court’s inquiry has to go beyond the documents themselves to examine the intent behind the transactions and the context in which they were made.

“Looking at just pieces of paper isn’t enough. … Trying to get to the intent of the parties by looking at the pile of contracts … just doesn’t do it,” he said.

While denying MID’s motion to dismiss the complaint, Judge Mary Walrath acknowledged that it is “a very close case.”

“I think all of these claims are really fact-intensive,” she said, agreeing with the committee that simply looking at the documents is not enough.

“It’s the duty of the court to look at the substance of the transactions, not the form. … Let’s see if they can prove their case at trial.”

Attorneys for both sides agreed that some of the transactions in question were made after MID directors rejected requests by MEC and Stronach to provide equity to Magna.

Hutchinson argued that such a refusal contradicts the committee’s assertion that Stronach was in control. But Harkness argued that MID’s refusal to provide equity simply left Stronach searching for alternative ways to cement his claim to certain MEC assets.

“They wanted to do equity, and they were denied the ability to do so,” he said. “Ultimately, they got to a secured-loan type of structure.”

Hutchinson argued that the idea that Stronach was hoping to snap up MEC’s assets in bankruptcy court is belied by the fact that he personally made a $20 million equity investment in MEC so it could pursue a debt elimination plan in 2007.

“It’s inconceivable that Stronach would have simply thrown away $20 million of his own money,” he said.

Hutchinson also argued that Magna’s noteholders were well aware that their unsecured debt would be subordinate to the secured loans made by MID. One loan actually benefited the noteholders by setting aside $15 million for their interest payments, which so far have totaled about $60 million, he added.

In other developments Tuesday, Walrath approved bid procedures for the proposed sale of Magna’s Lone Star Park facility in Texas. The judge already has approved the sale of two other Magna tracks, Thistledown in Ohio and Remington Park in Oklahoma City, for a combined total of almost $170 million.

Global Gaming Solutions RP LLC, a subsidiary of the Chickasaw Nation, is buying Remington Park for $80.25 million and has made an initial bid of $27 million for Lone Star Park.

Magna’s other holdings include Golden Gate Fields in Northern California, Gulfstream Park in Florida, Santa Anita Park in California, and Baltimore’s Pimlico racetrack — host of the Preakness Stakes, the second leg of the Triple Crown.