The parent company of horse-track owner Magna Entertainment Corp. is rejecting allegations that it engaged in sham financial transactions with MEC to benefit the man who serves as chairman of both companies.
In a complaint filed in U.S. bankruptcy court in Wilmington, Delaware, Magna's committee of unsecured creditors claims that Ontario-based MI Developments and its chairman, Frank Stronach, propped up Magna with equity infusions disguised as secured loans to ensure that Stronach retained control of MEC assets.
The committee also alleges that Magna fraudulently transferred more than $125 million in loan payments to a subsidiary of MI Developments, also known as MID, in the two years leading up to Magna's Chapter 11 filing in March.
The committee 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. The committee also is seeking to recover the alleged fraudulent transfers on behalf of Magna's bankruptcy estate and its creditors.
Ontario-based Magna owns 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.
Although MEC directors and managers are not named as defendants in the complaint, attorneys for the committee claim MEC officials worked with MID to ensure that asset sales that would have allowed Magna to avoid bankruptcy were limited, and that key properties were set aside for MID and Stronach, its controlling shareholder.
"The defendant's financial legerdemain should not survive judicial scrutiny," the complaint states. "The indisputable facts make plain that the series of transactions at issue here were entered into for the benefit of Frank Stronach, as controlling shareholder of MEC (through MID), in disregard of the duties owed to MEC and its stakeholders."
Magna attorney Brian Rosen and MID general counsel Richard Crofts did not immediately return telephone calls Thursday, but MID has issued a statement saying the committee's claims are without merit and will be vigorously contested.
In a separate filing this week, the creditors committee said it would not object to Magna's request for approval for two non-debtor subsidiaries to sell ownership and operating interests in an Austrian horse racing complex to an entity linked to Stronach.
Magna has said a new entity indirectly controlled by Fair Enterprises Limited, which is part of an estate planning vehicle for Stronach's family, has agreed to purchase Magna Racino, located about 25 kilometers outside Vienna, for 6.5 million euros ($9.2 million), an amount that would cover the outstanding balance on a bank loan to the racino that matures at the end of the year.
MEC has said it needs to complete the sale by July 31 in order to avoid foreclosure by the bank or a bankruptcy filing by Magna Racino, which has been operating at a loss for several years. Magna also contends that the purchase price is reasonable and that two other parties who had expressed interest in the Austrian facility rebuffed invitations to beat the price offered by Stronach's group.
While not endorsing the transaction with Stronach, the committee said that, given current economic conditions, MEC has no viable alternatives.
"As with the Austrian assets, now that MEC's assets have declined in value, Stronach (through MID) intends to purchase MEC's assets at a steeply discounted price to what the debtors could have obtained had they acted in good faith in prior years," the committee said in its response.
A hearing on the sale motion is scheduled for July 30.
Bankruptcy Judge Mary Walrath already has approved the sale of other MEC assets, including Santa Anita Park in California, Remington Park, Thistledown in Ohio and Portland Meadows in Oregon, as well as Magna's interest in Lone Star Park.
