Magna Entertainment Corp. creditors won a judge’s permission to sue Frank Stronach, the company’s chairman and founder, over loans they claim were wrongfully secured to prop up the bankrupt horse-track owner.
U.S. Bankruptcy Judge Mary Walrath approved the creditors’ request to sue Stronach and current and former company directors at a hearing today in Wilmington, Delaware. Creditors argued Stronach and the directors saddled Magna with more than $481 million in secured loans since 2004.
“It is imperative these claims be heard” and “fully litigated,” Adam Landis, an attorney for creditor GLG Partners LP. “My client has a tremendous amount of skin in the game.”
The creditors’ complaint seeks to demote the claims of companies controlled by Stronach that loaned money to Magna. “Costs of the proposed litigation are dwarfed by the potential recoveries” for creditors if they are allowed to be repaid ahead of Stronach’s companies, lawyers for the committee said.
Magna, based in Aurora, Ontario, sought bankruptcy protection in Delaware in March, listing assets of more than $1 billion and debt of $958.6 million as of Dec. 31.
Walrath told lawyers for Stronach and the directors that their objection is “more properly brought as a motion to dismiss” the complaint. “I’m not prepared at this time” to decide on whether to throw out the lawsuit, Walrath said.
2000 Spinoff
Stronach founded auto-parts maker Magna International Inc. in 1957, according to court documents. Magna International spun off Magna Entertainment in 2000, while Stronach kept a controlling interest through MI Developments Inc.
Magna International is bidding against RHJ International SA to buy General Motors Co.’s German unit Opel. The German government backs Magna’s offer for the carmaker.
Magna Entertainment officials haven’t filed a restructuring plan for company, which owns horse tracks including Pimlico Race Course in Baltimore and Gulfstream Park in Hallandale, Florida.
Creditors such as GLG, Bank of New York Mellon Corp. and Madison Capital Management LLC contend Stronach and other company officials should have sold Magna’s assets, including its race tracks, to pay down the company’s debt.
Stronach treated the tracks as his “personal playthings,” creditors said in a July 21 court filing in the case.
Stronach and the directors never broke any obligations owed to the stakeholders and the loans were the only financing available at the time, Glenn Kurtz, a lawyer for the defendants, argued. “This is not an abdication of responsibilities” by Stronach and the directors, Kurtz said.
‘Prized Assets’
Potential sales of Magna’s properties that the company canceled or rejected “were nothing more than an attempt by Stronach to ensure that the assets remained under his control -- even if to the detriment” of stakeholders, creditors’ officials said in court documents.
Magna “failed to turn its valuable properties into cash,” the creditors said in their July 22 complaint. The company instead “elected to keep its prized assets and allowed its majority shareholder, MI Developments Inc., to prop up MEC’s failing business through a series of secured loans.”
The case is In re Magna Entertainment Corp., 09-10720, U.S. Bankruptcy Court, District of Delaware (Wilmington).
(Source: Bloomberg)
