08/17/2009 11:00PM

Judge allows Stronach to be named in suit


A bankruptcy court judge has ruled that the unsecured creditors of Magna Entertainment Corp. may add the company's chairman, Frank Stronach, and other company directors and officers to a lawsuit that a committee of creditors has already filed against the company's largest creditor, MI Developments, according to court documents and lawyers in the case.

The ruling by Judge Mary Walrath will give the creditors committee "the authorization to go forward with litigations against the defendants," according to Kenneth Eckstein, an attorney representing the creditors committee.

In August, the committee filed a suit against MI Developments that accused Stronach and other company officers of using Magna's bankruptcy filing to protect the company's assets from creditors while transferring them to MI Developments, which is also controlled by Stronach. Eckstein said that it was the creditor committee's intention to find Stronach and the other officers personally liable for the plans by adding them as defendants to the suit.

In the suit, the committee contends that Magna Entertainment would not have needed to file bankruptcy if it had made good-faith attempts to sell its most valuable properties on the open market. Instead, the suit contends, Magna refused to sell the assets while borrowing more from MI Developments. Those decisions put MI Developments first in line for relief when Magna filed for bankruptcy, in front of the unsecured creditors. Magna owes MI Developments $371 million.

When Magna filed for bankruptcy in March, the company announced a plan to sell many of its properties to MI Developments in a deal valued at $195 million, which included $136 million in debt forgiveness. The plan was dropped after creditors and shareholders of both companies asked the court to reject the deal.