02/22/2010 12:00AM

New York lawmakers seek short-term OTB fix

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NEW YORK - The New York State legislature will for now take no action on bankrupt New York City Off-Track Betting Corp.'s proposed legislative changes, which the company said are imperative to help it remain in business, and has asked the company to come up with some short-term solutions to keep it from having to shut down.

That revelation came during a Monday hearing in a U.S. bankruptcy court in Manhattan to determine the offtrack betting company's eligibility to file for bankruptcy under the seldom-used Chapter 9 provision of the U.S. bankruptcy code, reserved for municipalities. One key component of OTB's reorganization plan would allow it to make statutory payments based on net revenue as opposed to gross revenue, something it has done since its inception in 1971.

The offtrack betting company's plan has been widely criticized by all facets of the racing industry, some claiming it could result in the end of racing in New York. In the first year alone, OTB payments to the industry would be reduced from $65 million to $19 million.

"And if OTB closes it drops to zero," said Sandy Frucher, chairman of New York City Off-Track Betting Corp.

The company filed for bankruptcy in December and last month said that it will close its doors on March 30 if the state legislature fails to enact changes on how the company meets statutory obligations to the racing industry as well as state and local government.

The New York Racing Association objected to NYC OTB's filing under Chapter 9, claiming in an earlier court filing that the organization was not specifically authorized to do so by state law and that the company did not file the bankruptcy petition in good faith. NYRA is OTB's second-largest creditor, with outstanding debt of $15 million.

After 5 1/2 hours of testimony Monday from OTB and NYRA officials, Judge Martin Glenn did not issue a ruling, but his constant hammering at New York Racing Association arguments appeared to have him leaning toward allowing the offtrack betting company to remain in Chapter 9, which would buy the company time to stay in business.

NYRA attorneys argued that while Gov. David Paterson did sign an executive order on Sept. 1 authorizing OTB to utilize Chapter 9, he was not empowered to do so by the state legislature, something Judge Glenn appeared to think was not explicitly necessary.

"There are New York state cases that say an executive order has the force of state law," Glenn said.

"Only if he was empowered to do so, and we don't believe he was," NYRA attorney Brian Rosen said.

Perhaps the most damaging bit of testimony for NYRA came when Charles Hayward, the company's CEO and president, was on the stand, called as a witness by OTB. Hayward attended the Sept. 1 press conference along with Paterson and Frucher. Hayward said he had no recollection of saying anything that was in support of the Chapter 9 filing. Attorneys for OTB, however, played a 30-second audio clip in which Hayward did in fact "thank the governor for issuing the executive order" authorizing the offtrack betting company to file Chapter 9 bankruptcy.

Asked by OTB attorneys if he felt that authorization was a good thing, Hayward said. "I didn't have any basis in the law to know if it was a good thing or not. I was doing this in support of Mr. Frucher."

In early January, the offtrack betting company gave state legislators details of its reorganization plan, which includes a shutdown of two-thirds of its 61 parlors, a 65-percent reduction in workforce along with the creation of five "super-parlors" throughout the five boroughs of New York and the creation of 1,100 to 1,300 self-betting machines, or kiosks, at licensed places throughout the city.

In several meetings with state officials, however - the most recent one on Feb. 17 - OTB officials were told that no action would be taken on those proposed legislative changes.

Frucher said on Monday legislators told him to come up with "short-term alternatives, which was their preference to an overhaul situation, which we are going to do this week."

Frucher said legislators "gave us certain cuts which they thought might be a way to reduce costs over a short period of time, and they would come back after the budget or next year and come back with long-term solutions."

Another key component to the plan is the floating of bonds to make available some $250 million offtrack betting company could use to pay debt, severance packages to laid-off employees, and for capitalization projects. A key change to the plan is that OTB is now amenable to asking the state to provide a "contingency guarantee" to those bonds that would make it more attractive for companies to underwrite such bonds.

The contingency guarantee lowers the interest rate on the bonds from 7 percent to 4 or 5 percent and lengthens the term of the bonds from 15 to 25 years. Frucher said he agreed to the contingency guarantee only when told it did not come out of the state's capital budget.

"It does, if you fail," a NYRA attorney, Brian Colbath, said.

"But we intend to succeed," Frucher shot back.