Some two decades after the New York Racing Association bankruptcy pointed to the need for added protections in the pari-mutuel wagering settlement process, here we are again with Hawthorne Race Course, which filed for Chapter 11 bankruptcy in February.
The list of creditors in the bankruptcy case for the Chicago area track includes pari-mutuel payout money and host fees owed to tracks, racing associations, and other wagering outlets. While we'll see how things play out, the inclusion of such pari-mutuel operations money in the list of creditors suggests little has changed since the 2006 NYRA bankruptcy that raised similar concerns.
As Thoroughbred racing features a business model that relies on interstate wagering, it's important to have protections in place to keep pari-mutuel funds separate from business operations, specifically those businesses that might be struggling. Without such protections, the entire industry can be impacted by the failure of a single track, racing association, or advance-deposit wagering outlet. That appears to be playing out in the Hawthorne bankruptcy. Beyond the concerns of Thoroughbred racing losing its final Chicago area track, this bankruptcy currently looks like it could cost the industry millions of dollars tied to pari-mutuel wagering settlements unless some outlets secure legal decisions that move this money to the front of the line to be paid in full.
Litigation filed by Churchill Downs Inc. and Delaware Park seeks to have pari-mutuel settlement money that currently is being included with all of the other Hawthorne creditors be paid in full. They argue these funds are held in trust as part of pari-mutuel wagering. That is to say that this money should not be included in business operations as it was never Hawthorne's money to begin with. While the amounts owed to many of the racing entities have not yet been listed, the Churchill-Delaware suit says they're owed more than $1.5 million from Hawthorne in pari-mutuel settlements.
CDI has argued that this money should not be included in the Hawthorne estate where the ultimate settlement could be a greatly reduced payment—perhaps pennies on the dollar. Hawthorne has argued that the money should be included in the bankruptcy, characterizing it as unpaid contractual obligations.
We'll see how that litigation plays out. If the money ultimately remains as part of the general bankruptcy plan, it's safe to say full repayment of those funds is in jeopardy. In an August filing in the bankruptcy case, acting United States trustee Adam Brief said Hawthorne's $90 million property sale "is millions of dollars shy of the amount required to satisfy liens against the debtor's property."
In terms of its legal standing, CDI argues that the funds should be separate from Hawthorne's other operations based on state law as well as a contractual agreement on pari-mutuel wagering.
"Hawthorne continues to assert ownership over the disputed pari-mutuel funds and to treat those funds as property of its bankruptcy estate, while plaintiffs (CDI) contend that the funds are held in trust, bailment, or a similar custodial capacity and therefore are excluded from estate property (under bankruptcy laws)," reads a Sept. 9 filing. Delaware Park made a similar argument, noting the money Hawthorne is attempting to include in its bankruptcy estate actually is money from pari-mutuel wagering that should be held in trust.
Brief has called on the court to move the Hawthorne case from Chapter 11 bankruptcy to Chapter 7. Chapter 11 allows the bankrupt party to not liquidate all assets, as it presents a plan that, if accepted by creditors and approved by the court, will allow it to move forward. Chapter 7 calls for liquidation of the debtor's estate with the proceeds then going to creditors.
In supporting his argument that the case should be moved to Chapter 7, Brief contends that because Hawthorne continues to see losses with little likelihood of rehabilitation, continues to mismanage its estates, and has "borrowed from Peter to pay Paul." As an example, he points to the pari-mutuel settlements. He said that Churchill and Saratoga (NYRA) allege Hawthorne has improperly withheld pari-mutuel pool funds that Hawthorne is contractually obligated to hold in trust for winning bettors and settlement with contractual counterparts.
As for available information for most of the list of creditors, the amount they say they're owed by Hawthorne is not publicly listed at this point. Some of the listed creditors that likely have pari-mutuel settlements owed include several tracks and prominent computer-assisted wagering platforms. While over the years I've raised concerns about the right balance of CAW and retail wagering in this column, I most assuredly support paying the CAW outlets that are owed money. Winning bettors not getting paid, or even being forced to go through the bankruptcy litigation process before they're paid, obviously is a huge integrity issue.
As for a solution going forward?
While we'll see how the litigation plays out, contractual and state laws may not immediately provide enough protection. States have traditionally regulated gambling, but with pari-mutuel wagering taking place across state lines, it's challenging to look for legal protection in this regard from state laws. It seems like something bigger is needed. Perhaps a state compact agreement could be made to cover this issue to ensure that the problems of one track do not become problems for the industry.
Short of putting new laws in place, perhaps a quicker turnaround of settlement money would at least reduce the impact of such problems. One would think in a world of Venmo and bank transfers, that these settlements could be made daily. As it stands now, as outlined in the CDI case against Hawthorne, the settlement process is carried out "bimonthly or monthly."
This monthly or bi-monthly timeframe, and I'm speaking in general here and not alleging that this is what Hawthorne did, seemingly allows struggling entities to build up greater debt and possibly make it more tempting to view that money as operating budget. Financially squaring these transactions in a more timely manner would figure to keep wagering money out of bankruptcies, or significantly reduce the hardship other outlets could face.
