July 23, 2009 / 12:33 AM / in 8 years

Creditors claim "looting" of Magna Entertainment

WILMINGTON, Delaware (Reuters) - Racetrack operator Magna Entertainment Corp fraudulently transferred more than $125 million to companies controlled by Canadian billionaire Frank Stronach before filing for bankruptcy, creditors charged in a court filing.

The complaint by unsecured creditors claimed that horse-racing enthusiast Stronach used his control of MI Developments Inc (MID), the majority shareholder of Magna Entertainment (MEC), to secure prized assets and fraudulently transfer payments to his companies.

“MID breached its fiduciary duties of good faith, honest governance, loyalty and care to MEC and its creditors by, among other wrongs, looting and engaging in self-dealing transactions to the detriment of the debtors,” the complaint said.

MI Developments said in a statement that the committee’s claims are without merit and that it intends to contest them vigorously.

Stronach, Magna Entertainment and the attorney for the creditors could not be reached for comment.

The complaint, filed in Delaware’s bankruptcy court by the Official Committee of Unsecured Creditors and dated Tuesday, seeks to subordinate MI Developments’ secured claims in the Magna Entertainment bankruptcy and recover the payments.

The complaint claimed that MI Developments prevented Magna Entertainment from selling assets that might have allowed it to successfully restructure. At the same time, according to the complaint, MI Developments propped up failing Magna Entertainment, which owns the Pimlico Race Course that hosts the Preakness Stakes, and “larded” it with secured loans made through an Icelandic unit.

The MID Islandi unit is the defendant in the complaint. Both Magna Entertainment and MI Developments are based in Aurora, Ontario.

“The MID defendant abused their control over MEC to keep it artificially afloat through cash injections in the form of ‘loans’ that MID knew could not be repaid, while it extracted enormous sums of money from the insolvent MEC in the guise of interest and lending fees,” the complaint claimed.

Those loans have a higher priority in a bankruptcy, and the complaint claimed this lending was aimed at protecting MI Development’s ownership in Magna Entertainment in a Chapter 11 filing. Magna Entertainment filed for bankruptcy protection in March.

The complaint wants the court to reclassify these loans as equity, which would subordinate them and increase the potential recovery for unsecured creditors.

According to court documents, shortly after Magna Entertainment filed for bankruptcy, the company proposed selling some assets to MI Developments through a credit bid. Such a bid allows a creditor to bid what it is owed. That proposal was withdrawn after creditors objected.

The case is In re Magna Entertainment Corp, U.S. Bankruptcy Court, District of Delaware, No. 09-10720.

Reporting by Tom Hals and John McCrank in Toronto

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