U.S. Trustee slams Hawthorne

by Neil Milbert

U.S. Trustee Adam Brief has requested the U.S. Bankruptcy Court of Northern Illinois to either dismiss Hawthorne Race Course’s Feb. 27 filing for Chapter 11 bankruptcy protection or change it to a Chapter 7 designation, charging that the current owners cannot manage a successful reorganization and citing “gross mismanagement” and “human cost.”

That would strip the Carey family, that owns the 119-acre property at which thoroughbred and harness racing have been conducted, of its debtor-in-possession status.

All 14 of Hawthorne’s Suburban Downs harness dates scheduled for January and February were canceled because of insufficient funds and its fall dates in November and December will not be held because the track has gone out of business. The thoroughbred meeting began in April, three weeks later than scheduled, and ended on July 19, almost four months before its scheduled closing.

The U.S. Trustees’ office is empowered to ask a court to take action if it believes Chapter 11 is no longer viable.

Brief’s Aug. 26 filing points out that the $90 million Hawthorne is to receive when its sale to the Delaware shell corporation Allimac 23 is finalized at a Sept. 1 closing falls far short of the amount the former thoroughbred and harness track owes its multitude of creditors. The number of creditors is reported to be in the neighborhood of 250 and estimates of the amount owed are as low as $100 million and as high as $500 million.

The request by the U.S. Trustee isn’t expected to negate the sale to the shell corporation — that reportedly is representing data center giant Digital Realty of Austin, TX — because it had already been approved by U.S. Bankruptcy Court Judge Timothy Barnes. Allimac 23 was the only bidder at the July auction.

If Hawthorne loses debtor-in-position status track president Tim Carey won’t have control of the sale proceeds or the remaining assets that might be liquidated to pay creditors.

“The record demonstrates that there are continuing losses and there continues to be gross mismanagement of the estate, all of which mitigate in favor of dismissal or conversion,” U.S. Trustee Brief stated.

“For example, the debtors, among other things have (1) repeatedly ‘borrowed from Peter to pay Paul,’ (2)… ceased almost all operations while taking extraordinary steps to pay professional fees at the expense of other creditors; (3) conducted a largely unsuccessful sale process; (4) upended the lives of the horsemen, their families and horses; (5) applied for a racing license at an unknown cost for the 2027 season.”

According to Brief, “Despite the debtors’ repeated assurance that there was interest from going-concern bidders and that their assets would be sold on a going-concern basis, no such interest or sale materialized.

“Consequently, hundreds of jobs have been lost, hundreds of people, children, and horses have been displaced from their homes on the backstretch with little meaningful means to relocate.

“Amid the chaos of these cases, the debtors’ principals caused the debtors to apply for a racing license for 2027 and may seek to race at a yet-to-be-identified track.”

Brief also said that Hawthorne “failed to segregate the purse money due to horsemen or how the funds that were budgeted to pay the horsemen were spent.

“The failure to fund the horsemen’s purse account is not the first time the debtors have been accused of failing to properly segregate funds. Both Churchill Downs and Saratoga alleged that the debtors failed to properly segregate and maintain funds from pari-mutuel wagering prior to the petition date and both have filed adversary proceedings alleging that the funds that the debtors were required to segregate are not property of the bankruptcy estate.

“The record is clear that the debtors’ gross mismanagement resulted in harm to the horsemen and to contractual counterparts, both of whom the debtors relied on for their operations and revenue. Rather than protecting these necessary relationships, the debtors squandered them [and] have attempted to lay the blame for the chaos they created at the doors of others.”