In Re Mid-State Raceway, Inc.

Citations: 343 B.R. 21; 2006 Bankr. LEXIS 870; 2006 WL 1389543Docket: 19-10218

Court: United States Bankruptcy Court, N.D. New York; January 19, 2006; Us Bankruptcy; United States Bankruptcy Court

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Oneida Entertainment, LLC filed a motion on December 28, 2005, seeking a determination that additional disclosures and vote resolicitation were unnecessary for its Modified Oneida Plan, submitted on December 12, 2005, and its Second Modified Plan, submitted on December 23, 2005. Opposition to this motion came from various parties, including Dominick A. Giambona, John J. Signorelli, Mid-State Raceway, Inc., Mid-State Development Corporation, Vernon Downs Acquisition, LLC, Vestin Mortgage, Inc., as well as the Official Committee of Unsecured Creditors, all of whom filed their oppositions by January 5, 2006. A hearing took place on January 6, 2006, after which the Court allowed for further legal memoranda to be submitted, with the matter submitted for decision on January 13, 2006. The Court asserted core jurisdiction over the case under 28 U.S.C. 1334, 157. The Debtors, having filed for Chapter 11 on August 11, 2004, are connected through joint administration. Raceway operates the Vernon Downs racetrack and owns the real estate for an adjacent hotel and gaming business. Jeffrey Gural, associated with Vernon Downs Acquisition, LLC, played a role in the acquisition of the Debtors. Oneida, a creditor in the case, is a joint venture with expertise in the gaming and harness racing industries, formed to assist in revitalizing distressed businesses.

Oneida's Disclosure Statement was filed on September 13, 2005, following its original plan and disclosure statement on August 17, 2005. Vestin is identified as the primary secured creditor, asserting an allowed claim exceeding $26 million, secured by a first lien on the Debtors' real and personal property. The Debtors have entered into cash collateral stipulations with Vestin, which include rollover security interests. Shawn Scott guarantees the Vestin loan, and his entity AVA is said to own 52% of Raceway shares, acquired through a foreclosure sale after Raceway Ventures, LLC defaulted. AC, also owned by Scott, is a secured creditor with an unsecured claim of about $550,000. Giambona and Signorelli are unsecured creditors and shareholders of the Debtors. The Official Committee of Unsecured Creditors was appointed on October 27, 2004. 

The Court denied an extension of exclusivity for the Debtors' plan on March 9, 2005. Subsequently, on June 14, 2005, the Debtors and VDA filed their First Joint Plan of Reorganization and its Disclosure Statement, amended on August 3, 2005. The AVA entities filed their chapter 11 plan on July 14, 2005, with a disclosure statement following on July 20, 2005. The Court approved the disclosure statements for both the AVA entities and the VDA/Debtor entities on August 22, 2005. Oneida filed its First Amended Chapter 11 Plan and disclosure statement on September 13, 2005. The Court approved both plans' disclosure statements on September 21, 2005, setting an October 31, 2005, deadline for ballot receipt.

On November 18, 2005, Jane Sullivan from Financial Balloting Group certified the tabulation of votes, revealing Classes 3, 4, 5A, and 5B accepted the VDA/Debtors' Plan while rejecting Oneida's Plan. Notably, VIP Structures, Inc. in Class 3, with a claim of $807,998.93, accepted the VDA/Debtors' Plan and rejected Oneida's. Other mechanic's lienors in Class 3 accepted both plans. On November 23, 2005, Oneida moved to disqualify VIP's votes in favor of the VDA/Debtors' Plan, alleging bad faith in the solicitation process by the VDA/Debtors.

On December 22, 2005, the Court denied Oneida's motion in its 1126(e) Decision, noting that Oneida's counsel indicated that knowledge of the transfer of the VIP claim could have led to a different structuring of their plan regarding mechanic's liens in Class 3. The Court did not express an opinion on the viability of this strategy. Subsequently, a confirmation hearing for the VDA/Debtors' Plan commenced on December 16, 2005, and was continued to December 28, 2005, allowing parties to submit uncontested facts and legal memoranda. The decision on the confirmation was set for January 13, 2006.

On December 12, 2005, Oneida filed its Modified First Amended Plan of Reorganization, proposing interest payments to unsecured creditors in Classes 5A and 5B. Following the Court's 1126(e) Decision, Oneida filed a Second Modified First Amended Plan of Reorganization on December 23, 2005, which proposed to split Class 3 into three subclasses: Class 3A for VIP, Class 3B, and Class 3C. Oneida argued for VIP's unique classification based on its capabilities and role in future construction projects at the racetrack, distinguishing VIP's interests from those of other mechanics' lien claimants. This argument was supported by citing prior case law. Oneida asserted that each Class 3 claimant had different collateral interests. In contrast, VDA/Debtors contended that the Court had facilitated a parallel progression for Oneida's Plan and urged confirmation of their own plan, which had garnered creditor support.

The VDA/Debtors highlight several potential issues if their Plan does not have an effective date by February 28, 2006, including the continuation of motions by Vestin for relief from the automatic stay and appointment of a chapter 11 trustee, ongoing adversary proceedings involving stock transfers, and unresolved appeals related to the removal of directors. They also note that the Debtors' dormant status may deter potential buyers, complications regarding the upcoming harness racing season due to licensing issues, and a likely return to chaos in the Debtors' cases. 

A critical condition for confirming the Oneida Plan is the resolution of the "Goldfarb/Cherry Claim," which Oneida seeks to estimate. The VDA/Debtors further clarify that the "VIP Claim" is now held by VDA, not VIP, and assert that VDA, as a co-proponent of their Plan, is not involved in construction management, negating any claims regarding VIP's unique capabilities. 

They argue against Oneida's proposed classification changes under Code 1122(a), citing the Second Circuit’s ruling in Boston Post Road Ltd. Partnership v. FDIC, suggesting Oneida’s actions are even more inappropriate as they follow an unfavorable vote on its plan. If reclassification were permitted, the VDA/Debtors contend that creditors in certain classes would require resolicitation, as would Class 6 equity interests due to potential dilution from a proposed "mezzanine facility" and additional financing.

Oneida counters that any needed capital contributions would not dilute existing shareholders' recoveries, although Vestin/AVA/AC criticize Oneida for its previous plan, which involved litigation without guarantees for unsecured creditors, arguing that Oneida's piecemeal amendments demonstrate a lack of earlier decisive action and that it should be held accountable for the prior plan's rejection.

Oneida's proposed plan was not accepted, making Fed. R. Bankr. P. 3019 inapplicable, thus necessitating resolicitation under Code 1127(a). Vestin/AVA/AC argue that Oneida's attempts to modify the plan have led to unnecessary costs and delays for the estate and its creditors. Giambona and Signorelli contend that Oneida's reasons for differing classifications are speculative and emphasize that further delays jeopardize the rehabilitation of Vernon Downs, as finality is crucial for advancing necessary business operations. The Committee aligns with Vestin/AVA/AC, asserting that claimants who rejected the original plan must be allowed to vote on modifications, referencing In re Dow Corning Corp. for support. They argue that creditors in Classes 5A and 5B remain impaired due to ambiguous terms regarding interest payments in the Modified Oneida Plan, necessitating resolicitation. Furthermore, the Committee accuses Oneida of vote manipulation and challenges the justification for the reliance on VIP's services for future success. Finally, the court must first evaluate the permissibility of reclassifying Class 3 creditors into subclasses under Code 1122(a) before addressing Oneida’s motion regarding the need for resolicitation.

Reclassification under the Modified Oneida Plan is critical for compliance with 11 U.S.C. § 1129(a)(10), which mandates that at least one impaired class of claims must accept the plan for confirmation. Oneida argues that VIP is a uniquely qualified creditor due to its expertise in managing significant construction projects necessary for the Reorganized Debtors' success. This argument references the Kliegl Bros. case, which highlights a division in the Second Circuit regarding the classification of similar claims. Judge Holland cites Judge Abram's assertion that similar claims should be classified together unless justified by section 1122(b). He notes that separate classification often aims to create a favorable class to secure plan acceptance, which is not permissible. Conversely, Judge Conrad's decision in In re AG Consultants Grain Div. Inc. supports a more flexible classification approach, asserting that separate classifications are valid if they serve the creditors' best interests and do not violate the absolute priority rule. The Second Circuit, in In re Chateaugay Corp., reinforced that separate classification requires a legitimate reason supported by credible evidence. The overarching principle is that dissimilar claims cannot be grouped, while similar claims may only be separated for valid reasons. The Second Circuit also emphasized Congress's intention to provide debtors flexibility in addressing general unsecured creditors to ensure future viability, affirming that business justification for classification is necessary to avoid manipulation of the voting process.

The Second Circuit's decision in Chateaugay referenced the Fifth Circuit's ruling in Phoenix Mutual Life Ins. Co. v. Greystone III Joint Venture, which clarified the application of Code 1122 regarding the classification of claims in bankruptcy. The Fifth Circuit found that Code 1122 does not explicitly prohibit classifying similar claims separately and recognized that a creditor's unsecured deficiency claim could be considered "legally different" from trade claims due to its statutory origins under Code 1111(b). The court emphasized that similar claims should not be classified differently to manipulate votes on a reorganization plan, and any separate classification must be supported by valid business reasons unrelated to the debtor's voting strategy.

In analyzing a specific case, the court dismissed Oneida's arguments about VIP's unique capabilities in construction management. It noted that no evidence was presented to show VIP was the only entity qualified for such services in the Central New York area. The agreement between VIP and VDA allowed VIP to opt out of acting as construction manager for significant projects, suggesting that the Reorganized Debtors could find alternative management services if necessary. Additionally, Oneida's separate classification of the VIP Claim did not alter its treatment, as VIP's claim would be paid in full without interest, similar to other claims in Classes 3B and 3C. The Court concluded that the separate classification of the VIP Claim was not critical for the Debtor's reorganization.

Oneida has not provided a valid business justification for the separate classification of the VIP Claim, which is prohibited under Code 1122(a). The proposal aims to gain acceptance of the Modified Oneida Plan from creditors with impaired claims in Classes 3B and 3C, potentially satisfying Code 1129(a)(10) and addressing inadequate acceptances under Code 1126. The Court concludes that Oneida cannot classify the VIP Claim separately from other claims in Class 3. Consequently, it is unnecessary to determine if Oneida must resolicit votes from creditors in Classes 3, 5A, 5B, or equity holders in Class 6. 

The Court will address arguments regarding Oneida's modifications to its plan following rejection by the majority of creditors. While Code 1127(a) allows plan modification before confirmation, the Court emphasizes the need to consider the best interests of both creditors and Debtors, especially with competing plans. The Court questions Oneida's failure to independently devise a reorganization plan before its rejection, suggesting that its subsequent attempts to modify the plan appear to be strategic maneuvering, which the Court will scrutinize closely. 

The Court cites the precedent set by Judge Sidney M. Aronovitz in In re University Creek Plaza, Ltd., which indicates that a bankruptcy court can limit a plan proponent's right to modify its plan after multiple amendments. Given the circumstances, the Court finds it appropriate to apply a similar approach here. Oneida's motion for a determination that further disclosure and resolicitation of votes regarding the Modified Oneida Plan is unnecessary is deemed moot and denied due to non-compliance with Code 1122, as integrated with Code 1127(a) and interpreted by relevant courts.

An involuntary Chapter 11 petition was filed against Raceway on August 9, 2004, in the U.S. Bankruptcy Court for the District of Nevada, which was dismissed on September 29, 2004. Raceway's operations reportedly ceased on July 23, 2004, due to suspended licenses. On February 21, 2005, the Debtors filed a plan and disclosure statement, followed by the Third Amended Chapter 11 Plan on September 13, 2005, which included the "Scott Settlement." Oneida submitted its First Amended Disclosure Statement on September 1, 2005. The Financial Balloting Group was appointed as Ballot Agent on September 21, 2005. 

VIP had an agreement with Raceway in August 2003 for constructing a video lottery terminal facility. A Notice of Transfer for VIP's claim to VDA was filed on November 15, 2005, with VIP agreeing to vote for the VDA/Debtors' Plan. During a January 6, 2006 hearing, parties could not stipulate uncontested facts. The Cherry/Goldfarb Plaintiffs filed a $30 million proof of claim for breach of contract, alleging fraud and tortious interference against Raceway's directors. Raceway objected to this claim but settled with the plaintiffs on September 8, 2005, contingent on the confirmation of the VDA/Debtors' Third Amended Plan. 

The settlement stipulated that the Cherry/Goldfarb Plaintiffs would receive compensation tied to a general unsecured claim of $130,000 and additional amounts dependent on the licensing and operation of VLTs. Despite Oneida's opposition, the court allowed the Debtors to withdraw their objection to the claim. Oneida subsequently objected to the Cherry/Goldfarb claim, arguing for its reduction to $130,000. This motion is set for review on January 24, 2006. The Court indicated that the classification of claims in Class 3 as secured was of minor relevance to the issue of separate classification.