Judge Rejects Suffolk OTB Bankruptcy Petition

A big New York state off-track betting corporation did not have the legal authority to seek Chapter 9 bankruptcy protection earlier this year, a federal bankruptcy judge has ruled.

Chief United States Bankruptcy Judge Carla E. Craig of the Eastern District of New York tossed out a bankruptcy protection petition by Suffolk Off-Track Betting Corp., a decision that leaves a looming question mark over the public benefit corporation’s future.

The judge declared the OTB’s Chapter 9 petition “unconstitutional and void” because it failed to get needed state approval for the bankruptcy filing. Suffolk OTB obtained from a federal district court a two-week stay to the dismissal.

Churchill Downs, which has been one of Suffolk OTB’s creditors, had earlier this year sought to get the case tossed on the grounds that it did not have the legal authority for the Chapter 9 filing.

The Suffolk County Legislature last March adopted a resolution permitting the OTB to declare bankruptcy, which it did two days after that vote.

But Craig said the county was “usurping the state’s power” by unilaterally acting to place the OTB, one of five such public corporations around the state, into Chapter 9. The judge noted the state has a “direct financial interest” in the OTB and that it is heavily regulated by the state racing and wagering board.

The judge said the bankruptcy move was an “impermissible attempt” by the county to legislate something it can’t do on its own.

Suffolk OTB had argued that even if the legal filing requirements were not met, the judge has the authority to let the case proceed. The judge disagreed in this case.

“The fundamental importance, in our federal system, of proper deference to state sovereignty outweighs Suffolk OTB’s arguments concerned the benefits which may flow to creditors and others from this Chapter 9 case,” the judge wrote in her decision.

The judge noted that the state had authorized the bankruptcy filing of the now-defunct New York City Off-Track Betting Corp. when it sought bankruptcy protection.

“Suffolk County does not maintain unfettered control over Suffolk OTB,” the judge said.

The OTB’s creditors include New York Commercial Bank, breeders, in-state tracks, a state retirement fund and out-of-state tracks, including Churchill.