The Louisiana Horsemen’s and Benevolence Association (an organization of racehorse owners) had sued the Fairgrounds Racetrack in New Orleans for failure to pay the horsemen most of their legal share of video poker proceeds of the Fair Grounds-owned off-track video poker casinos over a 10-year period. The Louisiana Supreme Court awarded the Horsemen a $90,000,000 judgment against the Fairgrounds, which immediately made them the major creditor with a first lien on all the unmortgaged assets the Fairgrounds owned. The Horsemen then demanded payment. The Fairgrounds immediately retained the region’s best bankruptcy lawyer, filed Chapter 11, and subsequently, in bankruptcy terms, is referred to as the “Debtor.”
The Horsemen’s corporate law firm (pseudo-name: ABC), which managed the successful lawsuit, hired a bankruptcy law firm, (pseudo-name: DEF) to represent the Horsemen. Several months later the Horsemen’s corporate law firm, ABC, became somewhat concerned about the quality of representation the Horsemen were receiving from DEF. They engaged Liuzza Management Consulting, Inc. to assess the performance of DEF. Over the several months of the engagement, Liuzza generally identified several concerns about DEF’s performance and reported them to ABC.
Vincent Liuzza had a concern that the entire value of the Fair Grounds Racetrack entity would likely be less than the amount of the $90,000,000 judgment. If so, then if all the Race Track’s assets would be sold in the bankruptcy process, then that would be the maximum amount that the Horsemen could receive. Therefore, it would be important to have an idea of the total present value of the Racetrack entity, including its off-track betting parlors, many of which included video poker gaming machines.
In a Chapter 11 bankruptcy, for the Debtor to retain ownership of the company, it would need to present a deal to all its creditors that they could approve. If not, then the company’s individual assets (or the entire company) would be sold in a courtroom-supervised auction. Liuzza then recommended to the Horsemen’s bankruptcy lawyers that they should get, at least, an informed “guess” on the value of the racetrack as a going concern. The Horsemen’s corporate attorneys declined.
Liuzza then did his own valuation of the Racetrack entity, which he concluded was a range of $40,000,000 to $50,000,000. Since this is less than the amount of the judgment, the Horsemen would likely be entitled to receive total ownership of the entire Racetrack and its several off-site betting and video poker casinos in return for settling the $90,000,000 debt.
Being of the opinion that the Debtor’s bankruptcy law firm was far more sophisticated and resourceful than the Horsemen’s bankruptcy law firm, Liuzza was concerned, based upon his actual experience in bankruptcy Debtor asset auctions, that these Debtor lawyers would attempt to use all their legal “tricks” to
- a) convince the court that they should be the party to draft the terms of the auction, and
- b) to load the bidding document with terms and restrictions that would discourage almost all potential bidders.
The reason for this is to enable the present owner, or its favored third party, to be legally able to purchase the company at rock-bottom prices, because there would be no other serious bidders. This, of course, would effectively mean that the current Fairgrounds owners would be legally able to buy the Horsemen’s $90,000,000 claim receivable in the auction for a small fraction of that amount because there would likely be no other bidders. Therefore, having sharp lawyers, they would have retired their $90,000,000 payable for maybe $20,000,000 or $30,000,000, while still remaining owners of the Fairgrounds!
Liuzza then recommended that the Horsemen propose to the court that they settle the entire case in return for complete and unimpaired ownership of the race track. That would enable the Horsemen to take total ownership and then do a national and well-publicized orderly-managed auction, selling to the highest bidder, thus maximizing the Horsemen’s recovery. Alternatively, they could propose to the court that the Horsemen manage the auction process, write the auction rules, and auction the entire entity through the court process and receive the total proceeds up to $90,000,000, with the unsecured creditors receiving any excess.
The Horsemen and both their law firms rejected that idea, and the court declared that the assets be sold, and that the Debtor (the Race Track) would be entitled to set the auction rules and manage the auction process. This could enable the present owner, the Debtor, to buy back its company for less than the true market value suggested by a fair and well-publicized auction price (for example maybe $10,000,000 or $20,000,000), which would then be all that the Horsemen could receive. Of course, the Debtor then proposed to the court that it be entitled to manage the entire auction process, and set all the auction terms, and the court promptly agreed because there was no effective objection from the creditor lawyers.
When Liuzza read the Debtor’s proposed terms of auction, he strongly advised ABC that they should vehemently object to those terms. But ABC and DEF appeared uninterested in Liuzza’s recommendation. To Liuzza, it appeared that they did not understand the consequences of not following his recommendation. Therefore, he insisted that both ABC and DEF meet with him for lunch to ensure that each understood, and together they, hopefully, would have a chance to change their minds. It was a good lunch meeting. And once they understood his arguments, they agreed. DEF then filed a motion to remove the most egregious terms in the Debtor’s proposed auction rules, and the court agreed.
The auction occurred. Churchill Downs was the buyer for $40,000,000, and the Horsemen netted $32,000,000 after administrative and attorney fees were deducted. Nothing was left for the unsecured creditors.
N.B. The consultant had the determination and the skill, fortunately, to change, at the last minute, the minds of his resisting client. As seen in other cases here, some clients continue to resist sound advice, possibly with very good reasons. Nevertheless, sometimes this results in a total loss of all their equity. Examples are Piccadilly Cafeterias, and The Deep-River Logistics Company.
