New York City Off-Track Betting Corporation

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------x 	FOR PUBLICATION
:
In re: 	: 	Chapter 9
:
NEW YORK CITY OFF-TRACK BETTING 	: 	Case No. 09-17121 (MG)
CORPORATION, 	:
:
Debtor. 	:
:
---------------------------------------------------------------x
MEMORANDUM OPINION AND ORDER DENYING IN PART AND ABSTAINING IN
PART TO MOTIONS TO COMPEL THE DEBTOR TO COMPLY WITH THE
REQUIREMENTS OF THE NEW YORK RACING, PARI-MUTUEL WAGERING AND
BREEDING LAW AND MAKE CERTAIN STATUTORY DISTRIBUTIONS
A P P E A R A N C E S:
CRAVATH, SWAINE & MOORE LLP
825 Eighth Avenue
New York, New York 10019
By: 	Richard Levin, Esq.
Attorneys for Debtor New York City Off-Track
Betting Corporation
OLSHAN GRUNDMAN FROME
ROSENZWEIG & WOLOSKY LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
By: 	Michael S. Fox, Esq.
Herbert C. Ross, Esq.
David Y. Wolnerman, Esq.
LAW OFFICES OF MARVIN NEWBERG
33 North Street
Monticello, New York 12701
By: 	Marvin Newberg, Esq.
Attorneys for Empire Resorts, Inc.
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HODGSON RUSS LLP
60 E. 42nd Street, 37th Floor
New York, New York 10165
By: 	Deborah Piazza, Esq.
HODGSON RUSS LLP
140 Pearl Street, Suite 100
Buffalo, New York 14202
By: 	Steven W. Wells, Esq.
Michael E. Reyen, Esq.
Attorneys for Finger Lakes Racing Association, Inc.
MARTIN GLENN
United States Bankruptcy Judge
Finger Lakes Racing Association (“Finger Lakes”) and Empire Resorts, Inc. (“Empire”
collectively the “Tracks”) move the Court to compel New York City Off-Track Betting
Corporation (“OTB”) to immediately pay certain post-petition statutory distributions currently
owed and which will allegedly come due under the New York Racing, Pari-Mutuel Wagering
and Breeding Law (the “Racing Law”). The Tracks argue that these payments must be made
because (i) state law mandates the payments and OTB is required to conduct its ongoing business
as a chapter 9 debtor in compliance with state law; and (ii) the payments are “actual, necessary
costs and expenses of preserving the estate” entitled to administrative expense treatment under
Bankruptcy Code § 503(b). OTB, for its part, admits it owes the Tracks amounts under the
Racing Law, but contends that the Racing Law does not require that the payments be made
immediately or on any particular schedule, and the amounts due cannot be treated as bankruptcy
administrative claims.
On July 13, 2010, the Court held an evidentiary hearing and heard argument on these
motions. Following the hearing the Court requested briefing on whether the bankruptcy court
should resolve the state law issue of when the Racing Law requires the payment of statutory
distributions, or whether the bankruptcy court should lift the automatic stay and require the
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parties to seek a determination of this state law issue from the New York State Racing and
Wagering Board (“Racing and Wagering Board”). The parties filed the requested additional
briefs on July 21, 2010. (ECF #s 128 & 129.)
For the reasons discussed below the Court determines that the post-petition statutory
distributions OTB owes the Tracks are not administrative expenses under section 503(b) of the
Bankruptcy Code. The Court further concludes that the bankruptcy court is not the appropriate
forum to resolve the state law issue of when these statutory payments must be made. This issue
involves important legal and policy questions involving many stakeholders in the horse racing
business in New York State, and not simply the concerns of OTB and the Tracks that are parties
to these Motions. The Court therefore abstains from deciding the state law issue, lifts the
automatic stay and directs the parties to commence an appropriate proceeding within seven (7)
days from the date of this Order to obtain a determination from the Racing and Wagering Board.
I. 	BACKGROUND 1
OTB is a public benefit corporation, established and governed by the Racing Law, that
operates an off-track pari-mutuel betting system within New York City. (Joint Pre-Trial
Stipulation at ¶¶ 4, 7.) OTB was created to earn money from horse betting activities and halt
illegal wagering and bookmaking on horse races. (Id. at ¶ 7.) OTB is operated by a board of
directors consisting of five persons appointed by the Governor of New York. (Id. at ¶ 8.)
Lawrence S. Schwartz is currently Chairman on OTB, having succeeded Meyer Frucher, who
1 	This section is based on a Joint Pre-Trial Stipulation entered into by the parties. Under the Joint Pre-Trial
Stipulation the Tracks and OTB have agreed that certain facts are undisputed for purposes of determining these
motions. (See Joint Pre-Trial Stipulation, ECF # 113.) In some instances only Empire, not Finger Lakes, has
stipulated to relevant facts. Counsel for Finger Lakes, however, agreed at the July 13, 2010 hearing that the Court
could consider each of these facts as proven for purposes of resolving these motions. (July 13, 2010 Tr. 17:7–
18:16.) Thus, the Court will treat all facts in the Joint Pre-Trial Stipulation as undisputed for the purpose of
resolving the motions currently before the Court.
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was Chairman at the time this case was filed. Shortly after his appointment, Schwartz hired Greg
Rayburn, a former employee of FTI Consulting, as the new CEO of OTB. (Id. at ¶ 86.)
OTB operates under the Racing Law and is heavily regulated by the Racing and
Wagering Board, which governs all off-track and on-track pari-mutuel betting in New York, as
well as all entities engaged in those activities. (Id. at ¶ 9.) Pari-Mutuel betting is a system where
particular types of bets on a single race are pooled together. 	(Id. at ¶ 12.) The pool of total bets
OTB receives on a race is called the “Handle.” Approximately 80% of the Handle is set aside
for the benefit of winning bettors. The Racing Law requires OTB to distribute certain
percentages of the Handle to the state, local governments, horse breeding funds, and certain race
tracks including those operated by Empire and Finger Lakes. (See id. at ¶ 13.)
As discussed in this Court’s March 22, 2010 opinion, OTB has faced economic troubles
for years. In re New York City Off-Track Betting Corp., 427 B.R. 256, 262 (Bankr. S.D.N.Y.
2010). Despite cost-cutting efforts and an eventual state takeover, OTB could not avoid filing
for bankruptcy on December 3, 2009. See id. at 262–63. OTB’s financial troubles have been
caused, at least in part, by the Racing Law’s requirement that OTB make distributions of its
Handle to stakeholders in the New York racing industry. OTB has lobbied for the past five years
for changes to the Racing Law’s mandatory statutory distributions. Id. at 262; (Joint Pre-Trial
Stipulation at ¶¶ 59–65). 	As of today, no legislative action appears imminent and the New York
Legislature may wait as much as a full year to make any changes. (See Minutes of the Meeting
of the Board of Directors of OTB, Apr. 17. 2010 (Ex. S to Joint Pre-Trial Stipulation).)
OTB’s financial results demonstrate its troubles. In fiscal years ending June 30, 2006,
2007, 2008, and the nine-month period ending on March 31, 2009, OTB had operating deficits of
approximately $121 million, $30 million, $76 million, and $25 million respectively. (Joint Pre-
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Trial Stipulation at ¶ 58.) Due to these losses OTB has repeatedly requested that the state
legislature change the payments required by the Racing Law. (See id. at ¶ 59.) The legislature
has recently made clear that it now favors a “short-term” solution to OTB’s woes. Any
permanent resolution will likely be deferred for as much as a year. (Id. at ¶¶ 73–74.)
A. Statutory Commissions
The Racing Law sets certain fees OTB must pay to tracks based on the total betting
Handle OTB receives for races held at those tracks. For purposes of this motion, these required
statutory payments are deemed “Direct Commissions.” 	(Id. at ¶ 15.) OTB also simulcasts and
accepts bets on races from tracks outside of New York as well as on races from tracks inside of
New York but outside of OTB’s region. The Racing Law requires OTB to make payments from
the Handle received on these races to certain tracks within New York State. These sums,
deemed “Indirect Commissions” for purposes of these motions, differ for harness racetracks and
thoroughbred racetracks. (Id.) In addition to the Direct and Indirect Commissions, OTB has
select contractual agreements with certain New York State thoroughbred racing tracks. OTB
continues to make payments as required by these contracts (the “Contractual Payments”). (Id. at
¶ 16.)
1. 	OTB’s Direct Commissions to the Tracks
Empire owns and operates Monticello Casino and Raceway (“Monticello Raceway”),
which conducts approximately 200 harness race programs a year. (Id. at ¶ 5.) OTB simulcasts
races held by Empire and other New York State harness racing tracks. Thus, pursuant to the
Racing Law, OTB owes Direct Commissions to these tracks. The Racing Law does not specify
when these Direct Commissions must be paid, but post-petition OTB pays these commissions
within 30 days after the month they are incurred. (Id. at ¶ 17.)
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Similarly, Finger Lakes owns and operates Finger Lakes Gaming and Racetrack which
holds numerous thoroughbred horse races and provides employment opportunities for New
York’s racing and breeding industry. (Id. at ¶ 6.) As OTB does with the harness tracks, OTB
simulcasts races held at New York State thoroughbred racing tracks and accepts bets on those
races. The Racing Law requires OTB to pay Direct Commissions to the thoroughbred tracks.
Direct Commissions to thoroughbred tracks accrue at rates set by the Racing Law and are only
paid to the track that hosts the races on which the bets are taken. Since filing for chapter 9
protection, OTB has paid Direct Commissions to the thoroughbred tracks 30 days after the
month they were incurred. (Id. at ¶ 29.)
2. 	OTB’s Indirect Commissions to the Tracks
In addition to the Direct Commissions, the Racing Law also requires OTB to pay Indirect
Commissions to harness racing tracks, including Monticello Raceway, for simulcasting and
taking bets on out-of-state harness races. (See id. at ¶¶ 19–20.) The Racing Law requires OTB
to pay a fixed percentage of the Handle it receives on out-of-state harness races it simulcasts to
certain New York State harness racing tracks. (Id. at ¶ 20.) The calculation of the precise
amount due varies on a number of factors including whether the New York State harness tracks
run races on the day the out-of-state races are simulcast. (Id.) The Racing Law also requires
OTB to pay Indirect Commissions to harness racing tracks within its region (Monticello
Raceway, Yonkers Raceway, and Tioga Downs (the “Regional Harness Tracks”)), on the Handle
OTB collects on New York State harness races it simulcasts that occur outside of OTB’s region.
The Indirect Commissions the Regional Harness Tracks are due on these races are based on a
formula within the Racing Law. (Id. at ¶¶ 14, 21.)
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Similar to the harness racing tracks, the Racing Law also requires OTB to make Indirect
Commission payments to New York State thoroughbred tracks based on the Handle it receives
from out-of-state thoroughbred races. Under the Racing Law, OTB may simulcast any out-of-
state thoroughbred race so long as (i) it simulcasts and accepts bets on New York State
thoroughbred races; and (ii) it receives approval from the Racing and Wagering Board to carry
the out-of-state races and accept wagers on those races. (Id. at ¶¶ 32–33.) The precise formula
governing the Indirect Commission owed to each thoroughbred track is provided by the Racing
Law and includes whether the thoroughbred track operated races on the day the Indirect
Commissions were incurred. (Id. at ¶ 34.)
The Racing Law also provides for payments to the Regional Harness Tracks based on the
Handle OTB receives on thoroughbred races held at Finger Lakes’ track. The Regional Harness
Tracks are only entitled to these payments (i) on days when New York Racing Association
(“NYRA”) 2 is not running races; and (ii) if the Regional Harness Track is not simulcasting
thoroughbred races and therefore does not receive bets on thoroughbred races. (Id. ¶ 22.) The
Racing Law similarly requires OTB to make payments to the Regional Harness Tracks based on
the Handle it receives when simulcasting out-of-state thoroughbred races. (Id. at ¶ 23.) On days
when tracks operated by NYRA are not operating (i.e. are “dark”), OTB is allowed to accept bets
on out-of-state thoroughbred races. If a harness track is open on such a day when NYRA is dark
and they do not take bets on any thoroughbred races that day, the Racing Law requires OTB to
pay a portion of the commission it earned on the Handle received from the out-of-state
thoroughbred races to the Regional Harness Tracks. These so-called “Dark Day” Indirect
2 	NYRA operates Aqueduct Racetrack, Belmont Park and Saratoga Race Course. NYRA was a chapter 11
debtor in an earlier case in this court, see Case No. 06-12618 (JMP). The successful reorganization of NYRA
required the New York legislature to amend the Racing Law. Compare Modified Third Amended Plan of Debtor
Pursuant to Chapter 11 of the United States Bankruptcy Code ¶ 2.1(a)–(b), Case No. 06-12618 (JMP) (ECF # 1009)
with 2008 N.Y. LAWS 77–81.
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Commissions accrue in the amount of 1.5% of OTB’s Handle on the thoroughbred races run
outside of New York. (Id. at ¶¶ 24–25.)
In addition to the Dark Day Indirect Commissions, the Racing Law also contemplates so-
called “Maintenance of Effort” Indirect Commissions. Maintenance of Effort payments require
OTB to pay each Regional Harness Tracks at least the same amount it paid to that track in
calendar year 2002. This amount is calculated from the Handle OTB received each day on
wagers placed on evening out-of-state harness races. The calculations are not adjusted to
account for demand, economic decline, or similar factors. (Id. at ¶¶ 26–27.) The Racing Law
also contemplates a second type of “Maintenance of Effort” Indirect Commission: once OTB’s
total Handle on out-of-state night time thoroughbred racing reaches $100 million, OTB must pay
an additional 2% commission to its Regional Harness Tracks on the Handle from bets placed on
future simulcast out-of-state night time thoroughbred races. (Id. at ¶ 28.)
B. Timing of Payments
While the Racing Law provides the formulas for calculating Indirect Commissions, the
statute is silent about when the payments must be made. The Racing and Wagering Board has
not adopted any regulations specifying the required timing of these payments. Over the past five
years, OTB has slowed the pace of payments on Indirect Commissions. In 2005 OTB paid
Indirect Commissions 30 days after they were incurred. In 2006, however, OTB started making
Indirect Commission payments two months after they were incurred. By 2007, OTB delayed
Indirect Commission payments three months. The delay reached five months by the end of
2009. (Id. at ¶ 41.)
Shortly after filing for chapter 9 protection, OTB stated its intent to pay both Direct and
Indirect Commissions on a one month lag, and OTB made payments on that schedule for the first
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three months of its bankruptcy case. (Id. at ¶ 46.) In March and April 2010, however, OTB
claimed it was running out of money and, faced with the prospect of shutting its doors, it sent
notice to its employees that operations would cease on April 11, 2010. (Id. at ¶ 47.) Instead of
closing, however, OTB decided to continue operating while the New York State legislature
debated a solution. In order to save cash, OTB began deferring payment of Indirect
Commissions. (Id. ¶¶ 48–51.) Since making this decision, OTB has continued its operations,
but it has not paid any Indirect Commissions. (Id. at ¶¶ 52, 84.)
As a result of these current and historical delays, OTB owes Empire prepetition Indirect
Commissions in the amount of $3,616,588 and post-petition Indirect Commissions of $782,073.
(Id. at ¶ 42.) OTB owes Finger Lakes $2,044,051.20 in prepetition Indirect Commissions and
$1,259,851.10 in post-petition Indirect Commissions. (Id. at ¶ 43.) OTB has not paid any
Indirect Commissions to Empire or Finger Lakes since March 2010. (Id. at ¶ 46.)
Unlike the Indirect Commissions, during OTB’s bankruptcy case, OTB has paid Direct
Commissions one month after incurred. (Id. at ¶ 53.) Prepetition, however, OTB had fallen
behind on Direct Commission payments to Empire. OTB owes Empire $1.7 million in
prepetition arrears for Direct Commissions. (Id. at ¶ 55.) Before OTB’s bankruptcy filing
Empire filed an action against OTB in New York State court, requesting the $1.7 million in
prepetition Direct Commissions. (Id. at ¶ 56.) The state court action is currently stayed.
OTB’s delay of payments has reduced the size of purses at Monticello Raceway.
Historically approximately 50% of all Dark Day Indirect Commissions received by Monticello
were put towards purses for races. And Monticello Raceway has also traditionally relied on
Indirect Commission payments from OTB to account for 50% of all racing revenue earned by the
track. Therefore, OTB’s statutory commissions are vital to the continuing health of Monticello
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Raceway and the harness racing industry in New York. (See id. at ¶¶ 88–89.) Finger Lakes also
relies on statutory payments from OTB. Monticello Raceway and Finger Lakes rely on Indirect
Commissions based on OTB’s simulcasting and accepting of wagers on out-of-state races to
make purse size competitive with those in other states. (Id. at ¶¶ 90–91.) Failure of OTB to
make its Indirect Commission payments could result in a reduction of races at Monticello and the
shutdown of Finger Lakers. (Id. at ¶ 93.)
C. Required Segregation of Funds
Recent acts of the Racing and Wagering Board have forced OTB to begin sequestering
funds for payment of Indirect Commissions. Under the Racing Law and federal laws, see 15
U.S.C. § 3001(a)(1) (“the States should have primary responsibility for determining what forms
of gambling may legally take place within their borders”), OTB must receive approval from the
Racing and Wagering Board to simulcast out-of-state races and accept bets on those races. OTB
must receive authorization for each separate out-of-state “race meet” it plans on simulcasting and
accepting wages on. (Id. at ¶ 75.) Prior to April 17, 2010, authorization was routinely requested
and received. On April 21, 2010, however, the Racing and Wagering Board requested additional
information regarding what OTB intended on doing with the funds it received from simulcasting
out-of-state races, including whether they would be used to make statutory payments to New
York racing agencies. OTB responded on April 23, 2010, informing the Racing and Wagering
Board that it intended on deferring payment of Indirect Commissions to racing entities. (Id. at ¶
76.)
Following OTB’s April 23 response, the Racing and Wagering Board delayed decisions
on a number of OTB’s applications to simulcast out-of-state races, effectively denying those
applications. (Id. at ¶ 77.) Following these denials, OTB and the Racing and Wagering Board
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held discussions that resulted in two letters from OTB. One of these letters, dated May 26, 2010,
committed OTB to deposit commissions computed under the Racing Law from accepting bets on
out-of-state races into a special segregated bank account. (Id. at ¶¶78–79.) Specifically, the
letter stated that OTB would start depositing “portions of retained commissions from wagering
payable to New York State racing entities (i.e., New York State licensed race tracks and
Breeding Funds) in accordance with applicable provisions of the Racing Law arising from
acceptance by [OTB] of wagering on out-of-state races.” (Id. at ¶ 81.) The letter called for
weekly calculation and deposits into the segregated bank account. Under the terms of the letter,
OTB may withdraw funds from the account to fund statutory payments or, with 24 hours written
notice to the Racing and Wagering Board, for purposes other than funding the statutory
distributions under the Racing Law. Any written notice must include the “nature, amount and
corporate purpose for the withdrawal.” (Id. at ¶ 82.)
OTB did not pay or segregate funds to pay the Tracks’ statutory distributions for the
period from March 1, 2010 through May 27, 2010. OTB maintains that, if forced to make these
payments, OTB would have been forced out of business. (See id. at ¶¶ 83, 105.) The Tracks,
however, seek precisely the relief OTB maintains will likely cause it to halt operations:
immediate payment of post-petition Indirect Commissions.
II. 	DISCUSSION
The Tracks maintain that OTB must promptly pay its Indirect Commissions. The Tracks
further argue that these sums must be paid as administrative expenses under section 503(b) of the
Bankruptcy Code, at least to the extent that they were incurred post-petition. OTB responds,
acknowledging that it owes the Tracks—plus other racing entities in New York State—Indirect
Commissions, but arguing that the Racing Law does not require OTB to pay these sums on any
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set schedule. OTB further argues that the post-petition Indirect Payments are not entitled to
administrative expense status in a chapter 9 case.
A. Section 904 of the Bankruptcy Code
Before examining the issues at bar the Court must first address whether it has the
constitutional and statutory authority to decide the issues raised by these motions. As a general
matter, section 904 of the Bankruptcy Code places severe limits on the power of courts to
compel any action from chapter 9 debtors. Specifically, section 904 states:
Notwithstanding any power of the court, unless the debtor consents
or the plan so provides, the court may not, by any stay, order, or
decree, in the case or otherwise, interfere with
1) 	Any of the political or governmental powers of the debtor;
2) 	Any of the property or revenues of the debtor; or
3) 	The debtor’s use or enjoyment of any income-producing
property.
11 U.S.C. § 904.
This section codifies the Tenth Amendment’s general prohibition on a bankruptcy court’s
power to interfere with a state entity. 	See 6 COLLIER ON BANKRUPTCY ¶ 904.01 (Alan N.
Resnick & Henry J. Sommer eds., 16th ed. rev.) (“Section 904 compliments section 903 in
providing a constitutional shield for chapter 9 by limiting federal intrusion upon States’ rights.”).
Section 904’s command is clear. A bankruptcy court may not interfere with a chapter 9 debtor’s
political or governmental powers, or the use of the debtor’s property, without the debtor’s
consent. The first subsection of the statute shields chapter 9 debtors from federal meddling with
their political or governmental powers. Id. at ¶ 904.01[1]. The remainder of the statute halts
bankruptcy courts from controlling a state entities’ use of its property or revenues. Id. at ¶
904.01[2]. In practice, this section prohibits bankruptcy courts from mandating that a chapter 9
debtor make specific payments in violation of the Tenth Amendment. See, e.g., In re County of
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Orange, 179 B.R. 195, 199–200 (Bankr. C.D. Cal. 1995) (finding that ordering the interim
payment of professional fees would violate section 904 of the Bankruptcy Code and opining that
the rational for section 904 “was to circumvent any possible Tenth Amendment objection to
municipal bankruptcy legislation”); 6 COLLIER ON BANKRUPTCY ¶ 904.01[2] (“[A] municipal
debtor is not restricted in its ability to use, sell or lease its property, and the court is not to
involve itself with the day to day operations of the municipality.”).
The statute carves out an exception to the command that a bankruptcy court may not
interfere with a chapter 9 debtor’s use of property. Specifically, a chapter 9 debtor may consent
to an order of a bankruptcy court that would interfere with the use of the debtor’s property. 11
U.S.C. § 904; In re County of Orange, 179 B.R. 185, 189–90 (Bankr. C.D. Cal. 1995) (observing
that a chapter 9 debtor may consent to treatment that would otherwise violate section 904 of the
Bankruptcy Code). See also 6 COLLIER ON BANKRUPTCY ¶ 904.02[1] (“If the debtor has
consented to an order of the court, the court’s action will not be deemed interference with the
affairs or property of the debtor . . . .”). The ability of a chapter 9 debtor to consent under section
904 is limited by section 903 of the Bankruptcy Code and federalism concerns. Specifically, a
chapter 9 debtor cannot consent to a court order that would violate a state law or administrative
order. 6 COLLIER ON BANKRUPTCY ¶ 904.02[2][a] (observing that a “municipality could not, by
it consent, empower the court to order the municipality to do an act that would be in violation of
a law or administrative order of the state controlling its municipalities”).
As demonstrated by OTB’s submissions and through clarification at oral argument, OTB
has consented to have this Court determine (i) whether the Indirect Commissions are
administrative expenses and, if so, the schedule on which they must be paid; and (ii) whether the
Racing Law, 28 U.S.C. § 959(b), or applicable bankruptcy law requires OTB to make immediate
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payment of post-petition Indirect Commissions. (See OTB Opp. Br. at 5 (ECF #105); July 13,
2010 Hr’g Tr. at 88:9–89:13.)
The Tracks argue, based on a mere utterance of OTB’s counsel at a hearing, that OTB has
consented to have this Court determine every issue presented by the motions. A review of the
record, however, demonstrates that this is not the case. OTB initially tailored its consent to have
this Court determine “whether either the bankruptcy law or the Racing Law requires [OTB] to
make the payments” on Indirect Commissions under a particular schedule requested by the
Tracks. (Initial Resp. of OTB (ECF # 98); June 16, 2010 Hr’g Tr. 14:9–15:9.) OTB, in its
formal response to the motions, refined this position to include whether 28 U.S.C. § 959(b)
required immediate payment of the Indirect Commissions. (See OTB Opp. Br. at 5.) Finally, at
the July 13, 2010 hearing, OTB expanded its consent to have this Court determine whether the
post-petition Indirect Commissions are administrative expenses and whether they must be paid
on a schedule in accordance with the Track’s wishes. (July 13, 2010 Hr’g Tr. at 88:9–89:13.)
Thus, the Court rejects the Tracks’ position and will limit itself to considering the issues to
which OTB has consented.
B. The Indirect Commissions Are Not Administrative Expenses
The Tracks argue that the Indirect Commissions that have accrued post-petition are
entitled to administrative expense status under section 503(b) of the Bankruptcy Code. (Empire
Mot. to Compel at ¶ 18 (ECF # 86); Finger Lakes Mot. to Compel at ¶ 24 (ECF # 90).) OTB
responds, arguing that because there is no “estate” in chapter 9 cases the Indirect Commissions
cannot be administrative expenses. (OTB Opp. at 10.)
Section 503 of the Bankruptcy Code applies to chapter 9 debtors. See 11 U.S.C. §
901(a). Section 503(b) contemplates the creation of administrative expenses for “the actual,
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necessary costs and expenses of preserving the estate” of the bankrupt entity. 11 U.S.C. §
503(b)(1)(A) (emphasis added). But, as recently explained by the Bankruptcy Court for the
Central District of California, chapter 9 does not incorporate section 541 of the Bankruptcy
Code, which provides for the creation of a bankruptcy “estate.” In re Valley Health Sys., 429
B.R. 692, 714 (Bankr. C.D. Cal. 2010). Indeed, courts have clearly established that in chapter 9
cases, there is no “estate” property. See In re JZ L.C.C., 371 B.R. 412, 419 n.4 (9th Cir. B.A.P.
2007) (observing that “there is no property of the estate in chapter 9”); In re City of Vallejo, 403
B.R. 72, 78 n.2 (Bankr. E.D. Cal. 2009) (“In a chapter 9 case there is no estate.”). Commentators
agree with this approach. 6 COLLIER ON BANKRUPTCY ¶ 901.04[13][a] (“In a chapter 9 case there
is no ‘estate.’”); 5 WILLIAM J. NORTON, J R. & WILLIAM L. NORTON III, NORTON B ANKRUPTCY
LAW AND PRACTICE § 90:3 (3d ed. 2009) (“no estate of the debtor is created under chapter 9”).
Because a chapter 9 debtor’s property remains its own and does not inure into a
bankruptcy estate as provided by section 541 of the Bankruptcy Code, there can be no
administrative expenses for “the actual and necessary costs of preserving the estate” as
contemplated by section 503(b)(1)(A) of the Bankruptcy Code. Both leading bankruptcy
treatises concur with this approach. Collier observes that because there is no estate in a chapter 9
case, administrative expense claims under section 503 must be limited to “expenses incurred in
connection with the chapter 9 case itself” and not operating expenses. 6 COLLIER ON
BANKRUPTCY ¶ 901.04[13][a]. Norton agrees, observing in passing that no operating
administrative expenses are permitted in a chapter 9 bankruptcy case. 5 WILLIAM J. NORTON, J R.
& WILLIAM L. NORTON III, NORTON BANKRUPTCY LAW AND PRACTICE § 90:3.
In response, the Tracks argue that because OTB has consented to have the Court
determine whether the Indirect Commissions are administrative claims, it somehow permits the
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Court to order administrative expenses pursuant to section 503(b)(1)(A) for “the actual necessary
costs and expenses of preserving the estate.” (Joint Reply Br. of Tracks ¶¶ 27–29 (ECF # 112).)
The Tracks’ reasoning does not convince.
The Tracks maintain that the only factor limiting a bankruptcy court’s ability to deem an
operating expense an administrative expense under section 503(b)(1) is section 904’s prohibition
on a bankruptcy court’s power to interfere with the property of a chapter 9 debtor. Thus, the
Tracks argue, because OTB has consented to have the Court determine whether the Indirect
Commissions are administrative claims, the Court may deem any of OTB’s operating expenses
administrative expenses under 503(b). But this line of reasoning ignores the crucial fact that no
bankruptcy estate exists in a chapter 9 case. As explained above, the plain language of chapter 9
does not contemplate the creation of an estate. As there is no bankruptcy estate in a chapter 9
case, there can be no “necessary costs and expenses” of preserving the estate. Moreover, when
the Tracks invoke the limitations of section 904 in support of their position, they tacitly
acknowledge that a chapter 9 debtor retains full title and control over its property in a bankruptcy
case. See Valley Health, 429 B.R. at 714 (“By virtue of § 904, a debtor in chapter 9 retains title
to, possession of, and complete control over its property and its operations, and is not restricted
in its ability to sell, use, or lease its property”). This further confirms that no bankruptcy estate
exists in a chapter 9 case and therefore no operating administrative expenses may be awarded
pursuant to section 503(b)(1) in a chapter 9 case.
This conclusion is supported by the policies inherent to chapter 9 cases. As this Court
has previously recognized, chapter 9 is permeated with dual sovereignty concerns. Respect for
the sovereignty of state entities, including OTB, substantially constrains the Court’s powers
when dealing with a chapter 9 debtor. Section 903 makes clear that chapter 9 “does not limit or
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impair the power of a State to control, by legislation or otherwise, a municipality . . . in the
exercise of the political or governmental powers of such municipality, including expenditures for
such exercise . . . .” 11 U.S.C. § 903. These constitutional underpinnings strongly caution
against the Court intruding upon a chapter 9 debtor’s operations, despite any consent they may
have offered for the Court to do so. Cf. 6 COLLIER ON BANKRUPTCY ¶ 904.02[1][a] (observing
that a municipal debtor’s consent must not violate section 903 of the Bankruptcy Code and that
section 903 may be violated where consent would lead to a bankruptcy court interfering too
greatly into the affairs of the chapter 9 debtor).
C. No Applicable Law Requires the Payment of Indirect Commissions on a Specific
Schedule
The Tracks argue forcefully that OTB violates New York State law by not making
immediate payment of the Indirect Commissions. The Tracks maintain that the Indirect
Commissions should be immediately paid as administrative expenses and that principles of
equity require OTB to make these payments promptly. The Tracks further argue that 28 U.S.C. §
959 requires OTB to operate in accordance with state law, including making prompt payment of
post-petition Indirect Commissions. Finally, the Tracks maintain that principles of federalism
require the immediate payment of the Indirect Commissions. The Court rejects all of these
arguments.
As an initial matter, as demonstrated above, the Court rejects the Tracks’ argument that
there can be any administrative expenses for the preservation of the estate in chapter 9 cases, as
no estate exists in those bankruptcies. Therefore, all of the Tracks’ arguments that the Court
should use its discretion to require the immediate payment of the Indirect Commissions as
administrative expenses are inapposite. (See Joint Reply Br. of Tracks ¶¶ 41–50.) The Court is
also not convinced that equity requires the immediate payment of the Indirect Commissions.
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The Tracks argue that the Indirect Commissions must be paid immediately because OTB is
earning revenue from the races taking place at the Tracks. (Empire Mot. to Compel at ¶ 17;
Finger Lakes Mot. to Compel at ¶ 23.) The Tracks essentially argue that OTB is being unjustly
enriched by refusing to pay the Indirect Commissions. But the Indirect Commissions do not
emanate from any products or services the Tracks provide to OTB. Instead, as described above,
the Racing Law alone requires the payment of Indirect Commissions to the Tracks. Indeed, the
Tracks earn Indirect Commissions merely for being in existence when OTB accepts wagers on
other races. Thus, the situation before the Court is not one of unjust enrichment. Unjust
enrichment requires the performance of services and the acceptance of those services. See, e.g.,
Economist’s Advocate, LLC v. Cognitive Arts Corp., No. 01 Civ. 9468, 2004 WL 728874, at *10
(S.D.N.Y. Apr. 6, 2004) (observing that, under New York law, a claim of unjust enrichment
requires “(1) performance of services by plaintiff; (2) the defendant accepts and benefits from the
services performed by plaintiff; and (3) the defendant under principles of equity and good
conscience should not be permitted to keep the value of the services without restitution to the
plaintiff”). 	In contrast, here the Tracks have not made any performance that has benefited OTB.
Therefore, because the Indirect Commissions are not provided in direct exchange for anything
offered to OTB by the Tracks, the Court does not believe that principles of equity require the
immediate payment of the Indirect Commissions.
The Tracks’ remaining arguments—that 28 U.S.C. § 959(b) and principles of federalism
require the immediate payment of the Indirect Commissions—distilled to their essence are
requests for the Court to enforce the Racing Law, as currently in effect in New York State.
Section 959(b) of title 28 requires most debtors to comply with the laws of the state where their
property is located. See 28 U.S.C. § 959(b) (“a trustee, receiver or manager appointed in any
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cause pending in any court of the United States . . . shall manage and operate the property in his
possession . . . according to the requirements of the valid laws of the State in which such
property is situated . . . .”). This statute reflects Congress’s concern that debtors continuing to
operate in bankruptcy comply with state laws. See In re Old Carco LLC, 424 B.R. 633, 644
(Bankr. S.D.N.Y. 2010) (intimating that section 959(b) reflects the “federal policy concern with
ensuring compliance by trustees with state law”). Principles of federalism, embodied in section
903 of the Bankruptcy Code, also mandate that chapter 9 debtors follow state law.
Section 903 of the Bankruptcy Code is the “constitutional mooring” for municipal debt
readjustment and makes clear that nothing in chapter 9 should be interpreted to limit a State’s
power to control its municipalities. Section 903 also indicates that with regards to debt
readjustment of municipal entities, chapter 9 preempts any coordinate state law. 6 COLLIER ON
BANKRUPTCY ¶ 903.01. As nothing in chapter 9 may be interpreted to interfere with the power of
a State to control its municipalities, it necessarily follows that debtors under chapter 9 must
follow state laws, at least those that are not preempted by federal law.
In its papers OTB seemingly argued that it did not need to comply with New York State
law—including the Racing Law—arguing through a highly technical statutory analysis that
section 959(b) does not apply to chapter 9 debtors. (See OTB Opp. Br. at 6–10.) At the July 13,
2010 hearing counsel for OTB retreated from this position and admitted that OTB must comply
with applicable state law, unless those state laws are preempted by the Bankruptcy Code. (July
13, 2010 Hr’g Tr. at 100:7–101:12 (“The Court: Do you agree that OTB must comply with state
law in its operations, even if 959 doesn’t apply to Chapter [9]? Mr. Levin: Yes . . . . OTB must
comply with state law . . . .”).) Counsel for OTB does not argue that the provisions of the Racing
Law concerning Indirect Commissions are preempted. (Id. at 100:13–101:12 (acknowledging
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that the Bankruptcy Code does not preempt state law with regards to post-petition Indirect
Commission payments).) Therefore, it is unnecessary for the Court to decide whether section
959 applies to chapter 9 cases. Thus, the only issue remaining to be determined is the schedule
on which the Racing Law requires payment of the Indirect Commissions.
1. The Racing Law is Ambiguous Regarding the Payment of Indirect Commissions
Both the Tracks and OTB admit that the Racing Law does not include any timeline or
deadline for OTB to pay the Indirect Commissions. (See Joint Reply Br. of Tracks ¶ 3; OTB
Opp. Br. at 6.) The Court cannot determine from examining the language and structure of the
statutes establishing the Indirect Commissions what schedule the New York State Legislature
contemplated for payment.
From the inclusion of detailed tables with payment percentages, the New York
Legislature clearly intended for OTB to pay Indirect Commissions on some type of regular
schedule. See, e.g., N.Y. RAC. PARI -M UT . WAG. & BREED. LAW § 1017 (McKinney 2009). This
interpretation is buttressed by the New York Legislature’s statement of intent when creating off-
track betting parlors, including OTB. The Legislature concluded:
It is also the intention of this article to ensure that off-track betting
is conducted in a manner compatible with the well-being of the
horse racing and breeding industries in this state, which industries
are and should continue to be major sources of revenue to state and
local government and sources of employment for thousands of
state residents.
N.Y. RAC. P ARI -M UT . WAG. & BREED. LAW § 518 (McKinney 2009). Permitting OTB to
withhold payments indefinitely is simply not consistent “with the well-being of the horse racing
and breeding industries in” New York State. Moreover, elsewhere the Legislature has concluded
that the revenues OTB distributes “plays an integral role in sustaining the viability of the entire
horse racing industry in New York state.” 2008 N.Y. LAWS 3083.
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Despite these pronouncements, the New York State Legislature has also concluded that
“the continued operation of [OTB] is of paramount importance to the public interest.” Id. Thus,
it appears that the New York Legislature intends a balance between the financial well-being of
the horse racing and breeding industries in New York and the continued operation of OTB.
Indeed, OTB has tacitly supported a balancing effort by admitting that it cannot defer paying the
Indirect Commissions indefinitely. (July 13, 2010 Hr’g Tr. at 93:12–24 (“The Court: . . . . Do
you agree that the racing law should not be read so as to provide the unilateral authority to OTB
to decide to defer payment of indirect commissions indefinitely? Mr. Levin: Underscoring the
word ‘indefinitely’, yes, I agree.”).) What balance the New York Legislature desires, however,
is not clear. The New York Court of Appeals, the final authority for interpretations of New York
State statutes, concurs with the Court’s assessment of the clarity of the Racing Law. When
interpreting statutes at issue here, Chief Judge Kaye opined that the “Racing, Pari-Mutuel
Wagering and Breeding Law remains an imbroglio, being born out of the union of diverse racing
industry interests and legislative compromise.” Suffolk Reg. Off-Track Betting Corp. v. New
York State Racing and Wagering Bd., 11 N.Y.3d 559, 569–70 (2008) (internal quotation marks
and citation omitted).
Nor should the Court extrapolate the intent of the New York Legislature from the
previous performance of the parties. The history of OTB’s payments to the Tracks does not offer
any clarity regarding what schedule of payments the Racing Law requires. The payment of
Indirect Commissions is contemplated by statute, not contract. If the Indirect Commissions
arose by virtue of a contract between the Tracks and OTB, then the Court could look to the
parties’ previous course of dealings to determine what payment schedule is appropriate. See,
e.g., Atateks Foreign Trade Ltd. v. Private Label Sourcing, LLC, No. 07CV6665(HB), 2009 WL
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1803458, at *4 (S.D.N.Y. June 23, 2009) (“Evidence of the parties’ course of dealing over the
course of their business relationship may be used to assist the Court’s interpretation of
the contracts where they are ambiguous.”) (citations omitted). But OTB and the Tracks cannot
amend New York law through conduct alone. Indeed, the Court is unaware of any canon of
statutory construction that allows a court to consider the previous course of dealings between
entities when interpreting the statute. See generally 2A NORMAN J. SINGER & J.D. SHAMBIE
SINGER, SUTHERLAND STATUTORY C ONSTRUCTION §§ 47:1–48:20 (7th ed. 2010) (canvassing
statutory interpretation aids and omitting any “course of conduct” canon of statutory
construction).
And even if the Court could consider the parties’ previous course of dealings, it would
not assist in interpreting the requirements of the Racing Law. The undisputed evidence shows
that prior to bankruptcy, OTB paid Indirect Commissions in periods varying from 30 to 150
days. Immediately following filing for bankruptcy, OTB paid the Tracks Indirect Commissions
30 days’ in arrears, at least through April 2010. At that point OTB began withholding payment
of Indirect Commissions. Thus, even if the Court could look to the previous course of dealings,
it would be forced to choose from a wide range of potential deadlines for payment of the Indirect
Commissions.
The lack of a contractual relationship between OTB and the Tracks also prohibits the
court from looking to industry norms regarding the payment schedules of Indirect Commissions
to assist in interpreting the Racing Laws. Cf. JA Apparel Corp. v. Abboud, 682 F. Supp. 2d 294,
303 (S.D.N.Y. 2002) (observing that courts may examine usage of trade, or how an issue is
commonly dealt with in an industry when interpreting contracts). Nor could the Court do so, as
there is no evidence in the record regarding how other regional off-track betting entities pay the
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Indirect Commissions commanded by the Racing Law. (See July 13, 2010 Hr’g Tr. at 78:6–
79:2.)
D. The Regulatory Structure of Racing and Wagering Board and the Ambiguity of the
Racing Laws Compel the Court to Abstain From Determining a Payment Schedule
for the Indirect Commissions
Confronted with this ambiguous statute—and keenly aware of the federalism concerns
that permeate chapter 9 bankruptcy cases—the Court questioned the parties at the July 13, 2010
hearing whether the Racing and Wagering Board would be a more appropriate forum to
determine the schedule on which OTB must pay the Indirect Commissions. (July 13, 2010 Hr’g
Tr. at 51:24–52:7, 93:25–94:10.) The Court requested and received additional briefing on this
matter. OTB argues that the Court must abstain pursuant to 28 U.S.C. § 1334(c)(2).
Alternatively, OTB argues that the Court should use its discretion to abstain from resolving this
matter under 28 U.S.C. § 1334(c)(1). In response the Tracks argue that neither mandatory nor
permissive abstention can or should be applied.
Most practitioners are aware of general federal court abstention principles. Cf. Erwin
Chemerinsky, FEDERAL J URISDICTION 735–834 (3rd ed. 1999) (discussing the various judge-
made federal abstention doctrines). Those unfamiliar with bankruptcy law, however, would
likely be surprised to learn that Congress has passed a statute, 28 U.S.C. § 1334(c), codifying
abstention principles in bankruptcy cases. Section 1334 generally discusses the jurisdiction of
bankruptcy courts and 1334(c)(1) provides:
Except with respect to a case under chapter 15 of title 11, nothing
in this section prevents a district court in the interest of justice, or
in the interest of comity with State courts or respect for State law,
from abstaining from hearing a particular proceeding arising under
title 11 or arising in or related to a case under title 11.
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Abstention pursuant to this subsection of 1334 is not mandatory; “it merely gives the
district court the discretion to abstain if abstention is in the interest of justice, or in the interest of
comity with State courts or respect for State law.” 1 COLLIER ON BANKRUPTCY ¶ 3.05[1].
In contrast, section 1334(c)(2) of title 28 provides for certain situations where a bankruptcy court
is required to abstain from making a determination and reads:
Upon timely motion of a party in a proceeding based upon a State
law claim or State law cause of action, related to a case under title
11 but not arising under title 11 or arising in a case under title 11,
with respect to which an action could not have been commenced in
a court of the United States absent jurisdiction under this section,
the district court shall abstain from hearing such proceeding if an
action is commenced, and can be timely adjudicated, in a State
forum of appropriate jurisdiction.
28 U.S.C § 1334(c)(2). This section is only applicable to proceedings based on state law claims
or causes of action merely “related to” bankruptcy cases, not those causes of action that arise
under the Bankruptcy Code or a bankruptcy case. Id.; 1 COLLIER ON BANKRUPTCY ¶ 3.05[2].
Collier opines that the difference between the two sections of the statute give a court greater
discretion to abstain from hearing a matter under 1334(c)(1) than 1334(c)(2). 1 COLLIER ON
BANKRUPTCY ¶ 3.05[1].
Courts in this Circuit have developed twelve factors to assist in determining when
abstention is appropriate pursuant to section 1334(c)(1):
1) 	the effect or lack thereof on the efficient administration of the estate if a Court
recommends abstention,
2) 	the extent to which state law issues predominate over bankruptcy issues,
3) 	the difficulty or unsettled nature of the applicable state law,
4) 	the presence of a related proceeding commenced in state court or other
nonbankruptcy court,
5) 	the jurisdictional basis, if any, other than 28 U.S.C. § 1334,
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6) 	the degree of relatedness or remoteness of the proceeding to the main
bankruptcy case,
7) 	the substance rather than form of an asserted “core” proceeding,
8) 	the feasibility of severing state law claims from core bankruptcy matters to
allow judgments to be entered in state court with enforcement left to the
bankruptcy court,
9) 	the burden on the court’s docket,
10) the likelihood that the commencement of the proceeding in a bankruptcy court
involves forum shopping by one of the parties,
11) the existence of a right to a jury trial, and
12) the presence in the proceeding of nondebtor parties.
In re Ephedra Prods. Liab. Litig., No. 04 MDL 1598(JSR), 2010 WL 882988, at *2 n.2
(S.D.N.Y. Mar. 8, 2010) (quoting N.Y. City Employees’ Ret. Sys. v. Ebbers (In re WorldCom,
Inc. Sec. Litig.)), 293 B.R. 308, 332 (S.D.N.Y. 2003)). See also In re Bozel S.A., --- B.R. ----,
2010 WL 2816369, at *9–10 (Bankr. S.D.N.Y. July 20, 2010) (listing factors courts consider
when determining when to abstain pursuant to section 1334(c)) (quoting In re Cody, Inc., 281
B.R. 182, 190–91 (S.D.N.Y. 2002)).
Little guidance exists, however, regarding the interplay between section 1334(c)(1) and
traditional federal abstention doctrines. Some courts maintain that section 1334(c)(1) grants
bankruptcy courts broader discretion than permitted by traditional federal abstention doctrines to
abstain from hearing matters. Bricker v. Martin, 348 B.R. 28, 32–33 (W.D. Pa. 2006)
(concluding that, unlike normal abstention situations, section 1334(c)(1) grants bankruptcy
courts “broad discretion” to determine whether to abstain from determining a claim) (quoting
Wood v. Wood, 825 F.2d 90, 93 (5th Cir. 1987)). And at least one court has opined in passing
that the existence of section 1334(c) makes traditional abstention doctrines inapplicable. Life
Flight of Puerto Rico Inc. v. Triple-S, Inc. (SSS) (In re Life Flight of Puerto Rico, Inc.), Nos. 09-
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00057, 08-08870 BKT, 2009 WL 2885109, at *1 (Bankr. D.P.R. Aug. 18, 2009) (determining
certain traditional abstention doctrines as “inapplicable in the face of” section 1334(c)).
The Second Circuit has determined that section 1334(c) “was intended to codify judicial
abstention doctrines . . . .” In re Pan Am. Corp., 950 F.2d 839, 845 (2d Cir. 1991). The Second
Circuit only reached this determination after researching and finding a dearth of legislative
history for section 1334(c). Given the lack of legislative history on section 1334(c), the court
turned to legislative history for former section 1471(d) of title 28 of the Bankruptcy Act, as the
two statutes are substantially similar. The court observed that the legislative history of section
1471(d) clearly stated that the statute “codifie[d] present case law relating to the power of
abstention in particular proceedings by the bankruptcy court.” Id. (quoting H.R. REP . NO. 595,
95th Cong., 1st Sess. 51 (1977), reprinted in 1978 U.S. Code Cong. & Admin. News 5963,
6012). Thus, the court concluded that Congress “intended that section 1334(c)(1) be informed
by principles developed under the judicial abstention doctrines.” Id. (internal citation and
quotation marks omitted). 3
Despite this guidance, courts in this Circuit have not fully addressed how to reconcile the
twelve factors used to assist in the application of section 1334(c)(1) with traditional abstention
doctrines. Some courts use traditional abstention doctrines to buttress their analysis of the
3 	As noted by the Second Circuit, the legislative history of historical section 1471(d) references a Supreme
Court abstention case, Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940). In re Pan Am., 950 F.2d at 845.
The Magnolia Court concluded that abstention is most appropriate where state law issues predominate or when a
case raises unresolved state law questions. Rosetta Res. Operating LP v. Pogo Producing Co. (In re Calpine Corp.),
361 B.R. 665, 669–70 (Bankr. S.D.N.Y. 2007) (interpreting the holding of Magnolia) (citing Magnolia, 309 U.S. at
483). The Court notes that the reference to Magnolia in the legislative history could be interpreted to somehow limit
the codification of abstention principles in section 1334(c) to the concepts within Magnolia, but observes that any
such conclusion is at odds with the Second Circuit’s clear direction that “section 1334(c)(1) should be informed by
principles developed under judicial abstention doctrines”—not just the concept announced in Magnolia. In re Pan
Am., 950 F.2d at 846. Indeed, the district court decision the Second Circuit cited in support of its statement that
section 1334(c) should be viewed through the prism of judicial abstention doctrines specifically stated that section
1334(c) “may summarize and incorporate federal non-bankruptcy abstention doctrines found in Railroad
Commission v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941), Younger v. Harris, 401 U.S. 37, 91
S.Ct. 746, 27 L.Ed.2d 669 (1971), and Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943).”
In re Gen. Am. Commc’ns Corp., 130 B.R. 136, 146 (S.D.N.Y. 1991).
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twelve section 1334(c) factors. In re Taub, 417 B.R. 186, 194 (Bankr. E.D.N.Y. 2009)
(employing traditional abstention doctrines in analysis of the twelve section 1334(c) factors).
Other courts seemingly ignore the existence of the various federal abstention doctrines in favor
of an analysis of the twelve section 1334(c)(1) factors. See, e.g., Baker v. Simpson, 413 B.R. 38,
45 (E.D.N.Y. 2009) (limiting review of bankruptcy court’s decision to abstain to section
1334(c)(1) and omitting an examination of other federal abstention principles); Langston Law
Firm v. Mississippi, 410 B.R. 150, 156 (S.D.N.Y. 2008) (same). Yet other courts have focused
their analysis on federal abstention doctrines instead of the section 1334(c)(1) factors. See
Kurtzman v. Mut. Benefit Life (In re Philips Offset Co.), 152 B.R. 836, 838 (Bankr. S.D.N.Y.
1992) (referencing section 1334(c)(1), but concentrating abstention analysis on traditional
federal abstention doctrine).
This Court need not harmonize these approaches as it concludes that abstention is
appropriate under analyses of both section 1334(c)(1) and traditional abstention doctrines.
Because the Court concludes that it should abstain under these theories, it is unnecessary to
examine whether mandatory abstention under section 1334(c)(2) is required in this case. See In
re Taub, 417 B.R. at 197 (omitting discussion of mandatory abstention as the court had decided
to abstain under section 1334(c)(1)).
1. Permissive Abstention Pursuant to Section 1334(c)(1)
The Tracks argue vehemently that the twelve factors used to examine section 1334(c)(1)
do not warrant permissive abstention. The Court does not agree. While the Court acknowledges
its “virtually unflagging obligation . . . to exercise the jurisdiction” given to it by Congress, the
extraordinary circumstances present in this case require abstention. Kirschner v. Grant Thornton
LLP (In re Refco, Inc. Secs. Litig.), 628 F. Supp. 2d 432, 446 (S.D.N.Y. 2008) (quoting Colorado
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River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)) (internal quotation
marks omitted).
As observed by the Supreme Court, abstention is born of a desire to “soften the tensions
inherent in a system that contemplates parallel judicial processes.” Pennzoil v. Texaco, Inc., 481
U.S. 1, 11 n.9 (1987). 	And the Second Circuit has concluded that abstention doctrines embody
“federal respect for State law and policy.” In re Pan Am., 950 F.2d at 846. As discussed above,
federalism concerns resonate loudly in chapter 9 bankruptcies. Indeed, this Court can think of no
instance where respect for State law is more paramount than in a municipal bankruptcy case
under chapter 9 of the Bankruptcy Code. These strong federalism concerns weigh heavily on the
Court’s analysis of the twelve factors used when examining abstention under section 1334(c)(1).
a. 	The effect or lack thereof on the efficient administration of the estate if a
Court recommends abstention
The Tracks argue that abstention will greatly impede the progress of this case. The
Tracks maintain that the Racing and Wagering Board has historically resisted making any
determinations regarding disputes between the various regional off-track betting entities and race
tracks. The Tracks claim that the Racing and Wagering Board’s history on making these
determinations is so poor that abstention is tantamount to denial of their motions. (Supplemental
Joint Mem. of Tracks at 8–9.) While there is some evidence in the record to support the Tracks’
position, recent acts of the Racing and Wagering Board illustrates willingness to take an active
role in OTB’s payments.
The parties do not dispute the Racing and Wagering Board’s power to issue a regulation
or otherwise determine when the Indirect Commissions must be paid. (Supplemental Joint Mem.
of Tracks at 3 (“accepting that the Board has jurisdiction to determine when [OTB] must pay
commissions”); Supplemental Statement of OTB at 2.) Indeed, the Racing and Wagering Board
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has the necessary adjudicative powers to determine this dispute. The relevant racing regulation
states that disputes between any regional OTB and a race track “with respect to the purposes or
objectives set forth in section 518 of the Racing, Pari-Mutuel Wagering and Breeding Law shall
be submitted in writing to the board for determination.” N.Y. COMP . CODES R. & REGS . tit. 9, §
5201.04 (2010). Section 518 of the Racing Law is a general provision discussing the purpose of
off-track betting. The statute reads as follows:
In the exercise of the power vested in it by subdivision one of
section nine of article one of the state constitution, the legislature
hereby prescribes that off-track pari-mutuel betting on horse races,
conducted under the administration of the state racing and
wagering board in the manner and subject to the conditions
provided for in this article, shall be lawful, notwithstanding the
provisions of any other law, general, special or local, including any
law prohibiting or restricting lotteries, pool-selling or bookmaking
or any other kind of gambling; it being the purpose of this article to
derive from such betting, as authorized by this article, a reasonable
revenue for the support of government, and to prevent and curb
unlawful bookmaking and illegal wagering on horse races. It is
also the intention of this article to ensure that off-track betting is
conducted in a manner compatible with the well-being of the horse
racing and breeding industries in this state, which industries are
and should continue to be major sources of revenue to state and
local government and sources of employment for thousands of
state residents.
N.Y. RAC. P ARI -M UT . WAG. & BREED. LAW § 518 (McKinney 2009). Thus the Racing and
Wagering Board has power to determine when the Indirect Commissions should be paid.
Specifically the final clause regarding the requirement that off-track betting occur in a manner
compatible with the well-being of the horse racing and breeding industries in the state gives the
Racing and Wagering Board wide power to resolve the dispute at bar.
While the Racing and Wagering Board has not yet used its adjudicative powers to require
payment of the Indirect Commissions, it has taken steps consistent with these powers as recently
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as April and May of this year. Specifically, as indicated above, OTB must seek approval from
the Racing and Wagering Board to simulcast and accept bets on out-of-state races. (Joint Pre-
Trial Stipulation at ¶ 75.) On April 21, 2010, in response to a request to simulcast an out-of-state
meet, counsel for the Racing and Wagering Board requested information from OTB regarding
how it intended to use the proceeds OTB would earn from accepting bets on this meet. The
Racing and Wagering Board was specifically concerned whether OTB would use the proceeds to
make the statutory payments contemplated by the Racing Law. (Id. ¶ 76.) OTB answered the
Racing and Wagering Board, noting that it would defer paying the required Indirect
Commissions due to the Tracks. (See id. at ¶ 76; Letter from Ira H. Block, Executive Vice
President OTB, to Robert A. Feuerstein, Counsel New York State Racing and Wagering Board
(Apr. 23, 2010) (Ex. J to Joint Pre-Trial Stipulation).) In response, the Racing and Wagering
Board delayed ruling on OTB’s request to simulcast out-of-state races, effectively denying
OTB’s application. (Joint Pre-Trial Stipulation at ¶ 77.) In an effort to start simulcasting out-of-
state races once more, OTB agreed with the Racing Board to begin depositing the amounts of
Indirect Commissions otherwise due into a separate account, reporting weekly to the Racing
Board on its computation of amounts due. (Id. at ¶¶ 78, 82; Letter from Ira H. Block, Executive
Vice President OTB, to Robert A. Feuerstein, Counsel New York State Racing and Wagering
Board (May 26, 2010) (Ex. L to Joint Pre-Trial Stipulation).) And OTB admits that it must
obtain the approval of the Racing and Wagering Board before simulcasting an out-of-state race.
(July 13, 2010 Hr’g Tr. at 37:15–25.)
As the Racing and Wagering Board has recently withheld approval from OTB to
simulcast out-of-state races, it seems clear that the Racing and Wagering Board is exercising its
authority to regulate the horse racing and pari-mutuel businesses while this chapter 9 case is
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pending. Indeed, OTB concedes that the Racing and Wagering Board has power to do so while
OTB is a chapter 9 debtor. (July 13, 2010 Hr’g Tr. 101:22–24 (“The Court: And you agree that
that form of regulation [withholding approval to simulcast out-of-state races] is not preempted by
the Bankruptcy Code? Mr. Levin: Correct.”).)
The Court therefore concludes that abstention will not have an overwhelmingly adverse
effect on the administration of this case. It is clear that the Racing and Wagering Board has the
authority—and has taken recent steps—to resolve the issues on which the Court abstains. In the
highly-regulated horse racing and pari-mutuel wagering businesses, this exercise of regulatory
powers is wholly appropriate and should not be interfered with by a bankruptcy court. This
appears to an appropriate exercise of state police power, respected in all bankruptcy cases, and
especially appropriate in a chapter 9 case.
b. 	The extent to which state law issues predominate over bankruptcy issues
The Tracks argue that the issues raised in their motions—specifically the payment of the
Indirect Commissions as administrative expenses—are pure bankruptcy issues. With regards to
administrative expense issues, the Tracks are correct. Whether the Tracks are entitled to
administrative expense claims under section 503 for post-petition Indirect Commissions,
assuming that state law requires that Indirect Commissions be paid on a current basis, is indeed a
core bankruptcy issue. The Court, however, disposed of this issue in the discussion above,
concluding that section 503 does not apply to operating expenses of a chapter 9 debtor.
In contrast, the lone issue on which the Court now abstains—the schedule on which OTB
must pay Indirect Commissions to the Track—is a pure question of state law. Moreover, a state
entity exists that is able to balance the various competing interests in the New York racing and
pari-mutuel industry required to make this determination. Thus, this factor weighs heavily in
favor of abstention.
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c. 	The difficulty or unsettled nature of the applicable state law
The Tracks maintain that the issues of state law at issue here are “not difficult” and thus
the Court should decide when OTB must pay the Indirect Commissions. But both the language
of the statutes and the history of the dealings between the parties belie the Tracks’ position.
As demonstrated above, the Racing Law is, at best, ambiguous regarding when OTB
must pay the Indirect Commissions to the Tracks. It clearly lacks any provision stating when the
Indirect Commissions must be paid. Moreover, there is a clear tension in the Racing Law
between proclamations that off-track betting should be “conducted in a manner compatible with
the well-being of the horse racing and breeding industries in” New York and statements that “the
continued operation of [OTB] is of paramount importance to the public interest.” Compare N.Y.
RAC. PARI -M UT . WAG. & BREED. LAW § 518 (McKinney 2009) with 2008 N.Y. LAWS 3083.
Requiring OTB immediately to pay all indirect commissions will likely result in a shut down of
OTB, with adverse consequences to the State and to many other stakeholders that benefit from
distributions from OTB. Balancing these competing interests is more appropriately done by the
State Legislature and the State Agency that regulates the business. Further, from the history of
payments, it appears that the parties themselves have never determined the appropriate schedule
for payment of the Indirect Commissions. The record clearly demonstrates that OTB previously
paid Indirect Commissions between 30 to 150 days after accrual.
As the statute is silent on when the Indirect Commissions must be paid, the competing
policy interests behind the Racing Law are of paramount importance. The Racing and Wagering
Board is better able to balance competing New York policy interests, and it has authority to issue
regulations and adjudicate disputes regarding the Racing Law. This Court will not usurp the role
of the Racing and Wagering Board in balancing these competing interests. Cf. Piccolo v.
Commodity Futures Trading Comm’n, 388 F.3d 387, 391 (2d Cir. 2004) (observing that courts in
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the Second Circuit “accord[] a high degree of deference to administrative agencies where their
special expertise is implicated”) (internal quotation marks and citation omitted). Thus, this
factor weighs in favor of abstention.
d. 	The presence of a related proceeding commenced in state court or other
nonbankruptcy court
There is no proceeding currently pending before the Racing and Wagering Board to
determine the appropriate schedule for paying the Indirect Commissions. The Tracks maintain
that this factor is of particular importance when determining whether to abstain under section
1334(c)(1). This Court does not agree. The cases that articulate the twelve factors used to assist
in determining whether abstention is appropriate do not indicate that any single factor is of more
importance than the others. In contrast, courts opine that not all twelve factors must be
considered. 	In re Bozel S.A., 2010 WL 2816369, at *14 n.23 (observing that courts need not
consider all twelve factors when determining whether to abstain under section 1334(c)(1)) (citing
In re Cody, Inc., 281 B.R. at 190–91); Langston Law Firm, 410 B.R. at 156 (same).
While this factor weighs against abstention, the Court gives it little weight. Given the
recent actions of the Racing and Wagering Board to force OTB to segregate funds for Indirect
Commissions, there is little indication that abstention would cause undue delay. Moreover,
whatever need the Tracks have for a quick resolution of these issues pales in comparison to
issues of federalism, the idea of comity, and respect for state law inherent in section 1334(c)(1).
In the first instance the Wagering and Racing Board should make a determination with wide-
ranging effects on New York’s racing and pari-mutuel industry even though no proceeding has
so far been commenced.
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e. 	The jurisdictional basis, if any, other than 28 U.S.C. § 1334
This factor weighs in favor of abstention. If this matter was brought in a district court,
there would be no federal question jurisdiction over the determination of when the Indirect
Payments are due. Moreover, as both entities are only located in New York, there would be no
diversity jurisdiction. As this dispute is only in federal court due to the Bankruptcy Code, it
weighs in favor of abstention. See Bricker, 348 B.R. at 35–36 (concluding that this factor weighs
in favor of abstention where there is no federal question or diversity jurisdiction for a dispute).
f. 	The degree of relatedness or remoteness of the proceeding to the main
bankruptcy case
This factor weighs against abstention. From the start of this litigation it has been clear
that legislative changes are required to statutory distributions—including the Indirect
Commissions—to ensure the continued operation of OTB. See In re New York City Off-Track
Betting Corp., 427 B.R. at 278 (observing that legislative changes are needed for OTB’s
survival). Moreover, OTB has admitted that a determination regarding when the Indirect
Commissions must be paid would likely impact the ability OTB to continue operating. 	(July 13,
2010 Hr’g Tr. at 34:15–18.) Thus, it is clear that the timing of payments of the Indirect
Commissions is central to OTB’s bankruptcy case.
g. The substance rather than form of an asserted “core” proceeding
This factor focuses on ensuring that parties do not clothe an issue of pure state law as a
core bankruptcy proceeding. See Bricker, 348 B.R. at 36 (quoting In re Republic Reader’s Serv.,
Inc., 81 B.R. 422, 427–28 (Bankr. S.D. Tex. 1986)). Here, there is no question that the issue to
be decided is one of pure state law; therefore this factor weighs in favor of abstention.
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h. 	The feasibility of severing state law claims from core bankruptcy matters to
allow judgments to be entered in state court with enforcement left to the
bankruptcy court
This factor weighs in favor of abstention. While the Tracks argue that it is not feasible to
sever the determination of when the Indirect Commissions must be paid because it would be a de
facto denial of their motions, the Tracks misapply this factor. First, as demonstrated above, it is
not clear that the Racing and Wagering Board will wait an unreasonable period of time before
making a determination on this issue. Second, the Tracks’ arguments have little to do with
feasibility. Feasible means “capable of being done, accomplished or carried out; possible,
practicable.” WEBSTER’ S THIRD NEW I NTERNATIONAL DICTIONARY UNABRIDGED (2002). Thus,
even if the Court accepted the Tracks’ position that requiring the parties to seek a determination
on the schedule of payments would cause a lengthy delay, this argument is irrelevant to whether
severing is possible. As the Racing and Wagering Board exists and has recently taken an active
role in matters regarding the payment of the Indirect Commissions by OTB, the Court
determines that the Board may determine the proper payment schedule. This determination may
then be enforced by this Court.
i. 	The burden on the court’s docket
This factor neither weighs in favor or against abstention. This Court will promptly
decide the matters properly before it, regardless of the burdens it may impose on the Court’s
docket.
j. 	The likelihood that the commencement of the proceeding in a bankruptcy
court involves forum shopping by one of the parties
This factor is also neutral. There is nothing in the record to indicate that the Tracks
engaged in forum shopping by bringing their motions in this Court. In fact, many of the Tracks’
initial arguments regarding administrative expenses could only be determined by a bankruptcy
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court. The Tracks also argue that the Racing and Wagering Board has essentially deferred to
allow this Court to determine when the Indirect Commissions must be paid. (Supplemental Joint
Mem. of Tracks at 12.) The Tracks further maintain that deference of the Racing and Wagering
Board is appropriate in this case for internal state political reasons. (Id. at 12–13.) Specifically,
the Tracks claim that it is inappropriate for the Racing and Wagering Board, constructed of
members appointed by the Governor, to resolve a dispute with OTB, an executive entity.
As an initial matter, the Court is uncertain what bearing these arguments have on forum
shopping issues. Even if they were relevant to forum shopping, the Court does not believe that
internal state political reasons make it appropriate for the Racing and Wagering Board to defer to
this Court. The Tracks argue that deference of the Racing and Wagering Board is appropriate to
this Court merely because it is an executive entity, with members appointed by the Governor of
New York, and it would need to review the actions of OTB, another executive entity. Yet this
precise situation occurs in administrative law courts across the country every day.
In addition, the Court concludes, given the strong competing state policy interests at play
in determining the proper schedule to pay the Indirect Commissions, it would be inappropriate
for the Racing and Wagering Board to defer to this Court’s judgment. At best, it would not be
consistent with comity and respect for state institutions to have this Court usurp the role of the
Racing and Wagering Board and determine these issues. Moreover, even if the Racing and
Wagering Board were to abdicate its responsibilities, this Court cannot—even when invited to do
so—displace the role of a state administrative entity. Such an act is clearly prohibited by
principles of federalism and the Tenth Amendment of the United States Constitution.
k. 	The existence of a right to a jury trial
This factor is neutral. The parties will not be entitled to a jury trial either before this
Court or the Racing and Wagering Board.
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l. 	The presence in the proceeding of non-debtor parties
This factor weighs heavily in favor of abstention. The Tracks, just two entities, are the
only non-debtor moving parties on these motions. The Racing Law, and in particular the
provisions dealing with Indirect Commissions, reflect important policy choices by the State
Legislature regarding the entire racing industry, with its many different constituencies. Any
decision by this Court with respect to the meaning and application of the Racing Law has broad
implications not just for the parties before this Court, but for the entire industry. Yet the Tracks
ask the Court to make a determination on an issue that will likely implicate the rights of every
track and other entity that receives statutory distributions in New York State. This strongly
favors deferring to the Racing and Wagering Board, where the opinions and desires of other
stakeholders in the New York racing industry may be canvassed and incorporated into a decision
without the filing of formal motion papers, as is required in this Court.
2. Burford Abstention
In addition to abstention under section 1334(c), the Court concludes that another basis for
abstention exists. In Burford v. Sun Oil Co., 319 U.S. 315 (1943), the Supreme Court identified
that federal court abstention was appropriate in certain situations “to avoid needless conflict with
the administration by a state of its own affairs.” 17A CHARLES ALAN WRIGHT , ARTHUR R.
M ILLER, EDWARD H. COOPER & VIKRAM DAVID AMAR, FEDERAL PRACTICE AND PROCEDURE
§4244, at 382 (3d. ed 2007). The Burford Court reviewed an action brought by Sun Oil assailing
a decision of the Texas Railroad Commission allowing Burford to drill oil wells on a particular
oil field in eastern Texas. Burford, 319 U.S. at 316–17. The Court observed the various policy
interests that the Texas Railroad Commission balanced when granting authority to drill.
Specifically, the Court acknowledged that the Texas Commission must balance the conservation
of oil and gas with the generation of tax revenue—and was granted broad discretion to do so. Id.
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at 320. The Court also noted the practical needs for consistent and thorough regulation of oil
fields to encourage economic and efficient oil drilling and acknowledged that the order in
question was “part of the general regulatory system devised for the conservation of oil and gas in
Texas.” Id. at 319. The Court also noted that judicial state review of the Railroad Commission’s
decision was available and concentrated in certain Texas courts. Id. at 326. The Court then
determined that the issues at bar “so clearly involve[d] basic problems of Texas policy that
equitable discretion should be exercised to give Texas Courts the first opportunity to consider
them.” Id. at 332.
Throughout the years the Supreme Court has refined this general concept into a doctrine
now known as Burford abstention. The Court’s latest attempt to articulate the doctrine is as
follows:
Where timely and adequate state-court review is available, a
federal court sitting in equity must decline to interfere with the
proceedings or orders of state administrative agencies: (1) when
there are “difficult questions of state law bearing on policy
problems of substantial public important whose importance
transcends the results in the case at bar”; or (2) where the “exercise
of federal review of the question in a case and in similar cases
would be disruptive of state efforts to establish a coherent policy
with respect to a matter of substantial public concern.”
New Orleans Pub. Serv. v. Counsel of New Orleans, 491 U.S. 350, 361 (1989) (quoting
Colorado River, 424 U.S. at 814). More recently, however, the Supreme Court has cautioned
against the mechanical application of the Burford doctrine and the cases on which it is based.4
The Court stressed that the Burford doctrine emanates “from the discretion historically enjoyed
4 	Commentators agree with this approach. The leading treatise on federal practice and procedure observes
that “it seems too narrow to try to confine Burford, and the later case of Alabama Public Service Commission v.
Southern Railway Co. to their own facts and to hold that this kind of abstention is proper only when a case involves
basic matters of state policy, complicated by nonlegal considerations of a predominantly local nature, and the state
has specially concentrated all judicial review of administrative orders of the sort involved in a single state court.”
17A CHARLES A LAN W RIGHT, A RTHUR R. M ILLER , EDWARD H. COOPER & V IKRAM D AVID A MAR , F EDERAL
P RACTICE AND P ROCEDURE §4244, at 383–84 (footnotes omitted).
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by courts of equity,” and indicated that courts must look to “principles of federalism and comity”
when exercising discretion to abstain under Burford. Quackenbush v. Allstate Ins. Co., 517 U.S.
706, 727–28 (1996) (quoting Growe v. Emison, 507 U.S. 25, 32 (1993)) (internal quotation
marks omitted). When making this equitable decision, the Supreme Court has instructed lower
courts to balance competing interests:
This equitable decision [of whether to abstain] balances the
strong federal interest in having certain classes of cases,
and certain federal rights, adjudicated in federal court,
against the State’s interests in maintaining uniformity in the
treatment of an essentially local problem and retaining local
control over difficult questions of state law bearing on
policy problems of substantial public import.
Id. at 728 (internal citations and quotation marks omitted). As indicated above, concern for
“principles of federalism and comity” are at their zenith in chapter 9 cases. Moreover, New
York State has great interest in maintaining uniform treatment of the schedule of payments of
Indirect Commissions—adjudication of which raises difficult questions of state law and
significant public policy issues—while the federal government has little interest in having the
matter resolved in federal court.
The Second Circuit has identified three factors to assist in determining when Burford
abstention is appropriate: “(1) the degree of specificity of the state regulatory scheme; (2) the
need to give one or another debatable construction to a state statute; and (3) whether the subject
matter of the litigation is traditionally one of state concern.” Liberty Mut. Ins. Co. v. Hurlbut,
585 F.3d 639, 650 (2d Cir. 2009) (quoting Hachamovitch v. DeBuono, 159 F.3d 687, 697 (2d
Cir. 1998)) (quotation marks omitted). All three factors support abstention here.
The first factor does not rest on the mere specificity of the state regulatory scheme a court
is being asked to review. Instead, it focuses on “on the extent to which the federal claim requires
the federal court to meddle in a complex state scheme.” KShel Realty Corp. v. City of New York,
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No. 01 Civ. 9039(LMM), 2003 WL 21146650, at *6 (S.D.N.Y. May 16, 2003) (quoting
Hachamovitch, 159 F.3d at 697) (internal quotation marks omitted). Thus, if a party claims that
a state regulatory structure violates the Constitution, so long as a federal court can limit its
review to the constitutional issue, this factor typically will not weigh in favor of abstention. See
Hachamovitch, 159 F.3d at 697 (observing that because a federal constitutional claim did not
require review of substantive provisions of a complex state scheme, it did not weigh in favor of
abstention). See also KShel Realty Corp., 2003 WL 21146650, at *6 (same). In contrast, here
the Tracks request the Court directly interfere with the interpretation of a detailed scheme of
state statutory distributions to various racing entities by determining when the Indirect
Commissions must be paid. As this case requires the Court to intrude in New York’s complex
scheme for remuneration of statutory commissions to race tracks and other racing industry
stakeholders, possibly disrupting future attempts by the Racing and Wagering Board to establish
a coherent policy, this factor weighs in favor of abstention.
The second factor, whether this Court would need to “give one or another debatable
construction to a state statute,” also weighs in favor of abstention. The Racing Law is silent on
the schedule when the Indirect Commissions must be paid. Thus, the Court would be forced to
create, essentially out of whole cloth, a timeline for payments when making a determination in
this case. This situation is far worse than that which concerned the Second Circuit when it
formulated factors to guide courts in determining when Burford abstention is appropriate. Here
the Court would not be deciding between two different debatable interpretations of a statute; it
would essentially be reading an entirely new term into a state statute. This clearly demonstrates
that difficult questions of state law exist in this case that would require the Court to balance the
important policy interests of OTB and New York’s various racing constituencies.
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The third factor also weighs in favor of abstention. The United States government is not
an active participant in regulating pari-mutuel bets on horse races. Indeed, Congress has
specifically stated that “the States should have primary responsibility for determining what forms
of gambling may legally take place within their borders.” 15 U.S.C. § 3001(a)(1). Congress has
passed limited legislation, however, “to ensure States will continue to cooperate with one another
in the acceptance of legal interstate wagers.” 15 U.S.C. § 3001(a)(3). This legislation is limited
to a single section of the U.S. Code which lays out procedures for the acceptance of interstate
bets on horse races and does not contemplate the structure of payments to different
constituencies or the timing of those payments. 	See 15 U.S.C. § 3004. Thus, this factor also
supports abstention.
In sum, the Court concludes that the proper timing of payment of the Indirect
Commissions is a difficult question of state law that would require the Court to balance state
policy interests between OTB and the recipients of its statutory distributions. This decision
would affect not just OTB and the Tracks, but all of the entities receiving distributions from
OTB. Moreover, it is likely that this Court’s interpretation of the Racing Law would be used in
other proceedings against other off-track betting entities in New York. Any interpretation this
Court would make would also disrupt the New York Legislature’s intent to have the Racing and
Wagering Board create a coherent policy regarding horse racing and betting issues in the state.
Thus, abstention is appropriate in this case under either section 1334(c) or the Burford abstention
doctrine.
This conclusion is consistent with the recent decision of the Second Circuit in Liberty
Mutual Insurance Co. v. Hurlbut. The court, invoking Burford, concluded that a district court’s
decision to abstain from a suit challenging certain amendments to New York’s Workers’
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Compensation Law (“WCL”) was correct. The court reasoned that the WCL is a complex statute
that governs an intricate system that seeks to balance the interests of New York employers and
employees. Hurlbut, 585 F.3d at 650. The court also observed that its intervention could lead to
inconsistent results to the extent its conclusions differed from those of the state Workers’
Compensation Board (“WCB”). Id. at 651. Here, too, there is a complex state statute governing
a system of statutory distributions that seeks to balance interests of different state constituencies.
There is also a possibility that this Court’s determination for the proper timing for payment of the
Indirect Commissions could differ from a future determination of the Racing and Wagering
Board, resulting in inconsistent results. 5
III. 	CONCLUSION
Deferring to the Racing and Wagering Board for a determination of the meaning and
application of the Racing Law with respect to Indirect Commissions does not strip this Court of
its power and responsibility with respect to the administration of this case. While arguing that
the Racing Law does not require payment of Indirect Commissions within a specified time
period, OTB acknowledges that the payments cannot be deferred indefinitely. Indeed, the
Stipulation of Facts highlights the potentially grave consequences to the Tracks and the entire
industry if these statutorily required payments continue to be withheld. At bottom, if OTB is
going to be successfully reorganized, the state legislature must modify portions of the Racing
Law regarding required payments. For at least five years, no legislative solution has emerged.
5 	The Court observes in coming to this determination that a factor present in many cases where courts find
Burford abstention appropriate, the consolidation of judicial review of administrative actions in a single state court,
is not present here. See, e.g., Ala. Pub. Serv. Comm’n v. S. Ry. Co., 341 U.S. 341, 348 (1951) (observing that state
statute contemplated review of agency decisions by a single appellate court); Burford, 319 U.S. at 326 (noting that
state legislation provided for review of agency decisions by a single court). The Second Circuit, however, has
determined that this factor is not “indispensible to Burford abstention.” Bethpage Lutheran Serv. Inc. v. Weicker,
965 F.2d 1239, 1245 (2d Cir. 1992). Moreover, any such mechanical approach is anathema to the Supreme Court’s
command that abstention doctrines “be applied in a pragmatic, flexible manner with a view to the realities of the
case at hand.” Id. at 1244 (quoting Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 21 (1983)).
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Time, at least for OTB and more likely for many parts of the racing and wagering industry, is
running out. This Court cannot mandate the necessary legislative changes. The hearing record
reflects comments attributed to the Legislature that it wants to wait another year before
considering basic changes to the formulas for payments required by the Racing Law. The State
Legislature may be able to wait a year, but this Court cannot. The Court therefore orders the
parties to formally seek resolution of the timing for payment of the Indirect Commissions from
the Racing and Wagering Board within seven days from the date of this Opinion and Order.
As the Court advised the parties at the argument, section 930 permits the Court to dismiss
a chapter 9 case for cause, including “unreasonable delay by the debtor that is prejudicial to
creditors . . . .” 11 U.S.C. § 930(a)(2). The record clearly establishes that many of OTB’s
creditors are being substantially harmed by OTB’s failure to complete a plan for the adjustment
of its debts, and to pay undisputed amounts due to creditors during the administration of this
case. While the Court does not have the power to order OTB to pay particular creditors, the
Court does have the power to dismiss the case where unreasonable delay by the debtor is
prejudicial to creditors. The free-for-all that may ensue if the case is dismissed is unlikely to
benefit any of the parties in interest, but it will leave the important decisions where they properly
belong, namely with the Governor, the New York State Legislature and the Racing and
Wagering Board.
Finally, given the impasse that has existed for many years in resolving the industry-wide
issues that have afflicted many of the parties in interest in this case, the Court will also enter an
order requiring the parties to mediate the broad issues in dispute. If the various racing industry
constituencies can resolve or at least substantially narrow their disagreements about the
restructuring of OTB, and the statutory changes required to accomplish it, they will increase the
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chances of legislative or regulatory changes. The parties can simultaneously pursue both
avenues—administrative proceedings before the Racing and Wagering Board and mediation of
the disputes. Consequently, the Court will abstain from deciding the state law issues, and lift the
automatic stay so the parties can commence an appropriate proceeding before the Racing and
Wagering Board to obtain a resolution of the state law issues. OTB is further ordered within
seven days from the date of this Order to seek such a determination from the Racing and
Wagering Board. Also, within the same seven day period, the parties shall confer on the
selection of a mediator. If the parties cannot agree upon a mediator within that time, the Court
will appoint one.
IT IS SO ORDERED.
DATED: 	August 5, 2010
New York, New York
_____/s/Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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