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IN RE PARR MEADOWS RACING ASSN.

May 14, 1979

In re PARR MEADOWS RACING ASSOCIATION, INC., Debtor. FLUSHING SAVINGS BANK, Movant-Appellant,
v.
PARR MEADOWS RACING ASSOCIATION, INC., Respondent-Appellee



The opinion of the court was delivered by: COSTANTINO

MEMORANDUM OF DECISION AND ORDER

Appellant-creditor Flushing Savings Bank ("Flushing") appeals from an order of Bankruptcy Judge Robert J. Hall which denied Flushing's motion for an order directing appellee-debtor Parr Meadows Racing Association, Inc. ("Parr") to post indemnity pursuant to Bankruptcy Rule 11-20(d) and Local Rule XI-4 in the amount of $ 1,000,000.

 Parr's sole business is owning and operating a racetrack specifically designed for quarter horse racing. In October 1977 Parr filed a petition for an arrangement under Chapter XI, Section 322 of the Bankruptcy Act, 11 U.S.C. ยง 722, and Fed.R.Bankr.P. 11-6. Pursuant to an order of the bankruptcy court, Parr was authorized to continue to operate its business and manage its property as a debtor-in-possession.

 Flushing is a secured creditor of Parr. Parr is indebted to Flushing, representing a group of banks and others, for an amount in excess of $ 14,000,000 arising from a construction loan made by Flushing and others to Parr to finance the construction of Parr's quarter horse racetrack. The indebtedness is evidenced by a mortgage note. As security for payment of the mortgage note, Parr granted Flushing a first mortgage lien on the real property and improvements owned by Parr. The property consists of certain improved land upon which is constructed a quarter horse racetrack, stables, a clubhouse, and other appurtenant facilities. Parr's obligations to Flushing are in default and Flushing has demanded payment of the entire indebtedness evidenced by the mortgage note.

 The racetrack ceased operating on September 27, 1977 after having been open for a brief time period. Parr voluntarily surrendered its license from the New York State Racing & Wagering Board for the 1977 racing season. Parr withdrew its application for a license for the 1978 racing season and thus far it has not applied for a license for the 1979 racing season. In order to obtain a license, Parr will have to show that it is financially viable. Parr's financial prognosis, however, is not good.

 Parr has generated no income from its business since the filing of the Chapter XI petition more than eighteen months ago. However, as stated by Judge Hall, "the expenses of the property continue relentlessly." Decision of Feb. 20, 1979 ("Decision") at 1. These expenses include fire and liability insurance premiums, real estate taxes, and security guard services, all of which are necessary to maintain and preserve the property of the debtor. These expenses have not been paid, and apparently cannot be paid, by Parr as the debtor-in-possession. In order to preserve the value of the debtor's property, Flushing has been paying many of the named expenses, thereby increasing Parr's indebtedness to Flushing.

 As of this date, Parr has been unable to obtain the financing necessary for it to open the racetrack for this year's racing season. In addition, Parr has yet to offer an acceptable Chapter XI plan to its unsecured creditors and it has made no arrangements with its secured creditors.

 Thus, not only has Parr been unable to generate income, but also any equity it has in its property is being constantly eroded, and expenses that cannot be met continue to accrue. Moreover, a satisfactory arrangement does not appear to be forthcoming. Based upon this bleak financial picture of Parr, Flushing brought a motion before the bankruptcy court requesting indemnity in the amount of $ 1,000,000 against subsequent loss or diminution of the estate of the debtor-in-possession. Parr's unsecured creditors did not join in the application for indemnification. *fn1"

 The facts outlined above were the only facts adduced at the hearing before the bankruptcy court. In his decision, Judge Hall stated that if those were the only facts he were to consider, "the Court would in good conscience have to direct the indemnity requested." However, Judge Hall took notice of the fact that Parr is seeking to set aside the lien that Flushing has on Parr's property. Parr has charged that its "financial downfall" was the result of certain improprieties perpetrated by Flushing, or its representatives, and other participants in the construction loan. Parr claims that these improprieties tainted the validity of Flushing's lien. Parr has also charged that organized crime figures were attempting to take over the racetrack, and that "certain political and banking figures were attempting to obtain concessions and kickbacks for their aid in the financing of the track." *fn2" Decision, Supra, at 2.

 Judge Hall considered Parr's charges to constitute a "serious attack" on Flushing's lien. He then concluded:

 
An adjudication which would be caused by an order for indemnity would as a practical matter abort the suit against Flushing. There is no money in the estate to fund the lawsuit and a trustee could not press the suit with the same diligence as the Parr brothers.
 
It would be inequitable to abort the Chapter XI when the trial (to set aside the lien) is so close at hand. If the Parr brothers were the victims of corrupt bankers and politicians and suffered because they resisted attempts by the underworld to take over the track; it would be a travesty of justice if they were prevented at this time from trying their case.
 
If the case is adjudicated at this time, Flushing will still be faced with the expenses it has been paying.
 
The Court has weighed the equities and finds that the imposition of an order of indemnity is not ...

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