Six days before Hawthorne Race Course is scheduled to be sold in a $90-million liquidation as part of a restructuring of between $100 and $500 million in debt, the Office of the United States Trustee has stepped in to tell the judge in charge of the case that the owners of the defunct Chicago-area track are not going to be able to orchestrate a reorganization. The U.S. Trustee wrote that the debtors' repeated botching of the process has resulted in both financial harm to horsemen and a “human cost” for backstretch residents.In a Wednesday filing, acting U.S. Trustee Adam Brief wrote that Hawthorne's owners, the Carey family and their related companies, should be stripped of their status of “debtors in possession” by either dismissing the Chapter 11 bankruptcy proceedings or converting them to a Chapter 7 designation.That would mean the Careys no longer have control over sale proceeds from the track or other remaining assets that might get liquidated to pay off creditors under the auspices of an independent trustee.“The record demonstrates that there are continuing losses, there is no likelihood of rehabilitation, and there continues to be gross mismanagement of the estates, all of which militate in favor of dismissal or conversion,” stated the U.S. Trustee's motion to dismiss or convert that was filed Aug. 26 in United States Bankruptcy Court for the Northern District of Illinois.“For example, the Debtors, among other things, have (i) repeatedly 'borrowed from Peter to pay Paul,' (ii) spiraled these cases toward administrative insolvency and ceased almost all operations while taking extraordinary steps to protect professional fees at the expense of other creditors; (iii) conducted a largely unsuccessful sale process; (iv) upended the lives of the horsemen, their families and horses, and (v) applied for a racing license at an unknown cost for the 2027 season.”In Hawthorne's case, the Careys have remained debtors in possession since they filed for bankruptcy protection six months ago. At that time, no trustee was appointed to the case, which is routine in Chapter 11 bankruptcies that are attempting a reorganization.But the U.S. Trustee's office still monitors such federal court cases, and can ask a court to take action if it believes Chapter 11 is no longer viable.A conversion to Chapter 7, if approved, doesn't necessarily mean the $90 million sale to a Delaware shell company is in jeopardy, because the judge has already approved that sale.But a newly assigned Chapter 7 trustee could end up dealing with the remaining assets, claims and disputes, subject to the rights of secured creditors.On July 29, the Illinois Thoroughbred Horsemen's Association (ITHA) filed a motion seeking payment of more than $1.3 million in unpaid purse money from Hawthorne.“Contrary to the Debtors' promises and rhetoric since the petition date, the sale process has been highly disorganized, ill-conceived, and largely ineffective, as the sale price for the estates' principal asset is significantly less than Debtors and their professionals estimated,” the filing stated.“And despite the Debtors' repeated assurances that there was interest from going-concern bidders and that their assets would be sold on a going-concern basis, no such interest or sale materialized.“The highest and best offer approved by the Court is millions of dollars shy of the amount required to satisfy liens against the Debtors' property, and most of the Debtors' operations have ceased in the absence of a going-concern sale.“Consequently, hundreds of jobs have been lost, and hundreds of people, children, and horses have been displaced from their homes on the backstretch with little meaningful notice or means to relocate.“Amid the chaos of these cases, the Debtors' principals caused the Debtors to apply for a racing license for the 2027 season and may seek to race at a yet-to-be-identified track.“While contemplating their own future, the Debtors' principals have largely abandoned the backstretch community and required the ITHA to step into the Debtors' shoes to fulfill the Debtors' obligations,” the filing stated.The U.S. Trustee identified two specific examples of Hawthorne's “gross mismanagement” that are central to the argument that the bankruptcy should be converted to Chapter 7.“First, by failing to segregate funds necessary to pay the horsemen their post-petition purse obligations as required by their agreement with ITHA, and second, by failing to properly plan for the relocation of hundreds of individuals and horses within a relatively short amount of time and with little financial means.”The filing continued: “The Debtors have not explained why they failed to segregate the purse money due to the horsemen, or how the funds that were budgeted to pay the horsemen were spent.“The Debtors' own DIP budget included $3,620,000 for 'Purse Accrual' so the Debtors were aware of the need to make payment to the horsemen and should have immediately funded the Horsemen's Purse Account after each race since it had already budgeted the expenditure.“[And] even assuming Debtors are correct in their true-up, it still does not explain where the additional $600,000 went that should have been segregated for payment to the horsemen….“The Debtors' failure to fund the Horsemen's Purse Account is not the first time the Debtors have been accused of failing to properly segregate funds.“Both Churchill Downs and Saratoga alleged that the Debtors failed to properly segregate and maintain funds from pari-mutuel wagering prior to the Petition Date, and both have filed adversary proceedings alleging that the funds that the Debtors were required to segregate are not property of the bankruptcy estate.“In short, the Debtors have demonstrated their inability and/or refusal to properly handle, segregate and track funds that others may claim an interest in, and that conduct from a debtor in possession should not be tolerated.“The record is clear that the Debtors' gross mismanagement resulted in harm to the horsemen and to contractual counterparties, both of whom the Debtors relied on for their operations and revenue.“Rather than protecting those necessary relationships, the Debtors squandered them [and] have attempted to lay the blame for the chaos they created at the doorstep of others and have relied on third parties, specifically the ITHA, to assist with the relocation of the backstretch community,” the filing stated.Hawthorne executives could not be reached for comment prior to deadline for this story.The post Citing ‘Gross Mismanagement’ and ‘Human Cost,’ U.S. Trustee Seeks to Force Hawthorne’s Bankruptcy to Chapter 7 appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.