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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
|X| Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
|_| For the quarterly period ended June 30, 2007
Transition Report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 333-112603
CATSKILL LITIGATION TRUST
(Exact Name of Small Business Issuer as Specified in Its Declaration of Trust)
DELAWARE 16-6547621
- ------------------------------------- -----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
C/O CHRISTIANA BANK & TRUST COMPANY
1314 King Street
Wilmington, Delaware 19801
- ----------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(302) 888-7400
- ----------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- ----------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter period
that Catskill Litigation Trust was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 20, 2007, 43,825,738 Units of beneficial interest were outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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CATSKILL LITIGATION TRUST
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION Page
ITEM 1. CONDENSED FINANCIAL STATEMENTS (unaudited)
Condensed Balance Sheet as of June 30, 2007 3
Condensed Statements of Operations for the Three and Six Months Ended
June 30, 2007 and June 30, 2006 4
Condensed Statements of Cash Flows for the Six Months Ended June 30, 2007
and June 30, 2006 5
Notes to Condensed Financial Statements 6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 12-17
ITEM 3. CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18-20
ITEM 6. EXHIBITS 20
SIGNATURES 20
2
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATSKILL LITIGATION TRUST
CONDENSED BALANCE SHEET
June 30, 2007
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 413,491
------------
Total Current Assets 413,491
Intangible Assets, net 17,493,774
------------
TOTAL ASSETS $ 17,907,265
============
LIABILITIES AND TRUST EQUITY
Current Liabilities
Accrued expenses $ 93,914
Accounts payable 327,941
Line of credit-related party 2,145,000
------------
Total Liabilities 2,566,855
------------
Trust Equity
Units of Beneficial Interest: 43,825,738
authorized, issued and outstanding, stated as 17,748,204
Accumulated deficit (2,407,794)
------------
Total Trust Equity 15,340,409
------------
TOTAL LIABILITIES AND TRUST EQUITY $ 17,907,265
============
The accompanying notes are an integral part of these condensed financial statements.
3
CATSKILL LITIGATION TRUST
STATEMENTS OF OPERATIONS
(Unaudited)
For the For the For the For the
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
--------------------------------------------------------------------------
General and Administrative Expenses:
Litigation Trustee Fees $ 30,000 $ 30,000 $ 60,000 $ 60,000
Administrative Trustee Fees 1,500 1,500 3,000 3,000
Consulting Fees 4,767 1,500 7,167 3,000
Legal Fees 361,854 120,400 640,726 134,768
Accounting Fees 9,750 7,000 21,750 19,000
Interest Expense 35,356 19,436 66,556 42,347
Amortization of Intangible Assets 36,521 -- 36,521 --
Other 17,360 1,344 22,332 3,174
------------ ------------ ------------ ------------
Total General and Administrative Expenses 497,108 181,180 858,052 265,289
Dividend Income 2,575 460 3,854 521
------------ ------------ ------------ ------------
Net Loss $ (494,533) $ (180,720) $ (854,198) $ (264,768)
============ ============ ============ ============
Loss per unit outstanding $ (0.02) $ (0.01) $ (0.04) $ (0.01)
============ ============ ============ ============
Weighted Average Number of Units Outstanding 23,860,680 21,912,869 22,886,774 21,912,869
The accompanying notes are an integral part of these condensed financial statements.
4
CATSKILL LITIGATION TRUST
STATEMENT OF CASH FLOWS
(Unaudited)
For the For the
Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
------------ ------------
Cash flow from operating activities
Net loss $ (817,677) $ (264,768)
Adjustments to reconcile net loss to net cash used in operating activities:
Imputed interest expense 66,556 42,347
Changes in operating assets and liabilites:
Accounts payable 327,941 134,246
Accrued expenses 86,718 --
------------ ------------
Net cash used in operating activities (336,462) (88,175)
Cash flow from financing activities
Increase in line of credit-related party 630,000 80,000
------------ ------------
Increase (decrease) in Cash and Cash Equivalents 293,538 (8,175)
------------ ------------
Cash and Cash Equivalents - beginning of period 119,953 17,235
------------ ------------
Cash and Cash Equivalents - end of period $ 413,491 $ 9,060
============ ============
Non cash investing and financing activities
Intangible Assets Acquired in exchange for issuance
of units of beneficial interest 17,530,295 --
The accompanying notes are an integral part of these condensed financial statements.
5
CATSKILL LITIGATION TRUST
Notes to Condensed Financial Statements--June 30, 2007 (Unaudited)
NOTE 1 - THE TRUST AND MANAGEMENT'S PLANS AND LIQUIDITY
The Catskill Litigation Trust is a Delaware statutory trust (the
"Litigation Trust") formed by Empire Resorts, Inc. ("Empire Resorts"),
Monticello Raceway Management, Inc., ("MRMI"), Monticello Casino
Management, L.L.C., Monticello Raceway Development Company, L.L.C.
("MRDC") and Mohawk Management, L.L.C. ("Mohawk"). On January 12, 2004,
22,702,896 units of beneficial interest were issued to the members and
stockholders of those entities. At that time, Empire Resorts, Catskill
Development, L.L.C. ("Catskill"), MRMI, Mohawk, Joseph E. Bernstein,
Paul A. deBary and Christiana Bank and Trust Company (the
"Administrative Trustee") entered into the Declaration of Trust of
Catskill Litigation Trust (the "Declaration of Trust"). Pursuant to
Amendment No. 1 to the Declaration of Trust, dated as of November 15,
2004, the number of units issued was reduced to 21,912,869.
In the Declaration of Trust, Catskill, MRDC and Mohawk assigned to the
Litigation Trust all of their claims under or related to the alienation
and frustration of their agreements and business relations with the St.
Regis Mohawk Tribe and their rights to any judgment or settlement that
may arise from any litigation relating to two litigations entitled
Catskill Development, L.L.C., Mohawk Management L.L.C. and Monticello
Raceway Development Company L.L.C., Plaintiffs v. Park Place
Entertainment Corporation, Defendant (the "PPE Case") and Catskill
Development, L.L.C., Mohawk Management, L.L.C., Monticello Raceway
Development Company, L.L.C., Plaintiffs v. Gary Melius, Ivan Kaufman,
Walter Horn, President R.C. - St. Regis Management Company, et al,
Defendants (the "President RC Case"). If at any time the Litigation
Trustees determine, in their absolute discretion, that the assets of
the Litigation Trust are not sufficient to justify its continuance, the
Litigation Trustees are authorized to terminate the Litigation Trust.
In addition, the Litigation Trust is to terminate on the date that all
litigation has been fully prosecuted to final judgment or dismissal,
including all appeals, and all Litigation Trust assets have been
distributed to the Litigation Trust's beneficiaries.
In June 2006, two of the plaintiffs in the PPE Case were dismissed
without prejudice on jurisdictional grounds as a result of a finding
that these parties lacked diversity of citizenship. A new complaint was
subsequently filed by the Trustees on behalf of these plaintiffs.
Pursuant to a stipulation entered into by all parties to the PPE Case,
the parties accepted all previous determinations of the trial court as
applicable to the new complaint and the case was consolidated with that
of the remaining plaintiff, essentially restoring the parties to the
status that had existed prior to the dismissal. Accordingly, references
to the "PPE Case" subsequent to the consolidation refer to the
consolidated case.
On January 24, 2007, the Litigation Trust entered into an agreement
(the "Joint Alliance Agreement") with the St. Regis Mohawk Tribe
providing for the assignment to the Litigation Trust of certain claims
of Tribal members against Park Place Entertainment, Inc. and Clive
Cummis, former General Counsel of Park Place Entertainment, Inc. The
Joint Alliance Agreement provided that the claims were to be assigned
in exchange for a certificate evidencing the ownership by the Tribal
members of 21,912,869 Units in the Litigation Trust (representing a 50%
beneficial interest in the Litigation Trust). The Trustees of the
Litigation Trust then obtained the consent of the holders of more than
66 2/3% of the units of the Litigation Trust to an amendment of the
Declaration of Trust to implement the Joint Alliance Agreement,
including an increase in the authorized number of units to 43,825,738
units. In accordance with its terms, this amendment ("Amendment No. 2")
became effective upon satisfaction of the condition that the claims of
the Tribal members were duly and properly assigned to the Litigation
Trust in accordance with the Joint Alliance Agreement. On June 21,
2007, pursuant to the Joint Alliance Agreement, the trustees of the
Catskill Litigation Trust, in exchange for the delivery of 21,912,869
newly issued units of the Litigation Trust, received an assignment of a
judgment rendered against PPE in connection with certain claims of
6
members of the St. Regis Mohawk Tribe against Park Place Entertainment
and Clive Cummis. The assignment was previously approved by the St.
Regis Mohawk Tribal Court.
As a result of the assignment to consummate the Joint Alliance
Agreement, an aggregate of 43,825,738 units are issued and outstanding.
In addition, in connection with Amendment No. 2, Mr. Dennis C. Vacco
agreed to serve as a Litigation Trustee of the Litigation Trust and Mr.
Paul A. deBary, who had previously served as a Litigation Trustee,
agreed to serve as Litigation Trustee Advisor. (See Note 6.) References
to the "Litigation Trustees" herein refer to Messrs. Bernstein and
deBary prior to June 21, 2007 and to Messrs. Bernstein and Vacco
thereafter.
On June 22, 2007, Dennis C. Vacco and Joseph Bernstein, acting in their
capacities as Litigation Trustees of the Litigation Trust, filed an
enforcement action (the "Judgment Enforcement Case") in the United
States District Court for the Northern District of New York. The
enforcement action was filed against Harrah's Operating Company, Inc.
(a wholly owned subsidiary of Harrah's Entertainment, Inc. (HET)), as
successor to Park Place Entertainment, Inc., and Clive Cummis to
enforce an order of default judgment issued by the St. Regis Mohawk
Court on March 20, 2001. The order of default judgment ordered the
defendants to pay $1.782 billion of actual damages and $5 million of
punitive damages. On July 12, 2007, pursuant to a duly noticed motion,
the St. Regis Mohawk Tribal Court issued an order that clarified that,
under Tribal law, the annual rate of nine percent provided for in
sections 5003 and 5004 of the New York Civil Practice Law and Rules
applies for the purpose of calculating interest on any unsatisfied
amount of the Tribal Court judgment that the Trust is seeking to
enforce in the Judgment Enforcement Case. No portion of the judgment
has currently been satisfied. There can be no assurance that the
Litigation Trust will receive any net proceeds from this judgment. A
previous suit to enforce the default judgment was dismissed, without
prejudice to the recommencement of the suit, after the Judge had not
heard further from the parties concerning efforts to settle the case.
Harrah's Entertainment, Inc., the parent of Harrah's operating company,
has indicated in its public filings that it believed that the case had
been settled and intends to vigorously defend any attempt to enforce
the judgment. The PPE Case, the President RC Case and the Judgment
Enforcement Case are herein collectively referred to as the
"Litigations".
As discussed in Note 4, Empire Resorts, Inc. ("Empire Resorts"), a
related party, has provided the Litigation Trust with a line of credit
of up to $2,500,000 to pay all expenses of the Litigation Trust
permitted under the Declaration of Trust. The line of credit expires
upon the termination of the Litigation Trust. Empire Resorts is a
holding company, owning all the capital stock or membership interests
of certain other entities. Empire Resorts is therefore dependent on
these other entities to pay dividends or make distributions in order to
generate internal cash flow and to satisfy its obligations, including
its obligations under the line of credit. There can be no assurance,
however, that these other entities will generate enough revenue
sufficient for such purposes. Although Empire Resorts significantly
increased its level of operations in recent years, it has yet to
demonstrate that such operations can be profitable. In addition, as
also discussed in Note 4, the Litigation Trust has also entered into
separate lines of credit in the aggregate amount of $250,000 with two
of its unitholders. There can be no assurance that either Empire
Resorts or these unitholders will have the ability to fund future
borrowings under these lines of credit.
Although funds currently available to the Litigation Trust are deemed
sufficient to cover its operations in connection with the appeal of the
PPE case, it is anticipated that the Litigation Trust will need to
raise additional funds in order to complete a trial in the PPE case and
recommence the President RC case in the event that the appeal is
successful or if the unitholders approve the assignment of the Tribal
Court judgment pursuant to the Joint Alliance Agreement. There is no
assurance that the Litigation Trust will have sufficient liquidity to
cover its operations.
7
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
These unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP"), and with Form 10-QSB and Item 310 of
Regulation S-B of the Securities and Exchange Commission (the "SEC").
In the opinion of the Litigation Trustees, the accompanying unaudited
condensed financial statements contain all the adjustments necessary
(consisting only of normal recurring accruals) for a fair presentation.
The interim results are not necessarily indicative of the results that
would be expected for the full year and do not contain all information
included in the Litigation Trust's annual financial statements and
notes for the year ended December 31, 2006.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the report on Form 10-KSB for the year ended December 31,
2006.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Litigation Trustees to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the fair value of
intangible assets, as described in Note 3. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on account, demand deposits and
certificates of deposit with original maturities of three months or
less at acquisition and money market funds. From time to time, the
Litigation Trust maintains significant cash balances in excess of the
amounts covered by the Federal Deposit Insurance Corporation. The
Litigation Trust has not incurred any losses in such accounts and the
Litigation Trustees believe it is not exposed to any significant credit
risk on cash.
INCOME TAXES
For federal income tax purposes, the Litigation Trust is treated as a
grantor trust. Under the grantor trust rules, each holder of a unit of
beneficial interest is treated as the owner of his or her share of the
Litigation Trust's assets. The treatment of income and expense items
under GAAP may differ from the tax treatment of such items. Expenses
incurred by the Litigation Trust are capitalized for tax purposes.
The Litigation Trust has adopted the provisions of Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109" ("FIN 48"), on January 1, 2007. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with SFAS No. 109, "Accounting for Income
Taxes," and prescribes a recognition threshold and measurement process
for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim period, disclosure and transition.
The Litigation Trust's policy for recording interest and penalties
associated with audits is to record such items as a component of income
before income taxes. Penalties are recorded in other expense and
interest paid or received is recorded in interest expense or interest
income, respectively, in the statement of operations. There were no
amounts accrued for penalties or interest as of or during the three and
six months ended June 30, 2007. The Litigation Trust has performed an
evaluation and determined that it is not required to file Federal tax
returns due to its Grantor Trust status. Accordingly, the Litigation
Trust does not expect its unrecognized tax benefit position to change
during the next twelve months. The Litigation Trustees are currently
unaware of any issues under review that could result in significant
payments, accruals or material deviations from its position.
NOTE 3 - INTANGIBLE ASSETS
As described in Note 1, on June 21, 2007, the Litigation Trust received
an assignment of a judgment rendered against Park Place Entertainment
Corporation, Inc. and Clive Cummis. This judgment was assigned to the
Litigation Trust in exchange for the issuance of 21,912,869 units. The
Litigation Trust has estimated the fair value of the judgment to be
$17,530,295. This value was based on the estimated fair value of the
units issued in exchange for the judgment. For purposes of determining
the fair value of a unit, the Litigation Trustees applied the per unit
price reflected in a transaction in 2005 in which a limited number of
units were purchased from a unitholder by a third party at a price of
$0.80 per unit. As an active market for shares of the units did not
exist at the time and continues not to exist at this time, this
transaction may not reflect the price at which a unitholder would be
able to obtain for their shares at any given point in time. However, it
is the most recent information available to the Litigation Trustees
concerning sales of units and represents the Litigation Trustees' best
estimate of the fair value that should be assigned to the judgment for
financial reporting purposes. The Litigation Trustees are continuing
their efforts to assess the fair value of the judgments, including
8
efforts to obtain a more recent third party valuation. The fair value
is dependent on those efforts and may differ significantly from the
currently estimated amount. The estimated life of the asset is
considered to be twelve years, based on the applicable statute of
limitations and the potential duration of enforcement efforts and/or
settlement terms. The asset will be amortized on a straight line basis
over the estimated life. Amortization expense for the three and six
months ended June 30, 2007 amounted to $36,520.
NOTE 4 - LINES OF CREDIT-RELATED PARTIES
As discussed in Note 1, Empire Resorts, a related party, has provided
the Litigation Trust with a line of credit of up to $2,500,000. The
line of credit can be used to pay all expenses of the Litigation Trust
permitted under the Declaration of Trust, including but not limited to
professional fees and the fees and expenses of the Litigation and
Administrative Trustees. The line of credit is non-interest bearing and
is to be repaid from any amounts received from litigation settlements
or awards. The line of credit expires upon the termination of the
Litigation Trust.
As of June 30, 2007, $2,145,000 had been drawn against the line of
credit.
The Litigation Trust imputed interest on the borrowings at Empire
Resorts' borrowing rate (8.00% per annum at June 30, 2007). Interest
expense for the three and six months ended June 30, 2007 amounted to
$35,356 and $66,556, respectively. Imputed interest expense is deemed
contributed capital to the Litigation Trust.
On June 21, 2007, the Litigation Trust entered into separate lines of
credit with two of its unitholders, Robert Berman and Ralph Bernstein,
each of which provides for advances of up to $125,000, with interest at
the rate of 10% per annum, upon written demand of the Litigation Trust.
Repayment of such advances is to be made solely from amounts available
in the Recovery Fund held by the Administrative Trustee under the
Declaration of Trust. As of June 30, 2007, no amounts had been drawn
under these agreements.
NOTE 5 - DISTRIBUTIONS
The distribution of any net proceeds from litigation settlements or
awards, after amounts are applied to cover all current or expected
expenses of the Litigation Trust, is to be made at the sole discretion
of the Litigation Trustees and will be distributed as follows:
First: To pay the Litigation Trustees and the Litigation
Trustee Advisor their fees arising from litigation settlements
or awards. (See Note 6.)
Second: To reimburse $7,500,000 to Empire Resorts for expenses incurred
in connection with the Litigation prior to the formation of the
Litigation Trust and, in addition, to repay Empire Resorts any amounts
outstanding under the line of credit.
Third: If any amount remains after the above requirements are met, such
amount remaining is to be divided among the beneficiaries of the
Litigation Trust in proportion to their ownership of units as of the
date the distribution is made.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
COMPENSATION OF LITIGATION TRUSTEES
Each of the two Litigation Trustees and the Litigation Trustee Advisor
is entitled to annual compensation of $60,000 plus reimbursement of
expenses incurred carrying out the purpose of the Litigation Trust. In
addition, one Litigation Trustee is entitled to 4.0%, and the other
2.0%, and the Litigation Trustee Advisor is entitled to 1.0%, of any
litigation settlements or awards.
9
COMPENSATION OF THE ADMINISTRATIVE TRUSTEE
The Administrative Trustee is entitled to a monthly administrative fee
of $500. In addition, the Administrative Trustee is entitled to a
custody fee on certain cash balances and marketable securities of 0.5%
per annum on the first $10,000,000 of fair value and 3.0% on the excess
and reimbursement for certain fees and expenses.
EXPENSES PAID PRIOR TO THE FORMATION OF THE LITIGATION TRUST
As discussed in Note 5, the Litigation Trust is obligated to pay to
Empire Resorts up to $7,500,000. This amount represents expenses
incurred prior to the formation of the Litigation Trust. The amount is
payable solely from the proceeds of litigation settlements or awards.
REPAYMENTS OF AMOUNTS DRAWN UNDER THE LINE OF CREDIT-RELATED
PARTY
As discussed in Note 5, the expenses of the Litigation Trust are
expected to be paid from draws under the line of credit. Amounts drawn
under the line of credit are to be repaid from any amounts received
from litigation settlements or awards.
ADDITIONAL AMOUNTS PAYABLE TO APPEALS COUNSEL
Under the terms of the Litigation Trust's arrangement with the law firm
handling its appeal, additional fees in an aggregate amount not to
exceed $100,000 may be payable to that firm.
The exact amount payable in the event of a reversal of the decision by
the trial court will vary from $50,000 to $100,000 depending on the
precise nature of the outcome.
CONTINGENT FEE PAYABLE TO CONSULTANT
On January 24, 2007, the Litigation Trust retained the services of JAF
Management, LLC ("JAF") to serve as a consultant to the Litigation
Trust concerning strategic and structuring alternatives, capital market
and industry conditions and financial valuations relating to potential
settlement opportunities or active settlement negotiations. The term of
the consulting agreement expires on March 31, 2008. As compensation for
the services of JAF, the Litigation Trust has agreed to pay a success
fee in connection with any out-of-court settlement or termination
arrangement with respect to any of the litigations equal to three
percent (3%) of the amount by which the gross realizable value of such
settlement or termination arrangement exceeds $200 million. This
consulting agreement was terminated, without cause, upon notice as
permitted in accordance with its terms, on July 28, 2007.
NOTE 7 - CERTAIN RELATIONSHIPS
The Litigation Trustee Advisor is currently a member of Empire Resorts'
Board of Directors. Mr. Bernstein, one of the Litigation Trustees, was
also a member of the Empire Resort's Board of Directors, but resigned
from his position as a director of Empire Resorts on June 21, 2007.
Dennis C. Vacco, one of the Litigation Trustees, is of counsel to the
firm of Crane, Parente & Cherubin. Crane, Parente and Cherubin
served as counsel to the St. Regis Mohawk Tribal Council prior to the
time that Mr. Vacco became a Litigation Trustee and performed certain
services that were paid for by the Litigation Trust pursuant to the
Joint Alliance Agreement. In conjunction with Mr. Vacco's appointment
as a Litigation Trustee, Crane Parente and Cherubin revised the terms
of its engagement with the Litigation Trust to provide that Mr. Vacco
will receive no share of the proceeds of any work performed for the
Litigation Trust by Crane, Parente and Cherubin. As of June 30, 2007,
the Litigation Trust had accrued and unpaid expenses of $136,526 for
fees payable to Crane, Parente and Cherubin, including expenses of
$108,469 and $136,526 for the three and six months ended June 30, 2007.
10
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities a minimum threshold for
financial statement recognition of the benefit of tax positions, and
requires certain expanded disclosures. The Interpretation is effective
for fiscal years beginning after December 31, 2006, and is to be
applied to all open tax years as of the date of effectiveness. The
adoption of the Interpretation did not have a material impact on the
financial statements of the Litigation Trust.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157"). This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosure
of fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. SFAS No.
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Litigation Trust does not expect
adoption of SFAS No. 157 to have an impact on the results of operations
and financial condition of the Litigation Trust.
In September 2006, the staff of the SEC issued Staff Accounting
Bulletin No. 108 ("SAB 108") which provides interpretive guidance on
how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for fiscal years ending on or after
November 15, 2006. Adoption of SAB 108 did not have a material impact
on the Litigation Trust's consolidated financial position, results of
operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities ("SFAS 159"), to permit all entities to choose to
elect, at specified election dates, to measure eligible financial
instruments at fair value. An entity shall report unrealized gains and
losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date, and recognize upfront costs
and fees related to those items in earnings as incurred and not
deferred. SFAS 159 applies to fiscal years beginning after November 15,
2007, with early adoption permitted for an entity that has also elected
to apply the provisions of SFAS 157, Fair Value Measurements. An entity
is prohibited from retrospectively applying SFAS 159, unless it chooses
early adoption. SFAS 159 also applies to eligible items existing at
November 15, 2007 (or early adoption date). The adoption of the SFAS
159 did not have a material impact on the financial statements of the
Litigation Trust.
NOTE 9 - SUBSEQUENT EVENTS
On August 13, 2007, Harrah's filed a motion to dismiss the Judgment
Enforcement Case on the grounds that the Litigation Trustees were not
proper parties to maintain the suit and that the case had been
previously settled. A hearing on the motion to dismiss the Judgment
Enforcement Case has been scheduled for September 28, 2007. A dismissal
as a result of this motion would not affect the transactions providing
for the issuance of units to the enrolled members of the St. Regis
Mohawk Tribe entered into in connection with the assignment of the
judgment, but would be expected to result in an impairment of
substantially all the estimated fair value of this intangible asset.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical facts included in this Report,
including without limitation, the statements under "General," and "Liquidity and
Capital Resources," are forward-looking statements. All subsequent written and
oral forward-looking statements attributable to the Litigation Trust or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements.
The following discussions should be read in conjunction with our financial
statements and the related notes thereto and other financial information
appearing elsewhere in this report. The following discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of various factors, including those discussed elsewhere
in this report.
GENERAL
We are a statutory trust created under Delaware law. Our formation was a
condition to the merger of Empire Resorts, Inc. ("Empire Resorts"), Monticello
Raceway Management, Inc., ("MRMI"), Monticello Casino Management, L.L.C.
("MCM"), Monticello Raceway Development Company, L.L.C. ("MRDC") and Mohawk
Management, L.L.C. ("Mohawk"). Also as a condition to that merger, each of
Catskill Development, L.L.C. ("Catskill"), MRDC, and Mohawk, agreed to assign to
us all of their claims under or related to the alienation and frustration of
their agreements and business relations with the St. Regis Mohawk Tribe. That
assignment included rights to any proceeds from any settlement or award that may
arise from any litigation relating to that claim. We currently maintain a web
site at WWW.CATSKILLTRUST.COM to facilitate communications and provide a
convenient source of more detailed information for our unit-holders and other
interested parties.
Our litigation claims arise from the efforts of each of Catskill, MRDC,
and Mohawk to develop with the St. Regis Mohawk Tribe a gaming casino in
Monticello, New York. These entities spent several years and substantial funds
to develop and obtain required approvals for the casino. Subsequently, Park
Place Entertainment Corporation, the world's largest gaming corporation and
Atlantic City's largest casino operator, entered into an agreement providing for
the St. Regis Mohawk Tribe to commit its future casino development efforts
exclusively to Park Place Entertainment Corporation. That agreement conflicted
with the Mohawk Tribe's agreements with Catskill, MRDC and Mohawk.
Several lawsuits were commenced as a result of these circumstances. The
first was commenced by certain members of the St. Regis Mohawk Tribe in the St.
Regis Mohawk Tribal Court. The defendants refused to recognize the validity of
the court and a default judgment was entered. The Litigation Trustees are now
seeking to enforce this judgment in the United States District Court for the
Northern District of New York. This case is referred to herein as the "Judgment
Enforcement Case". Two other lawsuits were commenced on behalf of the original
business entities who were working to develop the casino. One of these was
brought against Park Place Entertainment, Inc. ("PPE") in the United States
District Court for the Southern District of New York and was dismissed after
summary judgment was rendered for the defendant. This lawsuit is referred to
herein as the "PPE Case". The other was brought in the Sullivan County Supreme
Court of the State of New York Court against certain business partners of PPE
and has been discontinued, under an agreement that permits it to be re-filed at
a future date without being barred by the statute of limitations, pending
resolution of the issues in the PPE Case. This case is referred to herein as the
"President RC Case".
12
The PPE Case was initially dismissed on a motion for summary judgment.
However, the trial court subsequently vacated the earlier decision granting
summary judgment to Park Place Entertainment, in order to consider new evidence
and allow additional discovery proceedings. After these proceedings were
completed, the dismissal was reinstated. An appeal was taken in the PPE Case in
late 2004. In January of 2005, the Litigation Trust was created to pursue claims
in the PPE Case and subsequently filed briefs on the appeal. Oral arguments on
this appeal were initially heard on October 17, 2005. On March 8, 2006, however,
the Court of Appeals for the Second Circuit vacated the judgment in the case
because it determined, based on information brought to the attention of the
Court by the plaintiffs, that there was no jurisdiction over two of the
plaintiffs in the case. The case was then remanded to the District Court for
additional findings as to the jurisdiction over the remaining plaintiff and as
to the possible third party beneficiary status of that plaintiff with respect to
contracts entered into by the other plaintiffs.
Consistent with the determination of the Court of Appeals, the District
Court dismissed Catskill Development and Mohawk Management from the case.
Following the dismissal, the Trustees of the Litigation Trust filed a new
complaint on behalf of the beneficiaries of the Trust against Harrah's Operating
Company, the successor in interest to Park Place Entertainment, Inc. with
respect to the claims of Catskill Development and Mohawk Management. The state
citizenship of the Trustees of the Trust, which had received the claims of the
two non-diverse parties by assignment, entitled them to claim jurisdiction in
the federal court. The parties to the case had previously agreed that all
parties to the newly filed case would be subject to the decisions made in the
original case. This allowed the Judge to consolidate the two cases, re-enter its
original decision granting summary judgment and dismiss the consolidated case.
This effectively restored the case to the status it had been at the time the
appeal was filed, with all parties and all claims represented and all of the
decisions made in the case applicable to all the parties.
On November 20, 2006, the District Court issued a decision on the third
party beneficiary issue presented by the 2nd Circuit's remand. As a consequence
of the consolidation process, the issue of third party beneficiary status
becomes less important to a proper resolution of the appeal. However, as
requested by the 2nd Circuit, the District Court addressed the question of
whether Monticello Raceway Development, the one plaintiff whose claim to federal
diversity jurisdiction in the original case had not been in question, would be a
third party beneficiary of any of the contracts entered into by the other
plaintiffs. The plaintiffs argued that all of the contracts were clearly
interdependent as part of an overall structure designed to accomplish the
development and operation of the casino and that, in particular, the Land
Purchase Agreement contained an express obligation to support the approval
process for the other contracts. However, the Court found that the references
made in the Land Purchase Agreement and other documents to the development
agreement between Monticello Raceway Development and the Tribal Gaming Authority
were too vague to form the basis for a third party beneficiary claim,
particularly in light of express language in the development agreement that she
believed indicated that it was intended to stand on its own. Accordingly, the
District Court determined that there were no third party beneficiary rights
under the development agreement.
Following the issuance of this decision and order, the plaintiffs have
filed a new appeal to the 2nd Circuit. Since the restoration of the claims of
the two non-diverse plaintiffs to the case has resulted in all of the issues
remaining the same as on the previous appeal, it was anticipated by the parties
that the 2nd Circuit would be able to review the original briefs in the case as
they were originally filed, and that the only additional briefing that will be
necessary would be supplemental briefs to deal with cases and other developments
that have arisen since those briefs were issued. The ultimate decision on this
question rests with the Court, however. There is also no assurance that the
original panel that was assigned to the appeal last year will be assigned again.
Whether or not a new panel is assigned, it is likely that additional oral
arguments will be heard.
13
On June 1, 2004, we filed a Voluntary Discontinuance and Tolling Agreement
with respect to the President RC Case. Since there are many issues of fact and
law in the PPE Case which relate to matters that are also at issue in the second
lawsuit, we believe that, as long as the right to recommence the suit without
regard to the statute of limitations was preserved, the discontinuance of this
suit was appropriate in order to avoid the cost of maintaining two separate
lawsuits.
On January 24, 2007, the Litigation Trust assumed responsibility for the
Judgment Enforcement Case pursuant to an agreement (the "Joint Alliance
Agreement") with the original litigants in the Tribal Court litigation against
PPE and Clive Cummis. That lawsuit pursued claims on behalf of enrolled members
of the St. Regis Mohawk Tribe that are similar to the claims that the Litigation
Trust is pursuing on behalf of its beneficiaries. The lawsuit resulted in a
$1.787 billion judgment against PPE, which was rendered in the St. Regis Mohawk
Tribal Court (the "Tribal Court") on March 20, 2001. An enforcement action by
the plaintiffs to enforce that judgment in a federal district court was
subsequently dismissed, without prejudice. At the time of the enforcement
action, the validity of the Tribal Court was in question and the matter was the
subject of other judicial and administrative proceedings.
As a result of the common interests of the Litigation Trust's
beneficiaries and the class of enrolled tribal members, the parties to the Joint
Alliance Agreement agreed to work together to merge their respective interests
and share in any recoveries of their respective claims. The Joint Alliance
Agreement provided that the claims were to be assigned in exchange for a
certificate evidencing the ownership by the Tribal members of 21,912,869 Units
in the Litigation Trust (representing a 50% beneficial interest in the
Litigation Trust). The Trustees of the Litigation Trust then obtained the
consent of the holders of more than 66 2/3% of the units of the Litigation Trust
to an amendment of the Declaration of Trust to implement the Joint Alliance
Agreement, including an increase in the authorized number of units to
43,825,738. In accordance with its terms, this amendment ("Amendment No. 2")
became effective upon satisfaction of the condition that the claims of the
Tribal members were duly and properly assigned to the Litigation Trust in
accordance with the Joint Alliance Agreement. On June 21, 2007, pursuant to the
Joint Alliance Agreement, the trustees of the Catskill Litigation Trust, in
exchange for the delivery of 21,912,869 newly issued units of the Litigation
Trust, received an assignment of certain claims of members of the St. Regis
Mohawk Tribe against Park Place Entertainment and Clive Cummis. The assignment
was previously approved by the St. Regis Mohawk Tribal Court.
As a result of the assignment to consummate the Joint Alliance Agreement,
an aggregate of 43,825,738 units of the Litigation Trust are issued and
outstanding. In addition, in connection with Amendment No. 2, Mr. Dennis C.
Vacco agreed to serve as a Litigation Trustee of the Litigation Trust and Mr.
Paul A. deBary, who had previously served as a Litigation Trustee, agreed to
serve as Litigation Trustee Advisor. References to the "Litigation Trustees"
herein refer to Messrs. Bernstein and deBary prior to June 21, 2007 and to
Messrs. Bernstein and Vacco thereafter.
On June 22, 2007, Dennis C. Vacco and Joseph Bernstein, acting in their
capacities as Litigation Trustees of the Litigation Trust, filed an enforcement
action (the "Judgment Enforcement Case") in the United States District Court for
the Northern District of New York. The enforcement action was filed against
Harrah's Operating Company, Inc. (a wholly owned subsidiary of Harrah's
Entertainment, Inc. (HET)), as successor to Park Place Entertainment, Inc., and
Clive Cummis to enforce an order of final judgment issued by the St. Regis
Mohawk Court on March 20, 2001. The order of default judgment ordered the
defendants to pay $1.782 billion of actual damages and $5 million of punitive
damages On July 12, 2007, pursuant to a duly noticed motion, the St. Regis
Mohawk Tribal Court issued an order that clarified that, under Tribal law, the
annual rate of nine percent provided for in sections 5003 and 5004 of the New
York Civil Practice Law and Rules, will apply for the purpose of calculating
interest on any unsatisfied amount of the order of final judgment issued by the
Tribal Court. No portion of the judgment has currently been satisfied and there
is no assurance that the Litigation Trust will receive any net proceeds as a
result of the enforcement of the judgment. A previous suit to enforce the
default judgment was dismissed, without prejudice to the recommencement of the
14
suit, after the Judge had not heard further from the parties concerning efforts
to settle the case. Harrah's Entertainment, Inc., the parent of Harrah's
operating company, has indicated in its public filings that it believed that the
case had been settled and intends to vigorously defend any attempt to enforce
the judgment. The PPE Case, the President RC Case and the Judgment Enforcement
Case are herein collectively referred to as the "Litigations".
As a result of the acquisition of the claims of the class action,
Plaintiffs in the Judgment Enforcement Case, the enrolled members of the St.
Regis Mohawk Tribe, as beneficial owners of the new units issued in conjunction
with the transfer, will be entitled to share in any future recovery or
settlement in all litigation currently being prosecuted by the Litigation Trust.
Similarly, the existing unitholders will be entitled to share in any future
recovery or settlement relating to the new claims that the Litigation Trust
acquired.
Our purposes are the prosecution of our litigation claims through the
recovery of any settlement or final judgments and the distribution of the net
amount of any such recoveries to our beneficiaries. The administration of our
Litigation Trust will involve the authentication and payment of fees and
expenses for legal and related services in connection with our litigation
claims, reporting and regulatory compliance and the maintenance of litigation,
financial and unit-holder records. Administrative expenses, exclusive of imputed
interest and legal fees, are currently estimated to be approximately $300,000
per year, comprised of the fees and expenses of the litigation and
administrative trustees and advisors, auditors and accountants and other support
services. Legal fees and other expenses involved in pursuing our litigation
claims are impossible to predict with any degree of accuracy. No assurance can
be given that the amounts available to us for the payment of such expenses under
our line of credit will be sufficient to carry our litigation claims through to
a successful conclusion or that alternative funds will be available for such
purpose.
The Litigation Trust is not engaged in settlement negotiations with
respect to any of the claims at this time. The defendants have raised numerous
defenses to the various claims in the litigations and have pursued them
vigorously resulting in dismissals or judgments in their favor. The ability of
the Litigation Trust to prevail in the various litigations will depend on a
number of factors, including the ability to obtain reversals in the appellate
courts and to pursue the litigations successfully in the trial courts
notwithstanding potential defenses to the claims and the St. Regis Mohawk Tribal
Court judgment, including the alleged invalidity of the Tribal Court.
Our unit-holders will only be entitled to the net proceeds from any
settlement or award, if any, of our litigation claims after the payment of our
expenses, the fees of our litigation trustees, any amounts outstanding under our
line of credit and $7,500,000 to Empire Resorts for reimbursement of prior
expenses incurred in connection with our litigation claims.
Under our agreement with counsel arguing the appeal, a portion of the fees
related to arguing the appeal will be contingent on the resulting decision.
However, these contingent fees do not relate to the additional matters relating
to jurisdiction that arose subsequent to the initial briefing of the case. As a
result, we currently expect significant additional expenses related to the
appeal. We do not expect additional expenses related to a trial in the PPE Case
(which is itself dependent on the outcome of the appeal) until at least the
second quarter of 2008.
RESULTS OF OPERATIONS
The expenditures for legal fees in the first six months of 2007, as compared
with the comparable period for 2006, reflect the considerably increased level of
activity necessary to make submissions of briefs to the Court of Appeals for the
Second Circuit as well as to consummate the Joint Alliance Agreement and
commence the prosecution of the Judgment Enforcement Case. Administrative
expenses, excluding legal fees, also increased in the first six months of 2007,
15
as compared with the first six months of 2006, due principally to expenses
associated with the implementation of the Joint Alliance Agreement, including
printing and mailing fees associated with notifying unitholders in connection
with Amendment No. 2 to the Declaration of Trust. Imputed interest expense has
increased significantly due to the additional withdrawals on the line of credit.
For the three months ended June 30, 2007, we reported a net loss of
$494,533. Included in net loss are legal fees of $361,854, administrative
expenses of $63,376, amortization of $36,521 and imputed interest of $35,356,
offset by dividend income of $2,575. For the three months ended June 30, 2006,
we reported a net loss of $180,720. Included in these net losses are legal fees
of $120,400, administrative expenses of $41,344 and imputed interest of $19,436,
offset by dividend income of $460.
For the six months ended June 30, 2007, we reported a net loss of
$854,198. Included in this net loss are legal fees of $640,726, administrative
expenses of $114,248, amortization of $36,521 and imputed interest of $66,556,
offset by dividend income of $3,854. For the six months ended June 30, 2006, we
reported a net loss of $264,768. Included in these net losses are legal fees of
$134,768, administrative expenses of $88,174 and imputed interest of $42,347,
offset by dividend income of $521.
LIQUIDITY AND CAPITAL RESOURCES
Empire Resorts has provided us with an irrevocable line of credit of up to
$2,500,000 to provide funds to pay any and all of our expenses permitted under
the Declaration of Trust. Although no interest is payable on amounts advanced
under our line of credit, the Litigation Trust imputes interest on the
borrowings at Empire Resorts borrowing rate (8% per annum at June 30, 2007). As
of June 30, 2007, $2,145,000 had been drawn down and was outstanding under this
line of credit. Amounts outstanding under our line of credit are to be repaid by
us from proceeds received from any settlement or award in connection with our
litigation claims after payment of an amount necessary to pay our Litigation
Trustees the fees for their services as set forth in the Declaration of Trust.
Repayments of amounts outstanding under our line of credit may be made as a
whole or in part from time to time at any time without notice. We may re-borrow
any amounts repaid. Our line of credit will remain in full force and effect
until our termination.
Empire Resorts is a holding company, owning all the capital stock or
membership interests of certain other entities. Empire Resorts is therefore
dependent on these other entities to pay dividends or make distributions in
order to generate internal cash flow and to satisfy its obligations, including
its obligations under our line of credit. There can be no assurance, however,
that these other entities will generate enough revenue to pay cash dividends or
make cash distributions. In addition, these entities may enter into contracts
that limit or prohibit their ability to pay dividends or make distributions.
Empire Resorts had no operating revenue during the fiscal year ended
December 31, 2003 and operating revenue of $45.0 million, $86.8 million and
$98.1 million for the fiscal years ended December 31, 2004, 2005 and 2006 and
sustained net losses of approximately $6.5 million, $12.7 million, $18.5 million
and $7.1 million, respectively, during such periods. Although Empire Resorts
significantly increased its level of operations during 2005 and 2006, it has yet
to demonstrate that such operations can be profitable. Therefore, there can be
no assurance that Empire Resorts will have the ability to meet its obligations
under our line of credit.
On June 21, 2007, the Litigation Trust entered into separate agreements
with two of its unitholders, Robert Berman and Ralph Bernstein, each of which
provides for advances of up to $125,000 upon written demand of the Litigation
Trust. Repayment of such advances is to be made solely from amounts available in
the Recovery Fund held by the Administrative Trustee under the Declaration of
Trust.
16
CRITICAL ACCOUNTING ESTIMATES
The Trustees use estimates and assumptions in preparing our financial statements
in preparing our financial statements in accordance with generally accepted
accounting principles (United States). These estimates and assumptions affect
the reported amounts of assets and liabilities and reported revenues and
expenses. The fair value of our cash and equivalents approximates their carrying
value.
OFF BALANCE SHEET ARRANGEMENTS
As of August 20, 2007, the Litigation Trust does not have any off balance sheet
arrangements.
ITEM 3. CONTROLS AND PROCEDURES
(a) The Litigation Trust carried out an evaluation, under the supervision and
with the participation of the Litigation Trust's management, including Joseph E.
Bernstein (acting Chief Executive Officer) and Paul deBary (acting Chief
Financial Officer), the Litigation Trust's Litigation Trustees, of the
effectiveness of the design and operation of the Litigation Trust's "disclosure
controls and procedures", as such term is defined in Exchange Act Rule 15d-15e,
as of the end of the period covered by this report. Based upon that evaluation,
Messrs. Bernstein and Paul deBary have concluded that the Litigation Trust's
disclosure controls and procedures were effective as of the end of the periods
covered by this report to provide reasonable assurance that information required
to be disclosed by the Litigation Trust in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
(b) There have been no significant changes in the Litigation Trust's internal
controls or in other factors that could significantly affect the Litigation
Trust's internal controls subsequent to the date the Litigation Trust carried
out this evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems, no
internal controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
17
OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
We are a statutory trust created under Delaware law. Our formation was a
condition to the consolidation of Empire Resorts with MRMI, MCM, MRDC, and
Mohawk. Also, as a condition to that consolidation, each of Catskill, MRDC and
Mohawk, agreed to assign to us all of their claims under or related to the
alienation and frustration of their agreements and business relations with the
St. Regis Mohawk Tribe. That assignment included rights to any proceeds from any
settlement or award that may arise from any litigation relating to that claim.
Our litigation claims arise from the efforts of each of Catskill, MRDC, and
Mohawk to develop with the St. Regis Mohawk Tribe a gaming casino in Monticello,
New York. These entities spent several years and substantial funds to develop
and obtain required approvals for the casino. Subsequently, Park Place
Entertainment Corporation, the world's largest gaming corporation and Atlantic
City's largest casino operator, entered into an agreement providing for the St.
Regis Mohawk Tribe to commit its future casino development efforts exclusively
to Park Place Entertainment Corporation. That agreement conflicted with the
Mohawk Tribe's agreements with Catskill, MRDC and Mohawk.
Several lawsuits were commenced as a result of these circumstances. The
first was commenced against PPE and Clive Cummis, its General Counsel, by
certain members of the St. Regis Mohawk Tribe in the St. Regis Mohawk Tribal
Court. The defendants refused to recognize the validity of the court and a
default judgment was entered. In the Judgment Enforcement Case, the Litigation
Trustees are now seeking to enforce this judgment of the Tribal Court in the
United States District Court for the Northern District of New York, as more
fully described below. Two other lawsuits were commenced on behalf of the
original business entities who were working to develop the casino. The first was
the PPE Case, which was brought against PPE in the United States District Court
for the Southern District of New York in 2001. The Presidents RC Case was
brought in the Sullivan County Supreme Court of the State of New York Court
against Presidents, RC, Inc. and certain of its principals and other alleged
partners of PPE and has been discontinued, under an agreement that permits it to
be re-filed at a future date without being barred by the statute of limitations,
pending resolution of the issues in the PPE Case.
The PPE Case was initially dismissed on a motion for summary judgment.
However, the trial court subsequently vacated the earlier decision granting
summary judgment to Park Place Entertainment, in order to consider new evidence
and allow additional discovery proceedings. After these proceedings were
completed, the dismissal was reinstated. An appeal was taken in the PPE Case in
late 2004. In January of 2005, the Litigation Trust was created to pursue claims
in the PPE Case and subsequently filed briefs on the appeal. Oral arguments on
this appeal were initially heard on October 17, 2005. On March 8, 2006, however,
the Court of Appeals for the Second Circuit vacated the judgment in the case
because it determined, based on information brought to the attention of the
Court by the plaintiffs, that there was no jurisdiction over two of the
plaintiffs in the case. The case was then remanded it to the District Court for
additional findings as to the jurisdiction over the remaining plaintiff and as
to the possible third party beneficiary status of that plaintiff with respect to
contracts entered into by the other plaintiffs.
Consistent with the determination of the Court of Appeals, the District
Court dismissed Catskill Development and Mohawk Management from the case.
Following the dismissal, the Trustees of the Litigation Trust filed a new
complaint on behalf of the beneficiaries of the Trust against Harrah's Operating
Company, the successor in interest to Park Place Entertainment, Inc. with
respect to the claims of Catskill Development and Mohawk Management. The state
citizenship of the Trustees of the Trust, which had received the claims of the
two non-diverse parties by assignment, entitled them to claim jurisdiction in
the federal court. The parties to the case had previously agreed that all
parties to the newly filed case would be subject to the decisions made in the
original case. This allowed the Judge to consolidate the two cases, re-enter its
original decision granting summary judgment and dismiss the consolidated case.
18
This effectively restored the case to the status it had been at the time the
appeal was filed, with all parties and all claims represented and all of the
decisions made in the case applicable to all the parties.
Following the issuance of this decision and order, the plaintiffs have
filed a new appeal to the 2nd Circuit. Since the restoration of the claims of
the two non-diverse plaintiffs to the case has resulted in all of the issues
remaining the same as on the previous appeal, it was anticipated by the parties
that the 2nd Circuit would be able to review the original briefs in the case as
they were originally filed, and that the only additional briefing that will be
necessary would be supplemental briefs to deal with cases and other developments
that have arisen since those briefs were issued. The ultimate decision on this
question rests with the Court, however. There is also no assurance that the
original panel that was assigned to the appeal last year will be assigned again.
Whether or not a new panel is assigned, it is likely that additional oral
arguments will be heard.
On June 1, 2004, we filed a Voluntary Discontinuance and Tolling Agreement
with respect to the President RC Case. Since there are many issues of fact and
law in the PPE Case which relate to matters that are also at issue in the second
lawsuit, we believe that, as long as the right to recommence the suit without
regard to the statute of limitations was preserved, the discontinuance of this
suit was appropriate in order to avoid the cost of maintaining two separate
lawsuits.
The Litigation Trust assumed responsibility for the Judgment Enforcement
Case pursuant to an agreement (the "Joint Alliance Agreement") with the original
litigants in the Tribal Court litigation against PPE and Clive Cummis. That
lawsuit pursued claims on behalf of enrolled members of the St. Regis Mohawk
Tribe that are similar to the claims that the Litigation Trust is pursuing on
behalf of its beneficiaries. The lawsuit resulted in a $1.787 billion judgment
against PPE, which was rendered in the St. Regis Mohawk Tribal Court (the
"Tribal Court") on March 20, 2001. An enforcement action by the plaintiffs to
enforce that judgment in a federal district court was subsequently dismissed,
without prejudice. At the time of the enforcement action, the validity of the
Tribal Court was in question and the matter was the subject of other judicial
and administrative proceedings.
As a result of the common interests of the Litigation Trust's
beneficiaries and the class of enrolled tribal members, the parties to the Joint
Alliance Agreement agreed to work together to merge their respective interests
and share in any recoveries of their respective claims. The Joint Alliance
Agreement provided that the claims were to be assigned in exchange for a
certificate evidencing the ownership by the Tribal members of 21,912,869 Units
in the Litigation Trust (representing a 50% beneficial interest in the
Litigation Trust). The Trustees of the Litigation Trust then obtained the
consent of the holders of more than 66 2/3% of the units of the Litigation Trust
to an amendment of the Declaration of Trust to implement the Joint Alliance
Agreement. In accordance with its terms, this amendment ("Amendment No. 2")
became effective upon satisfaction of the condition that the claims of the
Tribal members were duly and properly assigned to the Litigation Trust in
accordance with the Joint Alliance Agreement. On June 21, 2007, pursuant to the
Joint Alliance Agreement, the trustees of the Catskill Litigation Trust received
an assignment of certain claims of members of the St. Regis Mohawk Tribe against
Park Place Entertainment and Clive Cummis. The assignment was previously
approved by the St. Regis Mohawk Tribal Court.
On June 22, 2007, Dennis C. Vacco and Joseph Bernstein, acting in their
capacities as Litigation Trustees of the Litigation Trust, filed a new complaint
in the Judgment Enforcement Case in the United States District Court for the
Northern District of New York. The enforcement action was filed against Harrah's
Operating Company, Inc. (a wholly owned subsidiary of Harrah's Entertainment,
Inc. (HET)), as successor to Park Place Entertainment, Inc., and Clive Cummis to
enforce an order of default judgment issued by the St. Regis Mohawk Court on
March 20, 2001. The order of default judgment ordered the defendants to pay
$1.782 billion of actual damages and $5 million of punitive damages On July 12,
2007, pursuant to a duly noticed motion, the St. Regis Mohawk Tribal Court
issued an order that clarified that under Tribal law sections 5003 and 5004 of
the New York Civil Practice Law and Rules apply an annual rate of nine percent
for the purpose of calculating interest on any unsatisfied amount of the Tribal
Court judgment that the Trust is seeking to enforce in the Judgment Enforcement
Case. No portion of the judgment has currently been satisfied. A previous suit
to enforce the default judgment was dismissed, without prejudice to the
recommencement of the suit, after the Judge had not heard further from the
19
parties concerning efforts to settle the case. Harrah's Entertainment, Inc., the
parent of Harrah's operating company, has indicated in its public filings that
it believed that the case had been settled and intends to vigorously defend any
attempt to enforce the judgment.
On August 13, 2007, Harrah's filed a motion to dismiss the Judgment
Enforcement Case on the grounds that the Litigation Trustees were not proper
parties to maintain the suit and that the case had been previously settled. A
hearing on the motion to dismiss the Judgment Enforcement Case has been
scheduled for September 28, 2007
ITEM 6. EXHIBITS
a: Exhibits
*31.1 Certification of Acting Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Acting Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of the Acting Chief Executive Officer pursuant to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*32.2 Certification of the Acting Chief Financial Officer pursuant to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*Filed herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, Catskill
Litigation Trust caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATSKILL LITIGATION TRUST
(Registrant)
DATE: August 20, 2007 By: /s/ Joseph E. Bernstein
----------------------------------------
Joseph E. Bernstein
Litigation Trustee
DATE: August 20, 2007 By: /s/ Dennis C. Vacco
----------------------------------------
Dennis C. Vacco
Litigation Trustee
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