Icahn wins control of Stratosphere, seeks Arizona Charlie’s

John Wilen and Cy Ryan

Monday, May 18, 1998 | 10:03 a.m.

Bankruptcy Judge Greg Zive in Reno today approved a financial reorganization of the Stratosphere hotel-casino that will put financier Carl Icahn in charge of the Las Vegas property.

Attorney Gerald Gordon said Icahn and his companies have applied to the Nevada Gaming Commission for a license, an investigation of their backgrounds is under way and a vote on licensing them could happen this summer.

As expected, the 19,038 people who bought Stratosphere vacation packages will receive most of their benefits. The hotel-casino had earlier declined to honor the packages because of its financial problems.

In approving Icahn's reorganization plan, Zive said it was offered in good faith and is feasible.

Icahn's plans had the blessing of the bankrupt Stratosphere Corp. and faced little opposition.

But in the case of Arizona Charlie's, which he is also pursuing, Icahn is fighting against rival plans filed by Becker Gaming Inc., the bankrupt property's current owner, and Station Casinos Inc., which would like to add the Decatur Blvd. resort in Las Vegas to its stable of locals casinos.

In Las Vegas, a different bankruptcy court heard arguments about disclosure statements Icahn and Station filed in support of their reorganization plans.

A disclosure statement is a lengthy document detailing the specific ways creditors will be compensated, and what the company proposing the plan wants to do with the bankrupt property. Disclosure statements are the documents creditors rely on when deciding whether or not to vote for a reorganization plan.

In general, a majority of a company's creditors must vote to support a plan before that plan can be approved by a bankruptcy judge.

Friday's hearing focused on the disclosure statements filed by Icahn and Station, giving competing parties a chance to argue that some things should be more fully disclosed, or that misleading language should be changed. A plan filed by Becker Gaming was approved at a disclosure hearing last month.

At the end of the disclosure hearing, a judge will order final changes to the statements. All three Arizona Charlie's disclosure statements will be mailed in one package to allow creditors the chance to compare and contrast the plans.

Icahn, through his High River L.P., owns 51.3 percent of Arizona Charlie's mortgage debt, which he has purchased since the resort declared bankruptcy. Station Casinos Inc. owns a small percentage of the mortgage notes, also purchased since bankruptcy.

Arizona Charlie's, with 258 rooms and 940 employees, declared bankruptcy in November largely as a result of Becker Gaming's inability to sell or get a license to operate its Missouri riverboat, the Capitol Queen. Arizona Charlie's had guaranteed Capitol Queen debt notes worth about $20 million, and declared bankruptcy to retain its right to contest the validity of those guarantees.

Friday's Arizona Charlie's hearing is expected to be lively, with each party criticizing plans submitted by the other two. But even after the fireworks die down, it will likely remain unclear which plan will ultimately win approval.

Becker Gaming's plan calls for mortgage debtholders to be repaid $44.9 million to $64 million of the resort's $55 million in outstanding debt, depending on whether they are paid in cash or over a period of time. Icahn's plan calls for debtholders to receive 90 percent equity ownership in the reorganized Arizona Charlie's. Station would pay debtholders $52 million in cash.

Under both the Icahn and Station plans, Becker Gaming will lose all equity ownership in Arizona Charlie's.

Each plan has pros and cons, said Candace Carlyon, an attorney representing Arizona Charlie's trade vendors -- suppliers of everything from food to gaming equipment. Carlyon also represents owners of mortgage debt in the Stratosphere case.

Becker Gaming's plan pays mortgage debtholders less initially, but may pay more over time, once interest is considered, Carlyon said. Also, Becker's plan ensures Arizona Charlie's will continue to operate without interruption.

"The (trade vendors) feel very confident with the current management," Carlyon said.

However, the vendors receive the same treatment -- 100 percent repayment of debts of about $2 million -- from all three plans, she said.

"We're really pleased in this case because we have three different proponents who are proposing three different plans, and each are calling for 100 percent payment of the trade claims, which is unusual," Carlyon said.

Carlyon declined to say which plan the trade vendors would support.

Icahn, through his majority debt ownership, controls enough creditor votes to block acceptance of any plan but his own. But the bankruptcy court could still use a rare procedure called cram-down to approve either of the other two plans if their proponents demonstrate that they are fair, and that they repay mortgage debtholders in full, Carlyon said.

The fairness and payment issues are likely to be the most contentious, she said.

"The Arizona Charlie's plan is going to argue that they are paying more over time than the other plans," Carlyon said. "I don't think it's going to be a clear-cut issue."

Becker Gaming predicts it will hold onto Arizona Charlie's, while the Icahn and Station camps maintain that Becker's plan in unworkable, and that their plans are better. Station continues to decline to comment on its plans for the resort, while Icahn has said he plans to invest money in it.

In the Stratosphere case, Icahn owns 88 percent of Stratosphere's mortgage debt, bought since bankruptcy. Under his plan, mortgage noteholders such as himself will receive full equity ownership of the reorganized Stratosphere. Current equity owners will receive nothing.

There was an unresolved dispute between the Stratosphere and Strato-Retail LLC, the company which subleases retail space in the resort.

Strato-Retail leases retail space in the Stratosphere from Stratosphere Corp., and then subleases the space to retail tenants. Strato-Retail contends that it was damaged when Stratosphere entered bankruptcy and discontinued construction of a planned second hotel tower.

Because of the unfinished construction and concerns about Stratosphere's future, Strato-Retail lost tenants and thus, "lots of money," said Jess Bressi, an attorney for Strato-Retail.

"We believe that the debtors' failure to perform injured Strato-Retail in the eight figures," Bressi said.

Strato-Retail has itself been sued by Stratosphere shops Gallery Michel Animation and Fine Art and Kaplan Shoes, and has been counter-sued by tenants Nathan's Hot Dogs and Juice Jockey which it had sued for alleged failure to pay rent.

The suing tenants allege that they were enticed to rent space in the Stratosphere by Strato-Retail promises that an additional hotel tower would be built, and that the Rainforest Cafe chain would build a restaurant at the property. After bankruptcy stopped construction on the second hotel tower, Rainforest Cafe reconsidered its restaurant plans, settling instead on an MGM Grand location.