Santa Fe avoids involuntary bankruptcy

John Wilen

Monday, March 22, 1999 | 11:14 a.m.

Calling Santa Fe Gaming Corp. creditor Hudson Bay Partners LP and its leader David Lesser "vulture capitalists," U.S. Bankruptcy Judge Linda Riegle on Friday denied an attempt by Lesser and other creditors to force Santa Fe Gaming Corp. into involuntary bankruptcy.

Riegle's ruling does not affect a voluntary bankruptcy filing by Santa Fe Gaming subsidiary Pioneer Finance Corp. Nor does it affect a separate attempt by Lesser and Hudson Bay to elect two outside directors to Santa Fe's board at the company's annual meeting next month.

The ruling gives Santa Fe Gaming a breather from Lesser and Hudson Bay's attempts to place the company under bankruptcy court supervision, allowing it to concentrate on Pioneer Finance's attempts to restructure its delinquent debt.

However, the battle is far from over. If Pioneer Finance is unable to get court approval of its restructuring plan by Aug. 22 -- a statutorily mandated deadline that falls 180 days from Pioneer Finance's Feb. 23 Chapter 11 bankruptcy filing -- Hudson Bay and other creditors will be free to again try to force Santa Fe Gaming into bankruptcy.

Through subsidiaries, Santa Fe Gaming owns the Santa Fe hotel-casino in northwest Las Vegas, the Pioneer hotel-casino in Laughlin, land in Henderson on which it plans to build a hotel-casino and land on the Strip currently being leased to the Wet 'n Wild water park.

Pioneer Finance was created in 1988 to sell $120 million in bonds to finance the acquisition of the Pioneer by one of Santa Fe Gaming's predecessor corporations. Last December, Pioneer Finance missed a $60 million balloon payment that was due on those bonds. Santa Fe Gaming guarantees the bonds.

As the December payment deadline approached, the company asked its bondholders to agree to extend the maturity date of the bonds by eight years, to December 2006, and to agree not to demand regular interest payments on the bonds until December 2000.

More than 75 percent of the Pioneer Finance bondholders agreed to the terms, but a small minority did not. That minority, led by Lesser, filed petitions in January asking the bankruptcy court to force both Pioneer Finance and Santa Fe Gaming into bankruptcy. Because Pioneer Finance later filed voluntarily for bankruptcy, that involuntary petition will likely be declared moot or combined with the voluntary case.

Hudson Bay owns 7.9 percent of the face value of the bonds. Other bondholders joining the Hudson Bay petition include The GMS Group LLC, of Atlanta, which owns 4.7 percent of the bonds' face value. Hudson Bay, GMS and several other small bondholders together control less than 14 percent of the bonds.

The purpose of Friday's hearing was to allow arguments on whether Santa Fe Gaming itself should be placed in bankruptcy. Hudson Bay's basic argument was that because Santa Fe Gaming guaranteed the bonds of a subsidiary that is in default on those bonds and is in bankruptcy proceedings, Santa Fe Gaming itself should be placed under bankruptcy court supervision.

That argument didn't go very far with Riegle, who asked Hudson Bay attorney Thomas Califano why Hudson Bay could not wait to see what happened in the Pioneer Finance voluntary bankruptcy case before trying to force Santa Fe Gaming into bankruptcy.

Califano replied that bankruptcy rules allow creditors to seek bankruptcy court control of the guarantor of a debt as well as of the issuer of the debt. Both Califano and Tim Cory, attorney for GMS, argued in court and in filings in the case that financial mismanagement at Santa Fe Gaming necessitated bankruptcy court supervision of the company.

"The company or companies are really trying to retire the debt cheaply and remain in control," said Cory.

In filings in the case, Hudson Bay has accused Santa Fe of failing to disclose material facts to bondholders last December when seeking their approval to extend the maturity date of the bonds. Chief among those material facts, argues Hudson Bay, was a $229 million offer made for the company last summer by Crescent Real Estate Equities, of Fort Worth, that would have fully paid off bondholders.

Crescent owns non-voting stock in a company that owns non-voting stock in Hudson Bay.

In addition, both Hudson Bay and GMS made offers to exchange bonds for preferred stock, according to Hudson Bay filings. Santa Fe Gaming has denied that.

"You have evidence that there were some meaningful solutions proposed," said Cory.

But Riegle noted that bondholders dissatisfied with the way Santa Fe Gaming is run have other recourse, including independent lawsuits and the Pioneer Finance bankruptcy proceeding, in which to pursue those kinds of claims.

"They have their rights in the Pioneer Finance plan," said Riegle. "They're free to go sue the guarantor. They acquired these with their eyes open."

She was far more concerned with the potential effect of a bankruptcy filing on Santa Fe's gaming operations. Forcing Santa Fe Gaming into bankruptcy could give the public the perception that its casinos are about to close, costing them business and hurting the company's employees, said Riegle.

Riegle was unhappy Hudson Bay bought most of its Pioneer Finance bonds with full knowledge that the company was in trouble.

"Your client bought these knowing they would be in default," Riegle told Califano.

Califano replied that Hudson Bay began buying the notes well before the company asked bondholders to agree to new terms on the debt.

But when that happened, said Riegle, "then (Lesser) hurried up and bought a whole bunch more."

Riegle called Lesser a "vulture capitalist," and said records clearly showed that, "he bought over half of these after the notice of exchange offer."

Saying investors who buy bonds intending to force their issuer into bankruptcy have no right under bankruptcy laws to ask for bankruptcy court supervision of the issuer, Riegle ordered Lesser to file an affidavit swearing that the Pioneer Finance bonds were bought for investment purposes only.

Califano noted that Lesser has made such declarations in several places in writing in his court filings, and in action in his attempts to negotiate payment and control terms with Santa Fe Gaming. Califano characterized the involuntary bankruptcy petition as an action of last resort, but promised Lesser would file an affidavit.

On Friday, Riegle ordered a suspension of the case, which freezes the involuntary bankruptcy petition. But she agreed to dismiss the case entirely if any Santa Fe Gaming insiders who received payments or other transfers within a year of the date Hudson Bay filed its involuntary petition agree to waive any protection they would have under the statute of limitations.

Payments or transfers within certain statutorily designated periods of a bankruptcy filing can be returned by court order from their recipient to the bankrupt company for equal distribution to all creditors. By waiving their statute of limitation protections, the unnamed Santa Fe insiders essentially agree to place their payments or transfers within the reach of the court in any future Santa Fe Gaming bankruptcy filing.

Riegle's order ends the attempt to place Santa Fe Gaming in bankruptcy until at least Aug. 22. That's the date by which Pioneer Finance must have court approval of its restructuring plan, or other parties can offer their own restructuring plans.

If Pioneer Finance's plan is approved, there will be little grounds for bondholders to re-file an involuntary bankruptcy petition against Santa Fe Gaming. If, however, the Pioneer Finance plan fails or is delayed, the same parties may end up back in Riegle's courtroom arguing the same issues.

The next act in the drama is likely to play out April 30, when Santa Fe holds its annual shareholder meeting at the Pioneer. In addition to owning Pioneer Finance bonds, Lesser and Hudson Bay control more than 30 percent of Santa Fe's preferred stock.

Because Santa Fe has missed dividend payments on the stock for two straight years, preferred shareholders have the right to add two directors to the company's board. Hudson Bay has nominated four people to serve on the company's board.