Stratosphere bondholders lose suit against Lakes

Thursday, April 5, 2001 | 10:46 a.m.

Less than a year after coughing up $18 million to settle lawsuits brought by former Stratosphere shareholders, Lakes Gaming Inc. has triumphed in a lawsuit brought against it by former Stratosphere bondholders.

A federal judge in Las Vegas last week ruled against IBJ Schroder Bank, the indenture trustee representing holders of $203 million in Stratosphere mortgage bonds. IBJ had been seeking damages for breach of contract from Grand Casinos Inc., Lakes' predecessor company.

The case dates back to the Stratosphere's contentious 1997 bankruptcy, and the obligations of Grand to assist the struggling hotel-casino. Grand was the largest shareholder in Stratosphere at the time, holding 42 percent of its stock.

In order to enable the Stratosphere to sell the mortgage bonds, Grand signed an equity commitment. This called for Grand to forward up to $20 million a year to Stratosphere if cash flow fell below $50 million a year. The agreement called for these funds to be returned to Grand once the Stratosphere sold additional equity.

In its lawsuit, filed in September 1997, IBJ claimed Grand breached the commitment by failing to put up this $20 million for the benefit of bondholders when it became apparent the Stratosphere wasn't producing enough cash flow.

But in his decision, Judge David Hagen ruled that the commitment worked both ways, and Stratosphere was obligated to sell additional equity -- but in June, the Stratosphere informed Grand it wouldn't be able to do this because of the bankruptcy filing. By doing so, Hagen ruled Stratosphere breached the commitment, freeing Grand from any obligations.

The bondholders had argued that Grand had forced Stratosphere into an unnecessary bankruptcy to escape its obligations, but Hagen also dismissed these claims, noting that the Stratosphere had suffered extremely heavy losses prior to its bankruptcy -- and that Grand lost more than $100 million because of its failure.

The ruling comes on the heels of a settlement by Lakes with former Grand and Stratosphere shareholders last June. The shareholders had accused Grand of making misleading statements regarding the costs of building the Stratosphere in 1995 and 1996. Lakes admitted no wrongdoing, but agreed to pay $9 million apiece to Grand and Stratosphere shareholders.