Court says Stratosphere note holders can’t collect

Thursday, Aug. 15, 2002 | 10:52 a.m.

CARSON CITY -- A federal appeals court has ruled that those who held notes when the Stratosphere filed bankruptcy in Las Vegas are not entitled to collect an estimated $20 million from an associated company.

The 9th U.S. Circuit Court of Appeals upheld the decision of federal Judge David Hagen, who ruled in favor of Grand Casinos Inc. and against the group of note holders called Stratosphere Litigation.

The court, in a decision written by Judge Joseph T. Sneed, rejected allegations that Grand Casinos, which was the largest shareholder in the Stratosphere, pushed the company into bankruptcy to avoid putting up the $20 million.

Stratosphere, which was headed by Bob Stupak, made a public offering of $203 million in junk bonds to develop the project.

To enhance the credit rating, Grand Casinos Inc. agreed to put money into an escrow account when Stratosphere's cash flow fell below $50 million. Part of the agreement required Stratosphere to raise additional capital when it dropped the specified level.

The cash flow dropped to below $50 million and the casino filed for Chapter 11 bankruptcy reorganization. Grand Casinos, which was the largest shareholder in Stratosphere, never infused the proposed $20 million into the escrow account.

The note holders, in an attempt to recover some of their money, filed a breach of contract suit. They suggested Grand Casinos, whose chief executive officer was Lyle Berman, induced Stratosphere into bankruptcy to avoid putting up the escrow account money.

The appeals court said the "record indicates that Stratosphere's bankruptcy was caused by its financial downfall rather than by Grand's alleged attempt to avoid its escrow funding obligation.

"Stratosphere filed for bankruptcy after it suffered a net loss of $348.8 million; defaulted on a $37.5 million capital lease transaction; had its stock de-listed from the Pacific Stock Exchange and failed to pay the first required interest payment on its notes."

The court said Grand lost about $100 million when Stratosphere filed for bankruptcy and did not gain any benefit.

Financier Carl Icahn bought the Stratosphere out of bankruptcy court in 1998 and continues to operate it.