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October 20, 2014

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Station Casinos sued over reorganization plan

Lawsuit claims debt-reduction plan would harm bondholders

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Texas Station was opened in the mid-90s by Station Casinos.

Two of the attorneys who sued Station Casinos Inc. three years ago over the company’s deal to go private are going after Station again, this time over Station’s plan to get rid of its high-cost debt and reorganize in bankruptcy court.

Las Vegas lawyers G. Mark Albright and Martin Muckleroy filed suit Thursday in U.S. District Court in Las Vegas on behalf of bondholder S. Blake Murchison, alleging Station’s debt-reduction plan would harm many of the company’s bondholders. They are seeking class-action status for the suit in order to represent all the bondholders they say are not getting treated fairly by Station.

"In the face of Station Casinos’ near-certain bankruptcy, debt default and other events of insolvency, the defendants are trying to avoid debt obligations they owe to a large portion of their corporate bond holders, including the plaintiff,’’ the lawsuit says. "The scheme the ... defendants have created is a bond-exchange offer, which gives a limited number of Station Casinos’ bond holders the opportunity to obtain new bonds which will subordinate the existing bonds during an event of bankruptcy. Station Casinos’ bond holders to whom the ... defendants have unilaterally chosen not to offer bond exchanges are left holding the short end of the stick and face the imminent threat that their investments in -- and contracts with -- Station Casinos will not be honored during a liquidation process.’’

A Station Casinos spokeswoman said the company would have no comment beyond what it disclosed in a Feb. 3 news release announcing plans to swap high-cost debt for low-cost debt, a capital infusion of $244 million by casino executives Frank Fertitta III, chairman and chief executive officer; and Lorenzo Fertitta, vice chairman; and Colony Capital; and a plan to have the transaction approved through a prepackaged bankruptcy filing.

Station has offered some investors 10 cents to 50 cents on the dollar, depending on the bonds they hold, in secured notes and cash, in exchange for about $2.3 billion of existing bonds.

Station has said some secured lenders favor the reorganization plan, which analyst Chris Snow at CreditSights estimates would reduce Station’s interest costs by $100 million per year by eliminating some $1.9 billion in debt — a loss borne by the bondholders. Bondholders face a March 2 deadline to accept or reject the offer.

Station, hurt hard by the recession and rising unemployment in the Las Vegas area and other markets it serves, faces bankruptcy because of its likely inability to make payments on high-interest debt. On Feb. 3 it said it likely would report a $2 million operating loss for the quarter ended Dec. 31 as revenue slid 19 percent to $290 million. Also on Feb. 3, Station announced it did not make a $14.6 million interest payment Feb. 2 on $450 million in notes due in 2014.

Albright and Muckleroy, of the firm Albright, Stoddard, Warnick & Albright; teamed up with attorneys from Boca Raton, Fla., in filing the suit. Those attorneys are with the firm Coughlin Stoi Geller Rudman & Robbins LLP.

The defendants in the suit are Station Casinos Inc. and six of its owners: Fertitta Colony Partners LLC, Fertitta Partners LLC, Colony Capital LLC, Frank Fertitta III, Lorenzo Fertitta and Thomas Barrack Jr. Also sued were Station directors Jonathan Grunzweig and James Nave as well as company executives Thomas Friel, Scott Nielson and Kevin Kelley.

The suit starts off with a bit of philosophy from Leo Tolstoy: "A gentleman is a man who will pay his gambling debts even when he knows he has been cheated.’"

"The ... defendants are not acting gentlemanly,’’ the lawsuit charges. The suit alleges: "The exchange offers unfairly, disloyally and without bondholders’ consent, deny plaintiff and the entire class of similarly situated bondholders the ability to take advantage of the bond tender offers. Plaintiffs’ bond holdings will be subordinated to the newly issued bonds and, as a result, will likely be rendered worthless as the specter of Station Casinos’ insolvency approaches.’’

The suit alleges the bond-exchange offer violates the indentures, or promises, Station made to Murchison and other purchasers of the two bonds he owns: One called a 6 7/8 percent Senior Note due 2016 and another called a 7 3/4 percent Senior Note due 2016.

For the 6 7/8 percent notes, the suit alleges Station promised the bondholders it "shall not incur any indebtedness ... senior in any respect in right of payment to the notes."

For the 7 3/4 percent bonds, the suit claims Station agreed to a limitation on liens prohibiting the casino company from assuming or guaranteeing any debt secured by a lien upon its properties without equally securing the notes with the debt secured by the lien. The suit says Station agreed not to unilaterally reduce the rate of interest, change the time of payments or reduce the principal owed on the notes.

The suit seeks a declaration that Station’s debt-exchange offer violates its promises to the plaintiff bondholders; and violates the "implied covenant of good faith and fair dealing with respect to the indentures.’’ The suit also seeks an order canceling the debt-exchange offers.

Albright and Muckleroy were among the attorneys who sued Station, the Fertittas and other Station directors in 2006 in Clark County District Court over Station’s plan to be taken private for $8.8 billion — including $3.3 billion in debt — in partnership with Barrack, the Los Angeles billionaire who controls Colony.

In those cases, Station and the plaintiffs settled. Station agreed to disclose more information about the deal to investors and agreed to pay the plaintiffs’ attorneys up to $1.9 million in legal costs and fees.

The plaintiffs, shareholders of Station when it had publicly traded stock, complained at the time that the defendants failed to engage in a fair process to maximize value to Station’s stockholders. Station and the individual defendants, without admitting wrongdoing, said they agreed to settle in order to avoid further costs and delays.

Station is a partner with the Greenspun family, owner of the Las Vegas Sun, in two hotel-casinos and several smaller gaming properties.

Steve Green can be reached at 990-7714 or [email protected].

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