Herbst hits roadblock for Iowa gaming license

By Steve Green

Tuesday, Sept. 22, 2009 | 11:14 a.m.

The nonprofit sponsor of Herbst Gaming Inc.'s casino license in Iowa is objecting to Herbst's plan to emerge from bankruptcy, with the sponsor saying it hasn't consented to a deal in which lenders will obtain control of the company.

At issue is Herbst's riverboat gaming license for a casino in Osceola, Iowa, a town south of Des Moines.

The nonprofit Clarke County Development Corp. (CCDC) in Osceola said in its objection Monday that the Las Vegas company can't unilaterally transfer the gaming license to the new corporate entity that would emerge from the Nevada bankruptcy proceedings.

The development corporation said that under Iowa law, there is a joint application process for the operation of gambling games on casino boats. It said the law requires the development corporation to maintain its license as a sponsoring organization and allows it to enter into a management agreement for the casino boat.

The management agreement requires the boat operator to pay to CCDC 1.5 percent of monthly adjusted gross gaming revenue. The property at issue, with about 1,000 slot machines, is Terrible's Lakeside Casino. It generated about $4.3 million in adjusted gross revenue in August, Iowa records show.

Herbst obtained the management agreement in September 2004 with the consent of the development corporation, the corporation said. Herbst still must have the cooperation and support of the corporation to operate Terrible's Lakeside, the corporation said.

Clarke County Development charged in court papers Monday that "the debtor proposes to unilaterally assume the management agreement and assign it to Reorganized Herbst Gaming. The assignee is a separate and distinct entity from the debtor."

"The assignee will have different owners (senior creditors), and will be an entirely different entity than the debtor," the corporation said.

"However, the debtor did not seek CCDC’s consent to the assumption and assignment of the management agreement to the assignee prior to the filing of the (reorganization) plan and since then has rebuffed CCDC’s efforts to reach mutually agreeable terms effectuating a mutual assumption and assignment of the management agreement," attorneys for CCDC complained in their filing.

"The management agreement may not be assigned without CCDC’s consent," the Iowa agency said.

"Clearly, the debtor is attempting to side-step its obligation under the Bankruptcy Code to obtain CCDC’s consent by simply, but inappropriately, providing in its plan for the assignment of the management agreement even though it has not received CCDC’s consent. The court should not countenance the debtor’s conduct," CCDC said.

CCDC said that under Iowa law,"the licensing of the operator for a gambling boat requires extensive investigation into the background of the individual owners or directors of the operating entity."

"This rigorous background investigation, the requirement that a qualified sponsoring organization support an operator’s license application and ... case law regarding the intention of the Legislature all indicate that the identity of the parties is material to the issuance of licenses and approval of management agreements, and that this rationale underlies the prohibition on (unilateral) assignment," CCDC said.

Attorneys for Herbst have not yet responded to the Iowa corporation's objection.

But Helen Kimes, president of the development corporation, said in an affidavit that she had been told by Herbst's counsel that Herbst did not agree with the corporation's position that its consent was required for assignment of the management agreement.

Kimes said in her affidavit that she was surprised in July when Herbst proposed its plan for reorganization and to exit bankruptcy because of the plan to unilaterally assign the management agreement.

"I was surprised by this, given that the debtor never sought or even discussed obtaining CCDC's consent to the assignment of the management agreement," Kimes said in her affidavit.

She said the reorganized debtor will have to file an application with the Iowa Racing and Gaming Commission, which requires the support and consent of her development corporation.

"Debtor's counsel did not agree with CCDC's position; instead indicating that because of the identity of the operator of the gambling structure is not material, consent from CCDC is not required. However, such an interpretation would in effect render the entire statutory scheme of Iowa Code ... ineffectual as a regulatory device," she said.

Despite the assertions in Monday's filing, records show Herbst officials and their attorneys have been working with regulators on post-bankruptcy licensing issues.

In July, they told the Iowa Racing and Gaming Commission that the lenders taking over the company understand they are not gaming licensees and are not in a position to direct gaming operations at any of the Herbst properties.

Once the debt is converted into equity, it will be determined which institutions and individuals need to be licensed, they told Iowa regulators. The lenders also plan to appoint a board of directors for the newly created company, members of whom will need to be licensed in Iowa; Herbst officials told regulators there.

Monday's court filing brings to three the number of objectors to Herbst's plan to exit from bankruptcy, the others being junior lenders and other unsecured creditors. Junior unsecured lenders owed $362 million would recover nothing on their investment under the reorganization plan.

The lender and creditor critics have charged Herbst and subsidiaries in the bankruptcy case engaged in risky casino acquisition deals in 2007 that overwhelmed the company with debt and improperly placed the interests of senior lenders ahead of junior lenders and other creditors.

Attorneys for Herbst have denied these allegations. The company plans to emerge from bankruptcy by turning Herbst and its subsidiaries over to senior lenders that are owed $876.5 million and that have agreed to assume another $350 million in debt.

With the recession hurting its ability to make debt payments, Herbst filed for Chapter 11 bankruptcy in March. Hearings on the plan to emerge from bankruptcy are set for Oct. 28 and 29.

Herbst owns a slot route; casinos in Las Vegas, Primm and Northern Nevada; small properties in Henderson, Searchlight and Pahrump; the Iowa property and casinos in St. Joseph and LaGrange, Mo.