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August 27, 2014

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Station Casinos opposes creditors’ request to probe 2007 deal

On the eve of a hearing in Reno in its bankruptcy case, a dispute emerged Tuesday on whether creditors can extensively investigate the 2007 deal that took Station Casinos Inc. of Las Vegas private.

The case's Official Committee of Unsecured Creditors said in a court filing that it intends to press its request Wednesday that it be allowed to hire law firm Quinn Emanuel Urquhart Oliver & Hedges LLP to fully investigate the deal.

Station, in a filing Monday, didn't object to the hiring of the firm but objected to the firm conducting a full investigation. Station noted its Board of Directors' Special Litigation Committee has already conducted a "comprehensive review" of the deal and the results were provided to the creditors.

"A complete re-creation of the Special Litigation Committee's investigation by Quinn Emanuel is unnecessary and would be waste of estate time and money," Station said in its filing.

"At most, Quinn Emanuel should be given an opportunity to vet the report, but not to re-create the investigation," Station said.

The $3 million study made public last week said that while the going-private transaction was not successful, the players in the deal could not have foreseen the recession that has sharply reduced revenue for Station and made it impossible to meets its debt obligations. The committee found the deal should be able to survive threatened legal challenges.

But the creditors committee said Tuesday: "The debtors should not attempt to intimidate the committee from undertaking its fiduciary duties owed to unsecured creditors of the debtors by seeking to curtail the committee from thoroughly investigating the going private transaction, which resulted in the debtors incurring at least an additional $1.6 billion in interest-bearing debt and resulted in hundreds of millions of dollars paid to insiders of the debtors."

The creditors noted a few issues with the report:

--Even the Special Litigation Committee concluded the deal resulted in Station Casinos and its subsidiaries not receiving "reasonably equivalent value" as measured against the transaction.

--Deutsche Bank, which was heavily involved in the deal and remains a key Station lender, declined to participate in the study.

--The creditors said the report didn't address a lease arrangement under attack in the bankruptcy case in which Station leases from itself four hotel-casinos, with much of the rental money going toward mortgage payments. Critics say the rent and mortgage deal should be reworked to reflect today's economic realities that have lowered the value of the property collateral.

--One of the Special Litigation Committee members, Dr. James Nave, may not be sufficiently "independent" to suggest that the creditors be precluded from fulfilling their fiduciary duties, the creditors said.

Separately, the acting U.S. Trustee in the case, Sara Kistler, filed an objection to Station's plan to pay several mid- and high-level executives back pay that exceeds guidelines in bankruptcy cases limiting such back-pay claims to $10,950.

The pay at issue is for work performed prior to the July 28 bankruptcy filing.

The annual salaries of 16 employees at issue range from $260,000 to $1 million, the trustee said.

The trustee said the debtors are not arguing any employee has threatened to leave and have not offered evidence that most of the employees could readily find employment elsewhere in the industry.

The trustee cited a ruling in another bankruptcy case, saying: "Fostering the morale of highly-paid employees to encourage them to work on rehabilitation of the debtors does not rise to the level required to treat insider pre-(bankruptcy) claims differently than all other pre-(bankruptcy) claims."

Station said that for paychecks issued on July 31 and Aug. 14, it withheld payment of $224,298 from 17 employees -- the amount of their combined salaries in excess of the $10,950 limit.

Of that amount, it's now seeking permission to pay $136,347 to the affected employees. Station said it's currently not seeking to pay back pay to one employee, identified as employee No. 1, who is owed $87,951 of pre-bankruptcy salary.

"The employees who did not receive their full wages on payroll dates July 31 and Aug. 14, comprise those of the debtors’ senior and mid-level managers whose bi-weekly salary exceeds $10,950. The debtors believe that these employees have been and remain a key element in the success of the debtors business operations, and their continued commitment to the debtors is a critical component of the debtors’ current restructuring efforts. Notwithstanding the overall downturn in the gaming industry, most of these employees could readily find employment elsewhere in the industry. Their commitment and morale is important to the success of these debtors and the Chapter 11 cases," Station's filing said.

"The debtors believe that making the effected employees whole for their hard work in the weeks immediately prior to the (bankruptcy) petition date, when they worked extremely long hours to prepare the debtors for these Chapter 11 cases, will foster employee goodwill, encourage more of that same dedication and hard work, and inure to the benefit of the debtors’ estates and creditors," the filing said.

But the acting U.S. Trustee asserted "the debtors have not met their burden to show that payment of these pre-petition claims, and not all others, should be paid prior to (reorganization plan confirmation."

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