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August 1, 2014

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Judge grants request of Station Casinos creditors to probe 2007 deal

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RENO – A federal bankruptcy judge has granted a request by creditors of Station Casinos Inc., allowing them to hire a private attorney to look into possible fraud or wrongful procedures in the deal that took the company private in 2007.

But U.S. Bankruptcy Judge Gregg Zive made it clear he doesn't want a duplication of a study already completed that found everything was above board in the deal.

Zive conducted a two and one-half hour hearing attended by more than 30 attorneys, plus another 15 on the telephone monitoring the session.

On other issues, the following rulings were made:

-- Station can pay 16 upper-management employees $136,000 for part of their salaries withheld on July 31 and Aug. 14.

-- The judge denied a request from nine lending banks to Station that they be reimbursed for their fees and lawyer costs during the bankruptcy proceeding.

The judge permitted the Official Committee of Unsecured Creditors to hire the law firm of Quinn Emanuel Urquhart Oliver & Hedges of Los Angeles to investigate the 2007 transaction.

Thomas Kreller, a Los Angeles lawyer representing Station, said the company had no objections to the hiring of the law firm by creditors. But he didn’t want to see the law firm plowing over the same ground that had been covered by Station's Board of Directors' Special Litigation Committee.

"The work has been done and we don’t want to see it re-done," Kreller said.

Zive said, however, the creditors need to examine the process that led to Station going private. He said the creditors can challenge some of the findings of the special committee.

Eric Winston of the Quinn Emanuel firm said he wants to look at the documents that led the special committee to its findings in its $3 million study. He said he also wants to talk with Deutsche Bank, which refused requests from the special committee.

Deutsche Bank is a lender to Station and was involved in the decision to go private.

A special committee was formed composed of certified public accountant Jerry Coffey, attorney David Weekly and James Nave, a director of Station Casinos Inc. Coffey and Weekly were independent members on the committee, which hired the Ohio law firm of Squire, Sanders & Dempsey L.L.P. to help in the examination.

Scott Kane, an attorney in the Ohio firm, said there was no evidence of fraud or breach of a fiduciary duty by Station. He said the special committee found the company was not insolvent at the time of the transaction nor did the company become insolvent because of the deal.

He said financial projections of future business and revenue were "reasonable at the time." The national economy since 2007 has taken a nosedive and hit the casino industry hard.

He said he understands the creditors want to look at the report but added, "we don’t think anybody needs to repeat." He stressed that the special committee worked independent of Station.

Zive said he hasn't "drawn any conclusions" on the findings of the report. But he said he wants ground rules to "avoid unnecessary expense."

On the issue of back pay to the 16 executives at Station, William Cossitt of the Office of U.S. Trustee said there was "no basis under the law" to allow the payment. He characterized these workers as "insiders." In its motion to the bankruptcy court, the U.S. Trustees said these workers have annual salaries between $260,000 and $1 million.

But Kreller, the attorney for Station, said these 16 were the core of the operation. He said these upper-management workers could leave and find work in other gaming companies.

Zive, in granting the back pay, said the $136,000 was needed more by the employees than many of the fees he approved for attorneys and other workers in the case. He said the casino workers, no matter their salary, have obligations to meet.

The next hearing before Zive is set for Nov. 20. Zive plans to rule at that time on a separate motion by a group of lenders that an examiner be appointed to study the company's finances.

Station filed for bankruptcy protection facing $6.49 billion in debt but its hotel-casinos have remained open.

Cy Ryan may be reached at (775) 687 5032 or [email protected].

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