Black Gaming bankruptcy plan hits early obstacles

By Steve Green (contact)

Thursday, March 18, 2010 | 10:30 a.m.

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Bankrupt Mesquite casino operator Black Gaming LLC has encountered some resistance to its initial plan to spend money while its bankruptcy case proceeds.

Attorneys for the U.S. bankruptcy trustee's office filed court papers this week objecting to Black Gaming's request for approval of an agreement between Black and certain creditors. The agreement allows for Black Gaming to use its cash for operations during the bankruptcy.

Such agreements are routine in bankruptcy cases, but the trustee's office expressed concern about how provisions in the deal would affect creditors that were not part of the deal.

Attorneys for the trustee's office, which under federal law monitors the administration of bankruptcy cases, said the deal seeks to determine the validity, priority or extent of liens without those issues being litigated; and seeks to bind all creditors to the deal even though unsecured creditors have yet to appear in the case.

"The Federal Rules of Bankruptcy Procedure require that the determination of the validity, priority or extent of a lien or other property interest be done through an adversary proceeding," attorneys for the trustee's office argued. "The motion impermissibly seeks a court order binding all creditors and estate fiduciaries as to the validity, priority and extent of the liens of secured creditor Wells Fargo and the senior secured noteholders. In addition, the motion and stipulation seek to bind entities not parties to the stipulation, including any unsecured creditors committee and Chapter 11 or Chapter 7 successor trustees."

The trustee's office said the Black Gaming request "is especially troublesome given the fact that these cases were only filed two weeks ago and an unsecured creditors committee has not yet been formed."

The trustee attorneys argued that given that Black Gaming is worth less than its debt, "the secured creditors appear to believe that their interests will be better served through the reorganization process than by foreclosing on their collateral."

But bankruptcy courts don't allow financing arrangements that convert the bankruptcy process from one designed to benefit all creditors to one designed for the unwarranted benefit of post-bankruptcy lenders, the trustee's office argued.

"Bankruptcy should not be a glorified foreclosure process designed to benefit only the secured creditor," the trustee's office argued.

The trustee's motion indicated that during the bankruptcy process, Black Gaming may be pressured to deal with bondholders and other creditors who weren't a part of the pre-packaged bankruptcy agreement resulting in the March 1 bankruptcy filing.

"Many of the clauses in this stipulation give rise to the possibility that the secured creditors are attempting to leverage the Chapter 11 process in this case to the detriment of other creditors and parties in interest," attorneys for the trustee argued.

Greg Garman, an attorney with the Las Vegas law firm Gordon Silver who represents Black Gaming, said Thursday that the trustee's concerns were largely procedural.

Garman said many of the trustee's issues have already been addressed and that he plans to meet with attorneys for the trustee in hopes of resolving other outstanding issues prior to a March 29 hearing in U.S. Bankruptcy Court in Las Vegas.

"None of the issues rise to the level of jeopardizing the consensual reorganization,'' Garman said.

Holders of a majority of Black Gaming's debt -- the secured lenders and noteholders -- have already agreed to the company's consensual reorganization plan.

Unsecured noteholders owed more than $75 million have yet to participate in the case. Once they weigh in, it wouldn't be surprising if they sought a better deal than what is proposed for them in the reorganization plan.

The March 1 Chapter 11 bankruptcy filing by Black Gaming and eight subsidiaries was expected after a December announcement that the company, unable to meet debt payments because of the recession, would be reorganized and investors would gain equity stakes. The investors include South Point hotel-casino owner Michael Gaughan, Black Gaming executives Robert "Randy" Black Sr. and Anthony Toti; and Texas company Newport Global Advisors LP.

The companies in their filing listed liabilities of $253.4 million. The going concern "enterprise value" of Black Gaming and its subsidiaries was estimated at between $85 million to $90 million.

Creditors include secured noteholders represented by the Bank of New York Mellon Trust Co. owed $143 million; Wells Fargo Foothill Inc., owed $14.8 million under a secured loan; and subordinated noteholders, also represented by Bank of New York Mellon Trust, owed $75.4 million.

The company's properties include the Virgin River and CasaBlanca hotel-casinos as well as the closed Oasis hotel-casino. The company also owns the Virgin River Convention Center site, formerly the Mesquite Star hotel-casino, as well as timeshare operations, two golf courses and a gun club.

Under terms of the prepackaged bankruptcy that certain lenders agreed to in December, the debt owed to Wells Fargo Foothill Inc. would be paid in full, senior secured noteholders would exchange their notes and claims for a new credit facility of $62.5 million, unsecured noteholders would receive warrants to buy equity interests in the reorganized company in exchange for their notes and claims and the investors in the newly organized company would put up more than $18.5 million for a 94 percent equity stake in the reorganized company.