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December 17, 2009 5:06 PM

What Happens in Vegas: Ten Am Law Firms on Year's Craziest Bankruptcy

Posted by Zach Lowe

It's appropriate that our colleague Brian Baxter reported earlier today about bankruptcy observers raising objections to fees in a few high-profile bankruptcies, including those of Nortel and Bernard Madoff's defunct operation. 

Those folks may want to turn their attention to the Chapter 11 case of gaming outfit Station Casinos in federal court in Reno, Nevada. We would guess that a bankruptcy guru interested in writing a great book about the Chapter 11 process would find all the material he or she would need in this case. 

Station, which owns and operates 18 casinos in the Las Vegas area, filed for bankruptcy in July, a little more than 18 months after its owners and new private equity investors took the company private in a $5.7 billion leveraged buyout--a transaction the creditors committee (repped by Fried, Frank, Harris, Shriver & Jacobson and Greenberg Traurig) is now investigating as a possible fraudulent deal that left the company effectively insolvent. 

Ah, but we're just scratching the proverbial surface of the case. Around the time that the LBO was completed, Station reorganized itself into three different entities with the following catchy names: OpCo (the parent owner of all the entities); PropCo (a debtor subsidiary that operates some Station properties); and LandCo (a nondebtor entity). Once created, the three entities struck several deals with each other--including a master lease agreement and various rental arrangements--that created a situation in which the entities could actually end up as adverse parties in the event of a bankruptcy. Not only that, but any institution extending loans to any of the entities could find itself at odds with itself because of the web of transactions involved. It is truly bewildering. 

Take this excerpt from a recent filing in which the attorneys for one group of lenders try to explain the lease situation: "OpCo transferred to PropCo certain casino properties. PropCo then entered into an agreement (the 'Master Lease') pursuant to which it leased the PropCo Properties back to OpCo. OpCo, in turn, sublets these properties to certain nondebtor operating subsidiaries." 

Try and follow that. The various entanglements have different creditor groups fighting each other, lenders accusing separate debtor entities of refusing to tear up lease agreements between them, and independent directors of each entity seeking their own counsel. 

There a ton of lawyers involved, and the debtor's estate is seeking to pay all of them. Predictably, that has some lenders and creditors upset, since that money is coming out of the debtor's coffers. The creditors committee has asked the judge handling the case to appoint a trustee to examine the debtor's actions. One group of lenders (repped by the Los Angeles firm Stutman, Treister & Glatt) have requested that the judge appoint an independent fee examiner to look at all the money the debtors are spending on law firms. As we've written before, judges and creditors sometimes look askance when debtor estates seek to pay legal fees for independent directors and other parties a bit removed from the debtor itself. 

According to the lender's motion for an independent examiner, the debtors are either paying or seeking to pay the fees of 14 different law firms. In addition to run-of-the-mill debtors counsel (Milbank, Tweed, Hadley & McCoy) and the usual array of firms representing lenders, Station is paying or seeking to pay Gibson, Dunn & Crutcher (special counsel to a group of commercial mortgage-back securities debtors); Skadden, Arps, Slate, Meagher & Flom (counsel to James Nave, an independent director of Station); Cadwalader, Wickersham & Taft (counsel to mortgage lenders who lent to PropCo); Squire, Sanders & Dempsey (counsel to a special litigation committee the Station board formed to investigate the original LBO); and many others. In total, the debtors have paid $31.5 million to those 14 firms plus a few financial advisers since the start of the case, court records show. 

A group of independent lenders protesting all of these fees asks in one filing, "Why are the debtors apparently willing to pay for six law firms to represent their directors?" Later in the same filing, the lenders call the fee applications an "all-you-can-bill professional 'fee buffet,'" in what may be the our favorite line from a bankruptcy filing this year. 

We called lawyers at Skadden, Milbank, Stutman, and Fried Frank, and all of them either declined to comment or didn't return calls. One lawyer who wished to remain anonymous tells us this is unquestionably the craziest case he has ever worked on. 

The case is in the news today because Boyd Gaming Corp., repped by Morrison & Foerster, has submitted an offer to buy all of Station out of bankruptcy for $2.45 billion, according to the Las Vegas Review Journal. Station has already rejected an early offer from Boyd worth about $950 million, but that came before Station and its myriad creditors and lenders failed to agree on a prepackaged reorganization plan, according to various court filings and the Review Journal. 

We'll have our eyes on what happens with this offer, that's for sure.

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