Subsidiary of Santa Fe files for bankruptcy

A subsidiary of the company that owns the Santa Fe and Pioneer hotel-casinos filed for bankruptcy court protection from creditors Tuesday.

Pioneer Finance Corp., a subsidiary created by Santa Fe predecessor company Sahara Casino Partners LP in 1988 to finance the company's acquisition of the Pioneer hotel-casino in Laughlin, filed for bankruptcy in Las Vegas, listing assets of $55.085 million and liabilities of $55.035 million.

Company officials stressed that the filing will not affect operations at either the Santa Fe hotel-casino, in northwest Las Vegas, or the Pioneer.

Las Vegas-based Santa Fe owns the Santa Fe and Pioneer, as well as prime land on the Strip and in Henderson. The company is trying to raise financing to build a casino on its Henderson land.

Tuesday's filing was not completely unexpected. Santa Fe Gaming is locked in a battle with three bondholders who have been trying to force both Santa Fe Gaming and Pioneer Finance into bankruptcy.

On Dec. 1, Santa Fe Gaming missed a $60 million balloon payment that was due on the 1988 Pioneer Finance bonds, which it guarantees. Anticipating it would miss the payment, Santa Fe sought bondholder agreements not to demand payment on the bonds, or if the company entered bankruptcy to accept new bonds due in 2006.

Nearly 77 percent of bondholders agreed to the terms. But a vocal minority, representing 13 percent of the bonds, did not. That minority, led by Hudson Bay LP, a New York investment firm, last month filed involuntary Chapter 7 bankruptcy petitions, trying to force both companies into bankruptcy.

Hudson Bay owns 7.9 percent of the bonds. Other bondholders trying to force Santa Fe into bankruptcy are The GMS Group LLC of Atlanta, which owns 4.7 percent of the notes, and Dr. Robert Baker of Pompano Beach, Fla., who owns four tenths of 1 percent.

Tuesday's filing by Pioneer Finance is an attempt by the company to shift the bankruptcy arena from a Chapter 7, which calls for liquidation of a company, to a Chapter 11, which allows a company to continue operating while restructuring its debts.

But Santa Fe Gaming did not itself declare Chapter 11 bankruptcy, and its attorneys declared the company's intentions to seek damages against Hudson Bay and the other dissenting bondholders for what they charge is a bad faith involuntary bankruptcy filing.

"We intend to seek damages (for) the involuntary (filing)," said Santa Fe attorney Gerald Gordon. "It's a defective filing and these people don't qualify for an involuntary filing."

Santa Fe Gaming alleges that Hudson Bay's real intention in filing the involuntary bankruptcy petitions is to take over the company, not receive payment for its debts.

In motions to dismiss the involuntary bankruptcy petitions filed earlier this month, the company charges that Hudson Bay acquired the notes "not for obtaining a return on an investment but to use the threat of an involuntary bankruptcy as a sword to wield in their battle to wrest control of Santa Fe Gaming Corp. from its shareholders."

Hudson Bay, led by President and General Partner David Lesser, also bought up 24.1 percent of Santa Fe preferred stock in recent months. Preferred stock is non-voting, but because Santa Fe has missed dividend payments on the preferred stock for two years, preferred shareholders have the right to appoint two company directors at this year's annual meeting. The meeting date has not been set.

In its bankruptcy court filings, Santa Fe Gaming alleges Lesser is using inside information he gained while trying to negotiate an acquisition of Santa Fe on behalf of Fort Worth-based Crescent Real Estate Equities Co. in 1997 and 1998 to take control of the company.

Lesser has declined to comment on his activities or intentions, but his Securities and Exchange Commission filings show he wants the company sold, merged or placed under new management. Santa Fe is now headed by Paul Lowden, who owns 53.4 percent of the company's common -- and voting -- stock.

Santa Fe Gaming alleges that Lesser's activities demonstrate he has acted in bad faith, and plan to use the involuntary Chapter 7 case filed by Hudson Bay against Santa Fe Gaming as a venue to seek damages against Hudson Bay. The involuntary Chapter 7 case filed against Pioneer Finance will likely be considered moot by U.S. Bankruptcy Judge Linda Riegle because of the voluntary Chapter 11 case.

A Santa Fe spokesman said the company has not determined how much it will seek in damages from Hudson Bay. Lesser could not be reached for comment.

Santa Fe Gaming's decision to place only Pioneer Finance in bankruptcy means the case will likely proceed on two tracks. In the Santa Fe Gaming Chapter 7 case, Santa Fe will make its bad faith arguments against Lesser and Hudson Bay, while Lesser and Hudson Bay will demand the company be liquidated to pay its debts. In the Pioneer Finance Chapter 11 case, the company will argue that because 77 percent of its bondholders have pre-approved the reorganization plan, it should also be approved by the court.

Santa Fe spokesman Andrew Klebanow declined to comment on whether the Pioneer Finance bankruptcy filing will also draw Santa Fe Gaming and Pioneer Hotel Inc., the Santa Fe Gaming subsidiary that operates the Pioneer, into voluntary bankruptcy. Company Securities and Exchange filings have warned that such a domino effect could result from a Pioneer Finance bankruptcy filing.

Tuesday's filing also opens another potential can of worms for Santa Fe Gaming. On Dec. 1, the company made a payment of nearly $5 million to the 77 percent of the noteholders who approved the exchange offer. Santa Fe had said it would wait for 90 days from that date to file bankruptcy, to avoid a statute which says any payments made to selected creditors within 90 days of a bankruptcy filing are preference payments.

A judge can order preference payments returned to the bankrupt company for equal distribution to all creditors.

By entering bankruptcy within that 90 day window, Santa Fe Gaming runs the risk that the payments will be declared preference payments by Riegle and returned to the company. Taking the payments away from their recipients could cause some bondholders to drop their acceptance of the reorganization plan.

But company officials doubt that will happen, and plan to argue that the payments were not preference payments, but were open to all creditors.

"Our position is it's not a preference payment," said Gordon.

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