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    Herbst's Gaming Bankruptcy Plan Under Fire

    Creditors accuse company of "improper deals" with its c-store chain sister company.

    LAS VEGAS -- A plan for Herbst Gaming Inc. to exit bankruptcy is coming under harsh criticism from key creditors and lenders that are owed hundreds of millions of dollars, the Las Vegas Sun reported.

    The lender and creditor critics allege Herbst and its subsidiaries involved in the bankruptcy case engaged in dubious casino acquisition deals that overwhelmed the company with debt, along with improperly placing the interests of senior lenders ahead of junior lenders and other creditors, the newspaper reported.

    Herbst Gaming filed for chapter 11 earlier this year, and operates a route business that owns and operates more than 6,800 gaming machines located in grocery stores, drug stores, convenience stores, bars and restaurants throughout the state of Nevada. Its casino business owns and operates 12 casinos in Nevada, two in Missouri and one in Iowa, employing a total of 5,400 people. The gaming division is a sister company to the more than 100-unit Terrible Herbst convenience stores, also based in Las Vegas.

    In a July filing with the court, the unsecured creditors charge that the company, controlled by the Herbst family, was harmed by a pattern of breaches of fiduciary duty, misconduct and mismanagement by the debtors’ officers and directors, and involved excessive salaries to Herbst officers and improper deals involving sister company Terrible Herbst, a convenience store chain.

    "That pattern of misconduct was designed to enrich the debtors’ insiders at the expense of the debtors. In some cases, the insider defendants took actions designed to shift value from the debtors to members of the Herbst family, which controls the debtors," the creditors charged in the filing cited by the paper.

    Some of the deals the unsecured creditors question include:

    -- Arrangements in which Herbst Gaming employees may be working almost exclusively for Terrible Herbst but are principally paid by Herbst Gaming.

    -- Deals not at "fair value" in which Herbst Gaming pays Terrible Herbst for the right to operate ATMs in Terrible Herbst convenience stores and pays Terrible Herbst transaction fees.

    -- Deals in which Herbst subsidiary ETT operates slot machines in Terrible Herbst stores.

    The creditors also alleged the Herbst brothers -- Edward, Timothy and Troy—"diverted substantial amounts of value" from Herbst Gaming to themselves, their father Jerry Herbst and to Terrible Herbst.

    Attorneys for Herbst have denied the allegations and are pressing forward with a proposal to emerge from bankruptcy by turning the company and its subsidiaries over to senior lenders that are owed $876.5 million, and that have agreed to assume another $350 million in secured debt, the report stated.

    "The expense of prosecuting the proposed claims cannot be justified in light of their utter futility," Herbst said in a court filing last month in response to the allegations.

    Herbst also said the salaries of the Herbst brothers, the officers and directors of Herbst Gaming were in line with or lower than salaries of other local gaming executives, according to the report. It also said its deals with Terrible Herbst were disclosed in Securities and Exchange Commission filings and generated profit margins for Herbst Gaming that were at least 10 percent higher than unrelated third-party contracts, the paper reported.

    Related News:

    Herbst Gaming Expects to File Chapter 11

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