Hooters Las Vegas, creditor fight over $100 million ‘deficiency’

Hooters hotel-casino just off the Las Vegas Strip.

A bankruptcy judge is weighing whether Nevada’s new law on “deficiency judgments” will apply to the auction of the Hooters hotel-casino in Las Vegas.

The Legislature last summer passed Assembly Bill 273 in what was billed as an effort to help homeowners losing their homes to foreclosure.

With so many homeowners underwater in their mortgages, the Legislature limited deficiency judgments to help them.

A deficiency judgment is the difference between the value of a property at foreclosure and the debt against the asset.

The Legislature limited the judgments so they’re based on what the owner of the debt paid for the debt, not its face value. The Legislature’s intent was to protect former homeowners from being hounded by collection agencies that typically buy debt for pennies on the dollar.

Since passage of AB 273, disputes have arisen as to whether AB 273 applies to the commercial real estate defaults that have multiplied in Nevada during the recession, and the Nevada Supreme Court has been asked to decide the issue.

In the Hooters case, distressed debt investor Canpartners Realty Holding Co. IV LLC holds about $180 million in Hooters’ debt — most of it picked up at a steep discount.

Canpartners is on track to buy the property for $60 million with a “credit bid” during an auction this month — unless another party steps up with a higher offer.

In any case, after the hotel-casino is sold, Canpartners is likely to end up with the right to collect on an additional $100 million-plus in debt, at least on paper.

The Hooters casino owners, who include some of the current casino management and some founders of the Hooters restaurant chain, have asked Bankruptcy Judge Bruce Markell to require Canpartners and U.S. Bank, trustee for bondholders including Canpartners, to prove they have a deficiency and can collect on it.

“Absent such proof, any further claims of Canpartners and U.S. Bank after the bankruptcy sale should be denied,” said the motion by the Hooters casino insiders, who frequently call Canpartners an opportunistic distressed debt investor.

Attorneys for Canpartners disputed these arguments in a Monday court filing.

They said the real issue is that the owners and insiders, who Canpartners says drove Hooters into bankruptcy, are trying to gain a windfall by grabbing for themselves any cash the company holds after the hotel-casino auction.

That cash, under one proposed budget, would total about $10.3 million. Canpartners says that under the loan agreements Hooters agreed to, that money belongs to the lenders and their successors including Canpartners.

Canpartners’ attorneys argued that in the Hooters case, there is no foreclosure and so AB 273 doesn’t apply.

Instead of Hooters being foreclosed on, it’s being auctioned, they noted.

And even if AB 273 applied and limited how much Canpartners could collect, Canpartners’ attorneys argued the state law would be superseded by federal law and in particular the Contracts Clause of the U.S. Constitution.

That’s the clause barring states from passing laws “impairing the obligation of contracts.”

It’s unclear if Markell will resolve this dispute prior to the Feb. 17 auction for the hotel-casino.

Potential buyers of Hooters that want to outbid Canpartners, in the meantime, have until Friday to submit a “qualified bid” that will allow them to participate in the auction.

Unable to meet its debt payments during the worst recession in memory, the 696-room Hooters filed for Chapter 11 reorganization on Aug. 1. The property is on Tropicana Avenue, just east of the Las Vegas Strip.