April 29 (Bloomberg) -- The Tropicana casino in Atlantic City, New Jersey, filed for bankruptcy today after winning regulatory permission to try to sell the resort to Carl Icahn and a group of other investors.

The bankruptcy should allow an auction of the casino before the end of June, said retired Judge Gary Stein, appointed by the New Jersey Casino Control Commission as trustee for the property, an affiliate of Tropicana Entertainment LLC. The bankruptcy is necessary for a “free and clear” sale of the Atlantic City casino, which is operating profitably, he said.

“Our financial position is solid and the only reason we’re filing a bankruptcy petition today is to be able to sell the casino free and clear of all liens,” Stein told the commission today. “We’ve been working very hard for 16 months to sell the casino to a responsible bidder. Today’s a big step in that direction.”

Stein put the casino into bankruptcy just hours after winning permission from the commission. Court papers filed in U.S. Bankruptcy Court in New Jersey listed assets and debt of as much as $1 billion each.

The filing is under the name of the casino’s parent company, Admar of New Jersey, an affiliate of Tropicana Entertainment.

Debt Cancellation

The auction may generate multiple bids. Unless a more valuable offer comes in, lenders including Icahn, many of whom bought the debt at a discount, may take over the Atlantic City hotel in exchange for canceling at least $200 million in Tropicana debt.

Any competing bids for Tropicana Atlantic City will have to be a cash offer acceptable to Icahn’s group, which has made the $200 million credit bid, Stein said. The casino will be “vigorously marketed” to attract multiple bids, he said.

“If lending loosens up, it may very well be that we’ll get significantly higher bids, if not, we may not,” Stein told reporters. “For a buyer that’s prepared to make the investment I think it’s a very propitious time to buy, and some of the secured lenders are very sophisticated investors and they apparently share that view.”

The casino commission extended the sale deadline to the end of this year “based on estimates of how long the bankruptcy court sale process and the licensing process will take,” Commission Chairwoman Linda M. Kassekert said in a statement.

‘Highest Integrity’

New Jersey regulators want to put Tropicana “into the hands of people with the highest integrity,” Kassekert said at today’s hearing. Afterwards, she said, “I’m hopeful we will get some other bidders. It should be a vibrant, vigorous process.”

Tropicana Entertainment’s 11 other properties in Nevada, Indiana, Louisiana and Mississippi would be split between two groups of lenders as part of a separate bankruptcy that began in May 2008 after the Atlantic City casino was placed under Stein’s control by New Jersey regulators.

Tropicana Entertainment also owns its namesake casino in Las Vegas, where the company is based. That hotel would be given to a separate group of lenders and would be operated as a separate company under a plan before Bankruptcy Judge Kevin Carey in Wilmington, Delaware.

Icahn is among investors who own almost $1.5 billion in Tropicana Entertainment mortgages, bought at a discount. The lenders’ bid follows the breakdown of an earlier, $700 million offer by Cordish Co. The Baltimore-based commercial real estate company lowered its bid for the Atlantic City casino amid an accelerating decline in gambling revenue in the seaside town.

Gambling Decline

Gambling revenue at Atlantic City’s 11 casinos tumbled a record 19.4 percent in March from a year earlier, accelerating drops in January and February. The city’s gambling revenue shrank 7.6 percent last year, its largest annual decline. Revenue slid 5.7 percent in 2007 after nearby Pennsylvania and Yonkers, New York, allowed slot machines.

Tropicana Entertainment, based in Las Vegas, filed for bankruptcy protection from creditors in May after being stripped of its license to operate the Atlantic City casino in December 2007, citing staff cuts and operating problems.

If their bid succeeds, Icahn and the other creditors would cancel Tropicana Entertainment debt equal to that amount.

The group would then apply to operate the casino as either a standalone resort or as part of a reorganized Tropicana Entertainment, after taking ownership of the bankrupt company when it emerges from Chapter 11, said Gil Brooks, a lawyer for the secured creditors, in an interview last month. Brooks is a partner at Duane Morris LLP in East Cherry Hill, New Jersey, and was formerly at WolfBlock LLP.

The case is In Re Tropicana Entertainment LLC, 08-10856, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net.

Last Updated: April 29, 2009 19:25 EDT