Caesars Examiner Center Stage as Bond Suits Threaten Bankruptcy

A judge handed a stinging defeat to Caesars Entertainment Operating Co. this week. He may also have made a former Watergate prosecutor with long experience delivering bad news into the most important person in the casino company’s $20 billion bankruptcy.

The bankruptcy court appointed Richard Davis in March to examine transactions and disputes at the heart of the judge’s July 22 ruling allowing creditors to pursue four lawsuits filed against Caesars’ parent.

Davis will study their claims to see whether they’re warranted and report what he finds to U.S. Bankruptcy Judge A. Benjamin Goldgar in Chicago. The judge will consult those findings when deciding the bankruptcy’s main question: How much should Caesars Entertainment Corp. have to pay to help its insolvent unit out of bankruptcy?

An examiner’s main job is to be the neutral bearer of bad news, according to Howard Seife of Chadbourne & Parke LLP. Seife was the lead lawyer for the examiner in the bankruptcy of mortgage company Residential Capital LLC, another case where creditors threatened to litigate their way to bigger recoveries.

Bankrupt companies and their hostile creditors don’t always welcome an examiner’s appointment, Seife said. Companies fear exposure of negative information that could be used against them and creditors worry an examiner won’t find anything to help recover more money.

“The tension is about who is going to control the narrative of the story and the investigation,” Seife said in an interview.

Watergate Prosecutor

Davis’s first job out of Columbia Law School was as an assistant U.S. attorney in New York. In 1973, he joined the team that prosecuted crimes related to the Watergate scandal.

After two years in practice at Weil, Gotshal & Manges LLP, he served as an assistant secretary of the U.S. Treasury, where he helped track down and seize Iranian assets. He returned to Weil in 1981 and stayed until 2012, rising to general counsel.

As the in-house lawyer at Weil, Davis gained plenty of experience bearing ill tidings. His job required him to offer a blunt view of whatever legal problem the firm faced, even when things looked bad.

According to the firm’s former chairman, Stephen J. Dannhauser, Davis always adopted a formal tone on those occasions, despite their decades of friendship.

“Whenever he said ‘Mr. Dannhauser,’ I knew it was a particularly difficult situation,” said Dannhauser, who led Weil from 2002 to 2012.

Warring Groups

Davis, 69, may have to adopt the same tone in the Caesars bankruptcy, where he’s charged with delivering a report that may cost one or more of the warring groups billions of dollars.

He has been asked to look into a series property transfers and a debt refinancing that Caesars made before putting the operating unit into bankruptcy in January. He will advise Goldgar on whether any of the transactions could be overturned to the benefit of particular creditor groups.

Davis declined to comment on the Caesars case or his appointment as examiner.

ResCap’s case is similar to Caesars’ in that both examiners were asked to evaluate potential lawsuits that creditors claimed could boost their recoveries. The ResCap examiner was Arthur J. Gonzalez, a retired judge who had presided over the Enron Corp. bankruptcy.

At the beginning of the ResCap case, creditors claimed the mortgage company should sue its parent, Ally Financial Inc., and others, to collect more money for unsecured claims.

Final Hours

But hours before Gonzalez issued his final report, the creditors and ResCap rushed to patch up their differences. The result was a $2.1 billion settlement, more than twice the $750 million Ally had initially offered.

As it turned out, Gonzalez had concluded the lawsuits probably would have raised $3 billion.

“There was tremendous insecurity and uncertainty, and it drove the parties to a settlement,” Seife recalled.

Caesars wants Davis to broaden his investigation to include a look at the 2008 $30.7 billion leveraged buyout led by Apollo Global Management and TPG Capital that left the company with so much unmanageable debt.

The official committee of unsecured creditors says an expanded probe could delay their investigation into the legitimacy of more senior creditors’ claims for repayment. The committee said pushing back that investigation would hurt their chances of challenging payment priorities.

Goldgar set July 27 as the deadline for briefing on the scope of the probe.

‘Real Meat’

A main goal of an examiner’s report is to help creditors and debtors talk about their disputes, said Dennis Connolly, a lawyer who represented one of the two examiners in the Enron case.

“It does provide some real meat to that conversation,” said Connolly, a partner at Alston & Bird LLP.

Caesars’ parent says it should only pay $1.5 billion and has spent months trying to persuade creditors to accept a deal built around that number. In their lawsuits, bondholders owed $4.6 billion say the Caesars parent is responsible for repaying them in full. They haven’t said what they’ll settle for.

Should Caesars lose the lawsuits, it would be unable to repay the bondholders and be forced into bankruptcy, a financial adviser for the operating company told Goldgar. That would threaten Apollo and TPG’s control of the business.

Parties may be more willing to compromise after they learn what Davis thinks of their claims, especially with the bondholder lawsuits in play. Whatever the examiner concludes, someone is bound to be disappointed.

“Rich would come into my office almost every day,” Dannhauser said. “Typically, it was not to tell me what a beautiful day it was.”

The case is In re Caesars Entertainment Operating Co. Inc., 15-01145, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

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