Caesars’s Summer Is No Vacation With Threats in Three Courts

Updated on
  • Judges in Delaware, New York and Chicago weigh creditor claims
  • Company says bondholder wins may trigger another bankruptcy

Caesars Entertainment Corp.’s campaign to get its operating unit out of bankruptcy faces its biggest tests this month as judges in three cities consider whether the casino giant must make crippling debt payments to holdout creditors.

Caesars Entertainment Operating Co., or CEOC, returned to court in Chicago on Monday to try to persuade U.S. Bankruptcy Judge A. Benjamin Goldgar to halt the high-stakes bondholder lawsuits against its parent in New York and Delaware. While the operating unit enjoys protection from litigation under the bankruptcy code’s “automatic stay,” Goldgar has so far declined to extend that shield to its non-bankrupt parent.

A loss in New York or Delaware would undermine the strategy Caesars is using in its reorganization of CEOC, which is to settle with as many creditor groups as possible while possibly using the code’s so-called cram-down provision to force the remaining dissenters, a group of second-lien bondholders, to accept a deal. A victory by the holdouts outside bankruptcy court would upset those plans.

Goldgar said he planned to rule on Wednesday morning in Chicago.

‘Turning Point’

“This could be a turning point in Caesars’ bankruptcy strategy, which up until now has been to try to pick off creditor groups other than the second-lien lenders and then to force a settlement,” said Julia Winters, a litigation analyst at Bloomberg Intelligence.

The dissenting creditors, who hold second-lien notes issued by the operating company, accuse the parent of improperly abandoning payment guarantees and moving valuable assets out of the unit before CEOC filed for bankruptcy in January 2015. 

The operating company owes the noteholders more than $5 billion, and Caesars has said if the guarantees are re-imposed it would have to join its operating unit in bankruptcy. It’s asked Goldgar to freeze that litigation until CEOC’s reorganization is complete.

On Thursday, the parent goes before a judge in Wilmington, Delaware, to fend off summary judgment in one bondholder case. The following week, a Manhattan judge is to hear arguments in a similar lawsuit.

Stephen Cohen, a spokesman for Las Vegas-based Caesars, declined to comment.

Deals Close

Caesars says the cases should be put on hold to so it can finish negotiating deals with several potential allies: senior lenders owed $11.7 billion and an official committee representing bottom-ranked, unsecured creditors owed more than $1.4 billion. Lawyers for CEOC told Goldgar last week that representatives of those groups are close to signing final papers tying their fates to CEOC’s reorganization plan.

“Let us solidify and finalize the deals,” CEOC lawyer David Zott told Goldgar on Monday.

Once it obtains binding agreements, CEOC can begin the final phase of its bankruptcy: a confirmation hearing in November where it could argue that the second liens are holding up an otherwise consensual reorganization.

If the lawsuits are allowed to go forward, CEC’s deal to contribute stock, cash and debt worth about $4 billion to CEOC’s creditors would end. That deal is at the heart of CEOC’s plan to reorganize and exit bankruptcy.

The official committee representing the second liens -- including affiliates of Appaloosa Management, Oaktree Capital Group LLC and Tennenbaum Capital Partners -- has fought Caesars throughout the bankruptcy. It’s allied with a bondholder trustee and others suing in New York and Wilmington.

Judge Sam Glasscock of Delaware Chancery Court and U.S. District Judge Jed Rakoff in Manhattan are being asked to decide whether Caesars broke the law when it shuffled assets and abandoned payment guarantees. Both sides have asked the judges to rule based on court filings and arguments rather than hold trials.

Negotiation Pressure

The second-lien bondholders argue that allowing the lawsuits to continue will pressure Caesars to negotiate. Their financial adviser, David Hilty of Houlihan Lokey, testified that even if Caesars loses the lawsuits and files for bankruptcy, a deal would still be possible.

Halting the lawsuits would encourage Caesars to refuse to negotiate and try to force the current reorganization proposal onto noteholders later this year in the confirmation hearing, noteholder attorney James Johnston said in court.

“They want to achieve by brute force what they failed to achieve” through talks Johnston said in court Monday.

Winters, the Bloomberg Intelligence analyst, compared the standoff to the case of Dynegy Inc. In that instance, creditors of the power producer’s bankrupt operating company pursued claims similar to the accusations against Caesars. After a court-appointed examiner sided with creditors, the parent reached a deal and filed for bankruptcy. Within weeks, the parent and the operating company came out with the terms of a reorganization plan.

The bankruptcy is In re Caesars Entertainment Operating Co. Inc., 15-01145, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The main Caesars lawsuit is BOKF NA v. Caesars Entertainment Corp., 15-cv-01561, U.S. District Court, Southern District of New York (Manhattan).

(Updates with day judge expects to rule in fourth paragraph.)
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