Caesars Entertainment Loses a Key Ruling in Its Ongoing Bankruptcy Court Battle

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Caesars Entertainment Told Judge Gettleman the Parent Company Would Have to File for Bankruptcy If It Lost This Case.

U.S. District Court Judge Robert Gettleman ruled on Thursday that junior bondholders can proceed with the lawsuit against Caesars Operations Entertainment Corp (CEOC). The suit was filed in February 2015 over a bankruptcy restructuring plan which would leave the creditors holding billions of dollars of debt, but few assets.

As the day began, Caesars Entertainment Corp (the parent company for CEOC) filed a motion saying it had amended its original bankruptcy plan. Later, Judge Gettleman upheld an earlier ruling, which said that junior creditors had the right to sue. Their lawsuit alleges that Caesars had “looted” CEOC bby shifting its profitable assets to other divisions of the company in the summer of 2014, in anticipation of eventually putting the CEOC division into bankruptcy.

2014 Reshuffling of CEOC

The creditors argue that Caesars moved several profitable casinos out of CEOC’s control, because they wanted to protect them from seizure when the inevitable bankruptcy happened. At the time, CEOC owned $18 billion of Caesars’ overall $23 billion in debt. At the time, gaming analysts and financial experts had predicted Caesars Entertainment eventually had no choice but to declare bankruptcy.

January 2015 Bankruptcy Pan

Caesars Entertainment filed its original bankruptcy plan in January 2015. The plan was to split CEOC into two separate units: one as an operations division and the other as a real estate development division.

Both would carry about $8 billion to $9 billion in debt. The plan would have given 1st lienholders stock in the new real estate development division, which is why the senior creditors (owning about 80% of the debt) agreed to the plan. The junior creditors balked at the proposition, because they would have been left holding about half of CEOC’s debt, with almost no assets to show for their investment. A few weeks later, a lawsuit was filed by those junior creditors.

Called for Suit to Be Set Aside

In the case before Judge Gettleman this week, Caesars argued that the lawsuit should be set aside, so the bankruptcy reorganization could proceed. The Las Vegas casino company, which owns more assets in the United States than any other gaming company, had told the judge the parent company would have to file for bankruptcy, if the judge denied its request and the junior creditors won their legal case.

Despite the filing, Robert Gettleman has not shown Caesars Entertainment much sympathy. In August, he described the 2014 reshuffling of assets as “an impermissible out of court restructuring”, giving a clear signal he viewed the creditors’ complaints to be legitimate. At the time, he told lawyers for both sides they needed to prepare for a court battle.

Complaints by CEC

After this week’s ruling, Caesars Entertainment released a statement in which it complained that Judge Gettleman “did not address in any way the merits of Caesars’ position“. The press release also said the Las Vegas casion company would “continue to contest these cases vigorously”, which is likely a signal that Caesars is going to appeal Gettleman’s ruling to the U.S. Court of Appeals.

CEC filed a motion in Chicago bankruptcy court asking to move back the Chapter 11 proceedings to March 15, which refers to the current deal on the CEOC restructuring, which expires on November 15. Richard Davis, who was appointed by US Bankruptcy Judge Benjamin Goldgar to examine CEOC’s reshuffling, is not expected to turn in his findings on the case until early next year.

Richard Davis is formerly of Weil Gotshal & Manges, and is known for work on several earlier bankruptcy cases, such as Enron and Lehman Brothers. Davis also handled the Fletcher International hedge fund bankruptcy, but may be best known for his work on the Watergate case. Davis was the one who interviewed President Richard Nixon on the famous missing 18-minutes of tape.

What to Expect

Judge Gettleman is likely to grant such a request, but Caesars Entertainment is at a crossroads. Given the judge’s apparent sympathy with the creditors in this case, the gaming company’s executives have to consider the possibility they lose the case. If that were to happen, then Caesars’s contention that the CEC would have to declare bankruptcy likely is not idle threat.

Of course, judges often ask hard questions and make a show of sympathy for one or both sides, when they are trying to convince two sides in a case to make a compromise. While there appears to be little room for a compromise which would leave everyone happy, judges tend to prefer a settlement to a ruling. In this case, Caesars Entertainment appears to have tried to leave one set of its investors holding the proverbial bag. Those creditors see no reason to accept such an eventuality without a court battle, and CEC might not have a fallback position but to force its creditors down that path.