Caesars’ main operating company prevailed against a creditors’ motion last Wednesday in the Delaware Bankruptcy Court that will allow its bankruptcy case to move forward in the Chicago Bankruptcy Court. On January 12, 2014, bondholders filed an involuntary chapter 11 petition against the operating company, Caesars Entertainment Operating Company, Inc. (“CEOC”), in the United States Bankruptcy Court for the District of Delaware. Three days later, CEOC filed a voluntary chapter 11 petition in the United States Bankruptcy Court for the Northern District of Illinois (172 affiliates also filed voluntary petitions there, and all the cases were ordered to be “administratively consolidated”).
The dispute at the heart of each filing centers on a series of inter-company transactions by which property was moved out of Caesars’ filing debtors and into non-filing subsidiaries (i.e., from affiliate companies CEOC’s parent put into the voluntary cases and to affiliates the parent did not put into the voluntary cases). Because of the Delaware Bankruptcy Court’s decision, the dispute will be resolved (with a host of other bankruptcy-related issues) in the Chicago Bankruptcy Court.
The bondholders who filed the Delaware petition hold second-lien positions in the capital structure of CEOC. They include Appaloosa Investment Limited Partnership I, OCM Opportunities Fund VI, LP and Special Value Expansion Fund LLC. Why did they initiate an involuntary case in Delaware and why did they want it to stay there? Although all U.S. Bankruptcy Courts follow the same Bankruptcy Code, the different judicial circuits can differ in how they interpret key provisions of the Code and other applicable law. The Delaware court is no stranger to large corporate bankruptcy cases, and the junior bond holders seemingly felt that Delaware would yield more favorable rulings in connection with the litigation over inter-company transactions.
The trigger for the case was some $225 million in interest payments due (on $4.5 billion in bonds) to be paid by CEOC to the bondholders in December 2014. The skipping of this interest payment created a 30-day shot clock: a failure to pay before the deadline would place CEOC in default under the bond indenture. The timing of the bondholders’ involuntary petition filing may have been not just to try to establish venue in Delaware but also to (a) prevent further payments to non-filing entities and (b) to establish that the 90-day preference period would reach far enough back to include payments made in October to first lien note holders.
What are CEOC’s bankruptcy goals? CEOC seeks to strip away some $10 billion in debt from its ~$18.4 billion debt load. Much of that debt load was taken on via the 2008 leveraged buy-out of the parent company, Caesars Entertainment Corp (CZR), by Apollo Global Management and Texas Pacific Group.
Before the venue switch to Chicago, the bondholders (aka, the “Petitioning Creditors”) moved in the Delaware Bankruptcy Court for the appointment of an examiner. An examiner may be appointed to investigate allegations of “fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor.” In moving for the appointment of an examiner, the bondholders made the following serious allegations about the company’s conduct:
The Petitioning Creditors filed this involuntary bankruptcy case on the heels of a series of suspicious transactions in which insiders plundered many billions of dollars of value from the Debtor. Those transactions, which resulted in five separate lawsuits now pending in Delaware and New York courts, ensured that the Debtor could not pay its debts and eventually would wind up seeking bankruptcy relief. There is no question that the legitimacy of the transactions will be the single most important issue in this case.
Another creditor, UMB Bank, had alleged in a complaint it filed in November 2014 against CZR that CZR stripped CEOC of some $7 billion, “without any legitimate commercial justification, for far less than reasonably equivalent value, and for the principal purpose of attempting to put those assets beyond the reach of CEOC’s creditors, they simultaneously looted nearly 60 cents or more of every dollar in value they took.” CZR has contended that CEOC received fair value in the transfers.
In ruling that the case should proceed in Chicago, Judge Gross (of the Delaware Bankruptcy Court) acknowledged that some of the actions that CEOC had taken were suspect. Nevertheless, Judge Gross found that “the interest of justice narrowly finds [that the case] should proceed before the Illinois court.” We note that after the January 12 filing of the involuntary petition against it and before its January 15 filing of the voluntary petition in Chicago, CEOC received some $400 million in cash from other Caesars units. Judge Gross stated that he was confident the Chicago Court would put CEOC “under a magnifying glass,” and that the company would not be allowed to breach its fiduciary duties to its stakeholders “should those facts come to the court’s attention.” Payments made during the 90 days prior to a bankruptcy filing are considered to be made within the “preference period” and are subject to being “avoided” or re-called back into the bankruptcy estate to be more equitably distributed amongst all creditors.  11 U.S.C. § 1104(c).  The text of the motion can be found here: http://commercialbankruptcyinvestor.com/articles/wilmington-savings-fund-society-files-papers-supporting-appointment-of-examiner-for-caesars-entertainment-operating-company-inc.  See http://webcache.googleusercontent.com/search?q=cache:dSxeoqZg2oYJ:ftalphaville.ft.com/files/2014/12/1st-lien-complaint-1.pdf+&cd=3&hl=en&ct=clnk&gl=us.  Transcript of the Court Decision re: Motion of the Petitioning Creditors For Order Establishing Venue Before the Honorable Kevin Gross United States Bankruptcy Judge at p. 11 (Docket No. 223), In re Caesars Entertainment Operating Company, Inc. (Bankr. D.Del. Jan. 28, 2015).  Transcript of the Court Decision at p. 15
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