Editor's Note: Maria Michelle Nisce is a 2014 J.D./M.B.A. candidate at the University of Nevada at Las Vegas William S. Boyd School of Law and Lee Business School.
Nevada was the first state to legalize casino gambling in 1931,[1] and was among the first states to realize the big potential with casino gambling as a large revenue generator. Las Vegas is now known worldwide as the mecca for casino gambling. Many other cities are also known for legalized commercial casino gambling, including Reno, Nev., and Atlantic City, N.J. As of December 2012, there are 464 land-based or riverboat casinos operating in the U.S., and 265 are based in Nevada.[2] These casinos have helped Nevada’s economy by providing 170,206 jobs and $868.6 million in state and local revenues.[3]
Casino Operations
The potential for large revenues in gaming industries has forced the state to control and regulate the industry. Casinos typically operate under two companies: the operating company and a registered parent company. The operating company must be incorporated in Nevada in order to operate a casino within the state,[4] and the parent company must have sufficient financial capacity in order to guarantee the debts of the operating company. [5]
The Gaming Control Board regulates almost all aspects of a casino, including the operation, management and ownership.[6] It also requires a detailed investigation of the business activities and financial status of both the operating and parent companies.[7] Although only the operating company needs to obtain a gaming license from the Gaming Control Board,[8] the parent company must be found suitable to be involved in the gaming operation in order to ensure that no unsuitable persons and companies benefit from the gaming operations.[9] The Gaming Control Board has strict requirements in casino operations and the companies are required to provide detailed and periodic financial and operating reports and obtain approval of major financial transactions including liens, leases, and sales of securities.[10] Failure to do so may result in substantial fines and even the limitation, suspension or revocation of its gaming license.[11] These strict requirements are enforced to protect the integrity and future of the casino gaming and entertainment industry, which is a primary source of state revenues.
Casino management is another aspect of commercial gaming that is highly regulated by the Gaming Control Board. All officers, directors and key casino employees of both the operating and casino companies that are materially involved in the management of the casino must be found suitable by the Gaming Control Board.[12] In addition, debt and equity security-holders, with some exception to institutional investors, must also be found suitable by the Gaming Control Board before they can benefit from the casino proceeds. Overall, the Gaming Control Board could revoke or deny a gaming license and casino operations after thorough investigation of suitability if they find, among other things, "unsuitable conditions of the casino, unsavory affiliates, inadequate financial conditions."[13]
Casino Bankruptcies
Casino bankruptcies are unlike the typical chapter 11 proceedings[14] because the courts must find a balance between the competing interests of federal bankruptcy laws and state gaming laws. The Bankruptcy Code ensures that creditors are paid and that the debtor remains in business so that it can continue contributing to the economy.[15] The goal of the state gaming regulations include preventing unsuitable persons from having involvement in the gaming industry, establishing and maintaining responsible accounting procedures and financial practices, preventing fraudulent practices, and creating state and local sources of revenues.[16] In exercising their overlapping powers to ensure that their goals are met, the bankruptcy courts and Gaming Control Board affect both the casino operations and the bankruptcy filing procedures.
Numerous commercial casinos have sought bankruptcy protection and as in any reorganization, timing is of the essence. Some casinos have filed for chapter 11 while still generating sufficient cash flows or it has enough financing to keep its doors open while finalizing its reorganization plan, including the Stratosphere Casino and Hotel, Fitzgeralds Gaming Corp., and the Aladdin Casino and Hotel.[17] If the chapter 11 casino debtor does not have either an adequate cash flow or financing to continue its operations while undergoing a plan-reorganization process, such as The Resort at Summerlin and Stateline Casino, the bankruptcy court may order the debtor to remain in operation but under the condition that the debtor's assets will be auctioned off.[18] If the debtor files for bankruptcy when it cannot continue operating for lack of positive cash flow and financing, the court would assign a trustee to continue the casino operations until the debtor's assets have been liquidated.[19]
No matter what action the bankruptcy court decides is best for the debtor, once the bankruptcy petition is filed, changes automatically apply and issues arise. Prior to bankruptcy, like any corporation, the casino's operating and parent companies owe fiduciary duties to their equity security-holders. However, as a debtor in possession (DIP), the fiduciary duty shifts to the bankruptcy estate and the goal now becomes to maximize the amount that the creditors could be repaid.[20]
Once a casino files for bankruptcy, its assets now become property of the estate.[21] An ensuing issue is whether the gaming license is deemed an asset that should be transferrable to the estate. Some argue that it is,[22] while some have argued that unlike other casino assets, the gaming license is issued only to the applicant and is therefore not assignable asset.[23]
Due to the unique situation of casino bankruptcies in balancing the federal and state laws, casino debtors also face unique issues. First, it may be rare for bankruptcy courts to assign trustees to oversee casino operations. Typically, the key employees of the DIP will remain to avoid risks in transferring authority to persons that do not meet the requirements set in place by the Gaming Control Board. However, in Nevada, a person may be able to request preliminary suitability determination to be involved in the operations, management, or ownership of a casino even before gaming deals and ventures materialize.[24] This avoids limits in appointing a trustee if the trustee has obtained a preliminary finding of suitability from the Gaming Control Board within two years of the casino's bankruptcy filing.
To continue casino operations, the DIP must ensure that pre-petition obligations are met and that post-petition financing is available. Casino debtors must file first-day motions that recognizes pre-petition obligations that must be repaid and are critical to continue the casino’s operations, including pre-petition casino chip and voucher obligations, as well as the payment of critical vendors and payroll.[25] Also needed in continuing the casino operations is post-petition financing. Prior to obtaining additional unsecured credit or incurring unsecured debt, the DIP must first obtain approval from the Gaming Control Board.[26] If these financial transactions are found to be inappropriate, it could be rescinded and the casino debtor would have only wasted its finite resources.[27]
Bankruptcy Alternatives
When casinos are financially distressed due to mismanagement or an economic downturn, there are alternatives to consider before seeking bankruptcy protection, thus avoiding the complicated and costly process of chapter 11. First, casinos can refinance their existing or outstanding debts.[28] The Gaming Control Board’s approval of the transaction might be required along with the determination of suitability of new and existing creditors.[29] Another option is for the creditors to swap their debt securities for equity securities, also known as the equity swap.[30] Under this option, a significant portion of the creditors (a majority in the number of creditors voting in the class and at least two-thirds of the amount) must be willing to accept the equity-swap plan.[31] Similar to the first option, former creditors that will now be equityholders must again go through a suitability determination before the swap can occur. Finally, the casino debtor may sell its assets to a third party in order to repay its obligations. Under this option, the creditors may not get the maximum amount repaid but the creditors could avoid scrutiny from the Gaming Control Board. In this instance, only the buyer and affiliates involved in the casino’s operation and management will have to undergo the suitability determination.[32]
Caesars Entertainment
Among the major casinos companies, Caesars Entertainment is one of the major players that has not filed for bankruptcy. Despite being highly leveraged and incurring negative cash flows, Caesars Entertainment has managed to stay afloat by shifting their assets around between the parent company and its subsidiaries.[33] See the attached chart, as it provides an overview of the organization structure for Caesar’s Entertainment.[34]
To avoid bankruptcy, Caesars Entertainment Corp. (the parent company) sold some its assets (properties and trademarks) — including Planet Hollywood, Project Linq, Bally’s, The Cromwell, The Quad, and World Series of Poker — to its subsidiaries, Caesars Growth Partners, Caesars Entertainment Resort Properties and Caesars Interactive Entertainment.[35] Although the sales proceeds have been used to pay off some of its debts, Caesars Entertainment still has more than $19 billion in debt,[36] but only owns few assets, now mostly owned by its subsidiaries.[37]
Caesars Entertainment has again managed to dodge bankruptcy by taking advantage of other bankruptcy alternatives. This time, Caesars Entertainment managed to restructure its $23 billion debt, resulting in $1.75 billion of new debt, enough to fulfill their $1 billion interest payments that were due next year.[38] Despite failing to reduce their overall debt, this restructuring will allow the casino to continue operations, which will provide a means to pay the remainder of the debt and boost the state and local economy.
[1] “Facts at Your Fingertips: U.S. Commercial Casino Industry,” American Gaming Association, 4 (2009).
[2] “2013 State of the States: The AGA Survey of Casino Entertainments,” American Gaming Association, 4 (2013).
[3] Id. at 18.
[4] Hon. Gregg W. Zive, “The House Doesn't Always Win,” 8 Gam. L. Rev. 278, 279 (2004).
[5] Id.
[6] 1-25 Collier Guide to Chapter 11 ¶ 25.03.
[7] Zive at 280.
[8] Id.; see also Robert W. Stocker II and Peter J. Kulick, “Gambling with Bankruptcy: Navigating A Casino Through Chapter 11 Bankruptcy Proceedings,” 57 Drake L. Rev. 361, 370 (2009).
[9] Gerald M. Gordon, Rudy J. Cerone and Scott Flemming, “Bankruptcy Trends in the Gaming Field,” 10 J. Bankr. L. Prac. 293, 299-300 (2001).
[10] Zive at 280.
[11] Id.
[12] Zive at 281.
[13] Christopher M. Humes, “The Long and Winding Road: State Sovereign Immunity's Effect on Gaming License Revocation for the Casino Debtor,” 3 UNLV Gaming L. J. 111, 122 (2012).
[14] Stocker, et al., at 363.
[15] 1-25 Collier Guide to Chapter 11 ¶ 25.01.
[16] Gordon, et al., at 299-300.
[17] Sean McGuinness, “Casino Bankruptcy Law and the Current Economic Crisis,” Casino Enterprise Management Magazine (March 2009).
[18] Id.
[19] Id.
[20] Id.
[21] Stocker, et al., at 363.
[22] Id. at 365; see also Humes at 123.
[23] Interview with Dawn M. Cica, a partner at Fox Rothschild, LLP in Las Vegas on April 2, 2014; see also Business Reorganization and Investment Banking Committees (joint meeting), 120105 ABI-CLE 547.
[24] Nev. Rev. Stat. 463.1625.
[25] Zive at 282, 287; see also Stocker, et al., at 380.
[26] Stocker, et al., at 376.
[27] Zive at 286.
[28] McGuinness, supra n.17.
[29] Id.
[30] Id.
[31] Business Reorganization and Investment Banking Committees (joint meeting), 120105 ABI-CLE 547.
[32] Id.
[33] Travis Hoium, “Caesars Entertainment Being Squeezed from All Sides,” The Motley Fool (March 31, 2014), available at www.fool.com/investing/general/2014/03/31/caesars-entertainment-being-s… (last visited April 2, 2014).
[34] Sabrina Firozali, “Betting on Casinos, Part I,” Distressed and Turnaround Blog (April 21, 2014), available at http://distressedworld.blogspot.com/2014/04/betting-on-casinos-part-i.h… (last visited May 1, 2014).
[35] Id.; see also Hoium, supra n.33; see also Howard Stutz, “Caesars Entertainment Restructures to Avoid $1 Billion in 2015 Payments,” Casino City Times (May 8, 1014), available at www.casinocitytimes.com/article/caesars-entertainment-restructures-debt… (last visited May 12, 2014).
[36] Firozali, supra n.34.
[37] Hoium, supra n.33.
[38] Stutz, supra n.35.