Chicago threw its hat in the ring to compete for major chapter 11 filings when Bankruptcy Judge A. Benjamin Goldgar accepted an invitation from the Seventh Circuit allowing him to enjoin a lawsuit against a nondebtor third party, in this case the non-filed parent of casino giant Caesars Entertainment Operating Co. Inc.
Judge Goldgar’s opinion and order on Feb. 26 gave the Caesars operating company a brief reprieve from the trial that otherwise would have begun on March 14, in which indenture trustees were aiming to tag parent Caesars Entertainment Corp. with $7.1 billion in liability for improperly terminating guarantees on operating company debt.
Caesars’ long-awaited examiner’s report is due no later than March 14. The examiner will give his opinion, among other things, on alleged defects in transactions in 2014 restructuring the casinos’ debt out of court and terminating some of the parent’s guarantees. The Caesars operating companies have been in chapter 11 since January 2015.
Debt-holders filed six lawsuits in federal district court in Manhattan and in Delaware Chancery Court to reinstate the guarantees. The creditors contend that the parent company’s private-equity owners also squirrelled away assets for their benefit, to the disadvantage of debt-holders.
By offering a package allegedly worth $2.5 billion to help the operating company confirm a chapter 11 plan, the Caesars parent is evidently admitting it has at least some liability. If confirmed, the plan would give the parent a blanket release from creditors’ claims.
In an opinion in July, Judge Goldgar refused to enjoin lawsuits against the parent, concluding that Seventh Circuit authority did not give him the power. He was upheld in district court in October. Caesars quickly took the case to the appeals court, where Circuit Judge Richard A. Posner reversed the lower courts on Dec. 23 and established an easily satisfied test allowing the bankruptcy court to enjoin lawsuits in other courts. To read ABI’s report on Judge Posner’s opinion, click here.
Judge Posner all but told Judge Goldgar that he should enjoin the debt-holders’ suits. Judge Goldgar obliged with his 18-page opinion on Feb. 26. He said that the circuit court “effectively endorsed the theory underlying the debtors’ injunction request.”
Judge Goldgar barred the trial from proceeding in district court in Manhattan on March 14. He enjoined that suit until the earlier of May 9 or 60 days after the examiner releases his initial report. Judge Goldgar said the injunction will afford Caesars a “brief spell” to attempt negotiating a consensual reorganization plan.
The noteholders argued that permitting a trial in New York would clarify legal issues and thus foster a plan. To the contrary, Judge Goldgar said that “uncertainty produces settlements because settlements avoid risk.”
Indeed, there is risk. District Judge Shira Scheindlin of Manhattan denied motions for summary judgment, calling for the now-delayed March 14 trial. She said in opinions in December and January that there were disputed issues of fact as to whether the Caesars operating company remained a wholly owned subsidiary. That question is pivotal because the indentures provide that the guarantees terminate when the operating company is no longer wholly owned. To read ABI's report on Judge Scheindlin's rulings, click here.