The Caesars’ bankruptcy case has garnered a great deal of attention throughout the year and has yielded a number of interesting and important opinions. The latest opinion of significance was issued on October 6, 2015 by the District Court for the Northern District of Illinois. In its opinion, the district court affirmed the bankruptcy court’s refusal to enjoin investors from proceeding with their lawsuits against Caesars’ non-debtor parent Caesars Entertainment Corp.’s (“CEC”).
Here are the underlying facts. On January 12, 2015, Caesars Entertainment Operating Company, Inc. (“CEOC”) and approximately 170 of its subsidiaries (collectively, the “Debtors”) filed voluntary Chapter 11 petitions. The Debtors are the primary operating units of the Caesars Gaming Enterprise and are currently working through a hotly-contested chapter 11 reorganization. Their parent, CEC, did not file for bankruptcy but is currently embroiled in litigation with CEOC investors over CEC’s debt guarantees. These lawsuits relate back to capital raises between 2005 and 2009, when CEOC issued and CEC guaranteed a series of first and second lien notes to raise just shy of $6 billion in capital. In 2008, affiliates of Apollo Global Management, LLC and TPG Capital LP and other investors acquired CEC and all of its subsidiaries, including CEOC, in a $30.7 billion leverage buyout comprised of a $6.1 billion cash component and the issuance of approximately $24 billion in debt.
As a result of the 2008 financial crisis, CEC sought to restructure CEOC’s debt and in that pursuit engaged in a series of over 45 capital market transactions including asset sales, exchange and tender offers, debt repurchases and refinances (the “Disputed Transactions”). As part of the Disputed Transactions, CEC sold a portion of its interest in CEOC to unaffiliated investors, and CEC and other of its affiliates acquired prime assets from CEOC. CEOC’s creditors contend that the Disputed Transactions effectively stripped CEOC of its valuable assets and created a “good” Caesars (CEC) and a “bad” Caesars (CEOC).
Another result of the Disputed Transactions was that it changed the ownership structure between CEC and CEOC—that is, CEOC was no longer a wholly owned subsidiary of CEC. As a result of the ownership change, CEC took the position that its guarantees under the first and second lien notes were now terminated.
CEC’s assertion that its guarantees were terminated led to four separate lawsuits being brought by investors (the “Investor Lawsuits”) in federal court in the Southern District of New York and in the Delaware Chancery Court. A Special Governance Committee of CEOC continues to investigate the Disputed Transactions, but its preliminary findings indicate that CEOC has its own causes of action against CEC resulting from the Disputed Transactions. As such, CEOC asked the bankruptcy court to enjoin the Investors Lawsuits, arguing that CEOC’s claims against CEC arise out of the same acts as the Investors Lawsuits and that the injunction is necessary to preserve the claims as an asset of the estate.
CEOC argued that section 105(a) of the Bankruptcy Code provides the bankruptcy court with the jurisdictional and statutory authority to enjoin the prosecution of a third party’s action against a non-debtor pending in another court. The bankruptcy court disagreed, ruling that it did not have jurisdiction to enjoin the investors from proceeding against non-debtor CEC. The district court affirmed the bankruptcy court’s ruling. In so doing, the district court gave an expansive reading to the injunction power under section 105(a), holding that injunctions are not limited to actions in which the third party seeks to prosecute claims that belong to the estate, but “includes suits to which the debtor need not be a party but which may affect the amount of property in the bankruptcy estate, or the allocation of property among creditors.” However, the court also limited this authority, holding that the injunction power “is not absolute and when…third parties are asserting individual personal claims (as opposed to general claims that belong to the corporate debtor) the court may enjoin prosecution only of claims that are sufficiently ‘related to’ claims brought on behalf of the estate in the bankruptcy case.” Here, the investors’ claims were not “sufficiently related” to estate claims since the investors’ claims against CEC do not depend on CEC’s misconduct with respect to CEOC, but instead are based on CEC’s failure to honor the guarantees it gave to the investors. The fact that CEOC’s (as yet undefined) claims against CEC involve the same pool of money at issue in the Investor Lawsuits is insufficient to justify an injunction under section 105(a). The court also rejected CEOC’s argument that the sheer monetary amount of CEOC’s claims against CEC, and their import to the Debtors’ bankruptcy cases, justified the injunction under section 105(a).
The Caesars case highlights some of the unique problems that can arise when only subsidiaries file for bankruptcy protection despite their financing structure being heavily intertwined with the parent. The Seventh Circuit Court of Appeals rejected the Debtors’ request for an expedited appeal, but has scheduled oral argument for December 10, 2015. Interestingly, District Court Judge Gettleman noted in open court that he believed that circuit precedent was unclear on whether a debtor could halt litigation against its non-debtor parent. We expect the Seventh Circuit will provide clarity on this issue; however, it seems likely that the court will preserve some limits on the bankruptcy court’s injunction power under section 105(a). Time will tell if CEC will be able to avoid a filing of its own.