Caesars Entm't Operating Co. v. BOKF, N.A. (In re Caesars Entm't Operating Co.)

561 B.R. 441

In re: Caesars Entertainment Operating Co., Inc., et al., Debtors.

Caesars Entertainment Operating Co., Inc., et al., Plaintiffs,

v.BOKF, N.A., et al., Defendants.

No. 15 B 1145 (Jointly administered)

No. 15 A 149

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed February 26, 2016

Attorneys for debtors Caesars Entertainment Operating Co., Inc., et al.: James H.M. Sprayregen, P.C., David R. Seligman, P.C., David J. Zott, P.C., Jeffrey J. Zeiger, P.C., Kirkland & Ellis LLP, Chicago, IL; Paul M. Basta, P.C., Nicole L. Greenblatt, Kirkland & Ellis LLP, New York, NY

Attorneys for Wilmington Savings Fund Society, FSB: Timothy W. Hoffmann, Jones Day, Chicago, IL; Bruce Bennett,

James O. Johnston, Sidney P. Levinson, Joshua M. Mester, Jones Day, Los Angeles, CA; Geoffrey Stewart, Jones Day, Washington, DC; Eric R. Wilson, David I. Zalman, Kelley Drye & Warren LLP, New York, NY

Attorneys for BOKF, N.A.: Mark F. Hebbeln, Esq., Harold L. Kaplan, Lars A. Peterson, Foley & Lardner LLP, Chicago, IL; Andrew I. Silfen, Mark B. Joachim, Michael S. Cryan, Arent Fox LLP, New York, NY; Jackson D. Toof, Arent Fox LLP, Washington, DC

Attorneys for MeehanCombs Global Credit Opportunities Master Fund, LP; Relative Value–Long/Short Debt Portfolio, a Series of Underlying Funds Trust; SB 4 CF LLC; CFIP Ultra Master Fund, Ltd.; and Trilogy Portfolio Co., LLC: Timothy R. Casey, Drinker Biddle & Reath LLP, Chicago, IL; James H. Millar, Kristin K. Going, Frank F. Velocci, Brian P. Morgan, Drinker Biddle & Reath LLP, New York, NY

Attorneys for Frederick Barton Danner: Edmund S. Aronowitz, Grant & Eisenhofer P.A., Chicago, IL; Jay Eisenhofer, Gordon Z. Novod, Grant & Eisenhofer P.A., New York, NY; Mark C. Gardy, James S. Notis, Meagan Farmer, Gardy & Notis, LLP, New York, NY

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge

Before the court on remand from the court of appeals is the motion of the debtors—Caesars Entertainment Operating Co., Inc. ("CEOC") and more than 170 of its subsidiaries—for a preliminary injunction under section 105(a) of the Bankruptcy Code, 11 U.S.C. § 105(a). The injunction would temporarily halt proceedings in four civil actions in other courts against CEOC's non-debtor parent, Caesars Entertainment Corp. ("CEC"), in which the plaintiffs seek to enforce CEC's guarantees of notes that CEOC issued.

After a careful review of the court's first decision, the opinion of the court of appeals, the record from the June 2015 evidentiary hearing, and events in the bankruptcy case and related litigation since the hearing, the court will grant the motion in part and continue it in part for the reasons and on the terms set forth below. See Fed. R. Civ. P. 65(d)(1) (made applicable by Fed. R. Bankr. P. 7065 ).

1. Background

Familiarity with the court's first decision is assumed. See Caesars Entm't Operating Co. v. BOKF, N.A. (In re Caesars Entm't Operating Co., Inc.) , 533 B.R. 714 (Bankr. N.D. Ill. 2015). What follows is a summary to provide context.

The debtors in these chapter 11 cases are the primary operating units of the Caesars gaming enterprise, an $8 billion international business operation. The debtor in the lead case is CEOC. The other debtors are subsidiaries of CEOC. The majority owner of CEOC is CEC. CEC is not a debtor.

In 2005 and 2006, CEOC issued $1.5 billion in senior unsecured notes due 2016 and 2017. CEC guaranteed CEOC's obligations under the notes. In 2008, CEC and its subsidiaries were acquired in a leveraged buyout. The next year, CEOC issued $3.71 billion in second priority secured notes due 2018. The year after that, CEOC issued another $750 million in second priority secured notes due 2018. CEC guaranteed CEOC's obligations under the second priority notes.

For several years after the 2008 financial crisis, CEOC's revenues declined, and they continued to do so even after the economy began to recover. CEOC found itself with insufficient cash flow to service the substantial debt remaining from the 2008 LBO, including the notes it had issued before and after. Beginning in 2009, the Caesars enterprise therefore engaged in more than forty-five transactions designed to restructure CEOC's debt (the "disputed transactions"). One, the "B–7 Refinancing," took place in May 2014. Another, the "Senior Unsecured Notes Transaction," took place in August 2014. The precise nature of these transactions is irrelevant. What matters is that CEC contends these transactions released its obligations under the guarantees of the 2016, 2017, and 2018 notes.

To say these transactions angered the noteholders is an understatement. Over the next ten months, indenture trustees and noteholders (the "guaranty creditors") brought a series of actions against CEC to reinstate the guarantees and recover damages for (among other things) breach of the indentures and notes. Wilmington Savings Fund Society, FSB, and BOKF, N.A., indenture trustees for the two sets of 2018 notes, sued CEC separately in the Delaware Court of Chancery and the U.S. District Court for the Southern District of New York. CEC's potential liability in the two actions together comes to $4.46 billion. Frederick Barton Danner brought an action against CEC in the same district as representative of a plaintiff class of 2016 noteholders. MeehanCombs Global Credit Opportunities Master Fund, LP, and other holders of 2016 and 2017 notes also brought an action in that district. CEC's combined potential liability in the MeehanCombs and Danner actions is $125 million.

In June 2014, CEOC's board formed a Special Governance Committee to investigate all of the disputed transactions (including the B–7 Refinancing and Senior Unsecured Notes Transaction) to determine whether CEOC had claims against CEC or its affiliates arising out of them. Although the investigation is unfinished, the SGC appears to have found that CEOC indeed has claims, including claims for fraudulent transfers.

Around the same time, the debtors began negotiating with CEOC's first lien creditors and CEC over a possible restructuring. In December 2014, the debtors, CEC, and some of CEOC's first lien noteholders entered into a "Restructuring Support and Forbearance Agreement" (the "Notes RSA"). Under the Notes RSA, CEC agreed to make a significant financial contribution to a restructuring, a contribution the debtors value at more than $2.5 billion. The contribution represents a settlement of CEOC's potential claims against CEC. CEOC agreed in turn that its reorganization plan would release all claims against CEC as well as against its affiliates, shareholders, officers, directors, and others.

Less than a month later, on January 12, 2015, three second lien noteholders filed an involuntary bankruptcy petition against CEOC in the District of Delaware. Three days after that, CEOC and the other debtors filed voluntary chapter 11 petitions in this district. The Delaware bankruptcy court then transferred the involuntary case here.

In March 2015, the debtors filed an adversary complaint and motion seeking, among other things, preliminary injunctive relief under section 105(a) of the Bankruptcy Code, 11 U.S.C. § 105(a), to halt temporarily the prosecution of the Wilmington Savings, BOKF, Danner, and MeehanCombs actions against CEC. The underlying theory was that the four actions threatened the debtors' ability to reorganize. That was so, the debtors said, because the reorganization (as envisioned in the Notes RSA) depended heavily on CEC's financial contribution. CEC lacked the resources to make that contribution and also pay judgments in favor of the plaintiff noteholders. If the actions were not enjoined and the noteholders succeeded not only in reinstating CEC's guarantees of the notes but also recovering on them, CEC's contribution to the reorganization would vanish. The noteholders would get the money meant to fund CEOC's plan. The debtors would get nothing.

In June 2015, the court held a two-day evidentiary hearing on the debtors' motion and in July 2015 denied it. See Caesars , 533 B.R. 714. The motion was denied because the court concluded it lacked the power to grant the relief the debtors sought.¹ The court acknowledged that under many decisions this would be "a textbook case" for a section 105(a) injunction, id. at 732, but read the two most recent Seventh Circuit decisions on the subject—Fisher v. Apostolou , 155 F.3d 876 (7th Cir. 1998), and Levey v. Sys. Div., Inc. (In re Teknek, LLC) , 563 F.3d 639 (7th Cir. 2009) —to allow the issuance of such an injunction only in exceptionally limited circumstances, id. at 729. Those circumstances, the court said, had not been shown. Id. at 731–32.

The debtors appealed the order. The district court affirmed for essentially the same reasons. See Caesars Entm't Operating Co., et al. v. BOKF, N.A. (In re Caesars Entm't Operating Co., et al.) , No. 15 C 6504, 2015 WL 5920882 (N.D. Ill. Oct. 6, 2015). The debtors appealed again and this time were more successful: the court of appeals vacated the order denying their injunction motion. See Caesars Entm't Operating Co., Inc. v. BOKF, N.A. (In re Caesars Entm't Operating Co.) , 808 F.3d 1186 (7th Cir. 2015).

In its opinion, the court of appeals reasoned that section 105(a) grants bankruptcy courts "extensive equitable powers ... to perform their statutory duties," and "nothing" in that provision (or in the Fisher and Teknek decisions, id. at 1189–90 ) "authorize[d] the limitation on the powers of a bankruptcy judge" that this court and the district court had found. Id. at 1188. Because of their misinterpretation of the statute, the court added, neither court had reached the critical question the debtors' motion presented. Id. That question

is whether the injunction sought by CEOC is likely to enhance the prospects for a successful resolution of the disputes attending its bankruptcy. If it is, and its denial will thus endanger the success of the bankruptcy proceedings, the grant of the injunction would,

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