Court Has Power to Halt Suits Against Caesars Parent

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By Stephanie Cumings

Jan. 4 — The Seventh Circuit has handed down another twist in the “immensely complicated” bankruptcy of Caesars Entertainment Operating Company Inc.

Judge Richard Posner said the lower courts got it wrong when they held that the bankruptcy court didn't have the power to stay lawsuits in New York in Delaware where some $12 billion is at stake.

The Caesars bankruptcy has been mired in controversy centered on whether the parent company, Caesars Entertainment Corp., raided the assets of its now bankrupt subsidiary and whether it is trying to escape guarantor liability on the debtor's notes.

Billions at Stake

Caesars, the owner and operator of a chain of casinos, filed for bankruptcy in Illinois in January after creditors filed a competing involuntary bankruptcy case in Delaware (27 BBLR 119, 1/22/15). Prior to the bankruptcy, Caesars had borrowed billions of dollars and issued notes to lenders that were guaranteed by the parent company.

As the companies finances deteriorated, the parent company sold off valuable assets belonging to Caesars and terminated the guaranties it had issued. The noteholders have brought multiple suits related to the guaranties in state and federal courts seeking some $12 billion in damages.

Caesars itself has also sued the parent company, alleging it was forced to transfer its assets to the parent for less than fair value.

‘Jump the Line.'

Caesars has been trying to temporarily halt the guaranty suits, arguing that they could thwart the company's restructuring efforts by letting the noteholders “jump the line in front of other creditors.”

The bankruptcy court refused to issue an injunction and the district court affirmed. The bankruptcy court found that it didn't have the authority to issue an injunction because the guaranty suits against the non-debtor parent company didn't arise from the “same acts” of the parent that gave rise to disputes in the bankruptcy.

Extensive Powers

The circuit court was more amenable to the debtor's view. Section 105 of the Bankruptcy Code gives bankruptcy courts “extensive equitable powers,” the court said, including the power to issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].”

The court said that if denying the injunction would “endanger the success of the bankruptcy proceeding,” then granting the injunction would be appropriate to carrying out the provisions of the Bankruptcy Code under Section 105.

‘Direct and Substantial Interest.'

The court said that the debtor and its creditors have a “direct and substantial interest” in the lawsuits the debtor wants to enjoin and that the misconduct alleged in those cases “directly harms the debtor, and concerns transactions that are closely related to, and sometimes overlapping with, those challenged in the bankruptcy.”

The court therefore held that the bankruptcy court had the power to stay the lawsuits, but didn't make any factual determination as to whether issuing an injunction would be “appropriate” under Section 105. It remanded that issue for the bankruptcy court to decide.

Judges Daniel Anthony Manion and Diane S. Sykes joined Posner on the three judge panel.

John C. O'Quinn of Kirkland & Ellis LLP, Washington, represented the debtor.

Andrew Silfen of Arent Fox LLP, New York, James O. Johnston and Joshua M. Mester of Jones Day, Los Angeles, Morgan Reid Hirst, Brian J. Murray, and Michael Zuckerman of Jones Day, Chicago, Edmund S. Aronowitz of Grant & Eisenhofer, Chicago, Gordon Zachary Novod of Grant & Eisenhofer, Los Angeles, James H. Millar of Drinker Biddle & Reath LLP, New York, Timothy R. Casey of Drinker Biddle & Reath LLP, Chicago, and Kristin K. Going of Drinker Biddle & Reath LLP, Washington, represented the appellees.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com