An important bankruptcy ruling came from the bankruptcy court in Chicago in the 7th Circuit involving Caesars Entertainment Corporation (CEC). The case is important for anyone practicing bankruptcy law in that circuit. Phoenix bankruptcy attorney Thomas Salerno discusses the case in this report.
Salerno notes that the Caesars matter is actually 170 cases. The cases involve affiliates and subsidiaries that own and manage about fifty casinos in five countries. The decision in question was handed down by Bankruptcy Judge Benjamin Goldgar in Chicago. Salerno says that the Caesars parent company of all the debtor subsidiaries engaged in a fairly common tactic in this case by staying out of bankruptcy itself. The holders of almost $5 billion in junior debt had guarantees from the parent, and they had commenced lawsuits prior to the bankruptcy filing.
There were lawsuits pending in Delaware and New York. Caesars Entertainment filed for a “105 injunction,” seeking an order stopping the junior lienholders from pursuing the non-debtor parent company on the guarantees. The matter was heavily contested, with extensive evidentiary presentation. At the end of the hearing, Judge Goldgar denied the request for the injunction. The ruling had an immediate effect on CEC share values.
Salerno points out that jurisdiction and venue can be very important in cases like this. Under U.S. bankruptcy law, a debtor can file for bankruptcy in any jurisdiction where it has substantial assets, or where it is incorporated, or it has its principal place of business. For an entity like CEC, it could easily have filed in Delaware, New York, Illinois, or Nevada. It chose Illinois. The choice is important because the law varies from circuit to circuit, sometimes greatly. The choice of the law that will be controlling is critical as to any venue choice.
Salerno says that, in this case, CEC (the parent company) had guaranteed certain junior debt obligations of its subsidiaries—about $5 billion. The debtor holders wanted to go after CEC. The debtors sought protection for CEC on the ground that CEC would be a funding source under the plan that was being negotiated in a very complex case. The debtors also said that letting actions against CEC proceed might impair possible actions by the debtors against an insurance policy. Salerno notes that, “those arguments have been made many times before, they’ve been successful many times before.” But not in this case.
Salerno explains that Judge Goldgar said that debtors have to show two things in order to get an injunction. First, they need to show that there is a reasonable likelihood of success on the merits, meaning that a plan will ultimately be put forward that stands a decent chance of being confirmed. That, says Salerno, is fairly easy in a case like the one at hand. The second standard is to show that an injunction would be in the public interest. Salerno feels that the debtors showed both of those things.
But the judge said that, before he can consider those things, he must have jurisdiction to do so. And in the 7th Circuit, Judge Goldgar held, in order for the bankruptcy judge to exercise jurisdiction over two non-debtors, it must be shown that the claims are closely related. The judge asked the debtors’ counsel to go through the Delaware and New York claims and show a sufficiently close relationship to the parties in the Illinois case such that the judge could grant the injunction. Instead, the debtors urged that the court look at the big picture and not the details. As Judge Goldgar put it in footnote 17 to his decision, “Rather than provide that count-by-count analysis, the debtors have chosen to paint with a far broader brush. It is fair to infer that the debtors have not explained how the estates’ claims and the defendants’ claims arise out of the same acts because they do not.” The judge held that he did not have the jurisdiction to grant the injunction requested.
The Caesars Entertainment case joins the KMart bankruptcy case as setting some rules in the 7th Circuit that are different from those in other circuits. In the KMart case, the 7th Circuit threw out the notion of “essential vendors” for cases brought in that circuit. Salerno says that the CEC case has the potential to be as important as the KMart case in the 7th Circuit.
Thomas J. Salerno is a partner in the Phoenix, AZ firm of Stinson Leonard Street LLP. He works in the Bankruptcy and Creditors’ Rights practice, and he represents distressed companies, acquirers and creditors in financial restructurings and bankruptcy proceedings, pre- and post-bankruptcy workouts, and corporate recapitalizations. The Legal Broadcast Network is a featured network of the Sequence Media Group.