On Monday, January 12th, second lien noteholders, notably including David Tepper’s hedge fund Appaloosa, filed an involuntary bankruptcy petition in Delaware bankruptcy court targeting Caesars Entertainment Operating Company, a subsidiary of Caesars Entertainment.
On Tuesday, Appaloosa asked Delaware’s bankruptcy court to prevent that subsidiary from filing for bankruptcy anywhere else while the involuntary proceeding was pending.
On Thursday, January 15th, two things happened: a larger group of Caesar’s entities, inclusive of the operating company, jointly filed a voluntary petition in the Northern District of Illinois. The debtors in that case indicate that they believe the involuntary petition in Delaware is a “transparent tactic” to derail to orderly re-organization that the debtors’ seek.
Also on January 15th, the Delaware bankruptcy judge on the case granted the motion of the involuntary petitioners staying parallel proceedings, specifically including the Illinois case, but then specifically exempting certain of the “matters identified in the Agenda for First Day Hearing filed” in that case.
If That Sounds Complicated….
This all sets up a legal donnybrook for control of Caesar’s assets: a donnybrook within the alternative-investment world. Hedge funds lie on the Delaware side of the divide, and private equity on the Illinois side. The assets are considerable, including the flagship Las Vegas resort, and casinos in regional markets including Juliet, Illinois. And the billable hours to be had for lawyers? Also considerable.
PE giant Apollo Global Management has been the dominant owner of Caesar’s equity since 2008, with TPG as a sort of junior partner. Apollo has busily restructured various Caesarian entities in ways that, the hedge funds charge, amount to fraudulent transfers. Meanwhile it has bet heavily on China’s gambling market, specifically on Macau. That bet didn’t pay off. Thus, the dueling proceedings.
Why does Apollo want the restructuring to move forward in Illinois? Why not simply contest it in Delaware? Either Delaware or New York courts end up dealing with most of the Big Bankruptcy Circuses.
There are a number of theories about this in play. But surely proper bankruptcy court treatment of non-debtors seeking release from alleged liabilities will be one of the issues that will be contested in the course of these proceedings. Apollo and TPG don’t want angry second-lien noteholders coming after, say, Kelvin Davis, a member of the Caesar’s board who is also a partner at TPG, and one of the six new directors that the dominant owners put on the board in June 2014. Or David Sambur, another one of those six new directors, and a partner at Apollo.
Davis and Sambur are among the individual defendants in a lawsuit filed in the Chancery Court in Delaware in November 2014. The question, then, is: under what circumstances can the bankruptcy court let them off the hook?
Under Bankruptcy Code Section 105(a), the court has broad equitable power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” So it could presumably release Messrs. Davis or Sambur if it found that appropriate. Right? Well, not so fast.
Under another Bankruptcy Code section, 524(e), “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of another entity for, such debt.”
Some appeals courts, including that of the ninth district (and thus, as it happen, Nevada) refuse to allow bankruptcy courts to release claims by one non-debtor against another non-debtor. Most appeals courts, including that of the 3d district, which includes Delaware, do allow such releases in at least some circumstances.
But the 7th Circuit may be the most favorable with regards to permitted such releases, since the 2008 Airadigm precedent, which seems to say that the bankruptcy court can release third parties from liability whenever it suits the very broad language of 105(a) as quoted above, and that whether a release is “appropriate” under that language “is fact intensive and depends on the nature of the reorganization.”
Appellate courts stress the “fact intensive” nature of decisions when they want to leave the lower courts, the fact finding courts, freest possible rein.