In re Caesars Entm't Operating Co.
| Decision Date | 30 July 2018 |
| Docket Number | No. 15 B 1145 (Jointly administered),15 B 1145 (Jointly administered) |
| Citation | 588 B.R. 32 |
| Parties | IN RE: CAESARS ENTERTAINMENT OPERATING CO., INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Attorneys for Reorganized Debtors: James H.M. Sprayregen, David R. Seligman, David J. Zott, Jeffrey J. Zeiger, Kirkland & Ellis LLP, Chicago, IL; Nicole L. Greenblatt, Kirkland & Ellis LLP, New York, NY
Attorney for Showboat Renaissance LLC: Sara T. Ghadiri, Chapman and Cutler LLP, Chicago, IL
A. Benjamin Goldgar, United States Bankruptcy JudgeThis matter is before the court on the omnibus objection of the reorganized debtors (collectively, "the debtors"), including Caesars Entertainment Operating Co., Inc. ("CEOC") and Showboat Atlantic City Propco LLC ("Showboat Propco"), to the claims of Stockton University, f/k/a The Richard Stockton College of New Jersey ("Stockton"), which have been transferred to Showboat Renaissance LLC ("Renaissance"). The debtors contend that Renaissance lacks standing to enforce the claims.
For the reasons below, the objection will be sustained. Although the debtors are wrong in calling it a "standing" problem, they are right that Renaissance cannot enforce the Stockton claims. The claims will be disallowed.
The court has subject matter jurisdiction under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). Because a claim objection is a matter "arising in" a case under Title 11, see In re Montalbano , 486 B.R. 436, 438 (Bankr. N.D. Ill. 2013) ; In re Tripplett , 115 B.R. 955, 958 (Bankr. N.D. Ill. 1990), the objection here is a core proceeding – both statutorily, see 28 U.S.C. § 157(b)(2)(B), and constitutionally, see Schmid v. Bank of Am., N.A. , 498 B.R. 221, 223-24 (W.D. Wis. 2013). The court may therefore enter a final judgment. In re Smith , 848 F.2d 813, 816 (7th Cir. 1988).
The relevant facts are drawn from the parties' papers, the proofs of claim, the identical "Addendum" attached to each proof of claim, and the court's docket.1 The parties agree no facts are in dispute. (See Dkt. No. 7890, Tr. dated Feb. 21, 2018, at 4).2
The origin of the dispute lies in a casino sale three decades ago. In 1988, Trump Taj Mahal Associates LP and Trump Taj Mahal Realty Corp. (the "Trump entities") sold the Showboat Hotel and Casino in Atlantic City, New Jersey (the "Showboat property") to Atlantic City Showboat, Inc., a predecessor to debtor Showboat Propco. The sale documents contained a use covenant that said the Showboat property could only be operated as a "first class hotel casino" until December 15, 2082 – nearly a century (the "Trump use covenant"). The Trump use covenant was duly recorded on November 17, 1988, and March 14, 1989, with the Clerk of Atlantic County, New Jersey.
Sixteen years later, in September 2014, Showboat Propco entered into negotiations to sell the Showboat property to Stockton. At the time, the casino on the Showboat property was shuttered.3 Stockton planned to build and operate a university campus extension there. The negotiations between Showboat Propco and Stockton lasted about four months. During that period, no one from CEOC or Showboat Propco told Stockton about the Trump use covenant, and Stockton did not conduct a title search that would have revealed its existence.
The Trump use covenant must either have been forgotten or ignored, because during the negotiations Showboat Propco recorded a Declaration of Restrictive Covenant with the county clerk that prohibited gaming or gambling on the Showboat property until November 2024 and gave CEOC enforcement rights (the "Showboat restrictive covenant").4 The Showboat restrictive covenant directly contradicted the Trump use covenant. One prohibited gaming or gambling; the other required it.
The contradiction went unnoticed. A month later, Stockton and Showboat Propco came to final terms on the sale. Stockton agreed to buy the Showboat property for $18 million. Stockton knew about the Showboat restrictive covenant but had no concerns: the Showboat property would be used as a university campus, not a casino.
But Stockton claims to have been unaware of the Trump use covenant. According to Stockton, it first learned of the Trump use covenant when it at last obtained a title report a week or so before the closing set for December 12, 2014. Stockton was understandably troubled at the discovery: Stockton had thought the Showboat property encumbered with a covenant prohibiting gaming, not one demanding it. Stockton told CEOC and Showboat Propco there would be no deal unless the Trump use covenant were released.
CEOC and Showboat Propco were receptive to Stockton's concerns. They asked the Trump entities about a release, and the Trump entities were willing to consider one. But there was a hitch. The Trump entities were themselves debtors in bankruptcy cases. Releasing a use covenant in their favor would arguably require bankruptcy court approval – after 21-days notice and hearing. See 11 U.S.C. § 363(b)(1) ; Fed. R. Bank. P. 2002(a)(2). A release could not be obtained in time for the December 12 closing.5
To avoid postponing the closing date, the parties agreed to add to the Purchase and Sale Agreement (the "PSA") a provision addressing the Trump use covenant:
From and after the Closing, [Showboat Propco] shall use commercially reasonable efforts, at its sole cost and expense, to obtain from [the Trump entities] (with ... bankruptcy court approval) an executed written release of the [Trump use covenant] in recordable form .... If and when [Showboat Propco] obtains such Use Covenant Release, [Showboat Propco] shall deliver the original thereof to [Stockton]. From and after the Closing Date and continuing until such time as [Showboat Propco] delivers to [Stockton] such Use Covenant Release, if at all, [Showboat Propco] shall indemnify, defend and hold harmless [Stockton] from any Liabilities arising out of or in connection with any claim or action by [the Trump entities] (or successors or assigns) to enforce the Use Covenant against the Property and/or any judgment thereon (the "Use Covenant Indemnification Obligations").
The "Liabilities" were defined as "all damages, claims, demands, liens, costs, judgments, losses, liabilities and expenses, including, without limitation, reasonable attorneys' fees and costs." CEOC agreed in the PSA to guarantee Showboat Propco's "payment and performance" of its indemnification obligation.
The parties agreed that the PSA would " inure to the benefit of and be binding on the parties ... and their respective heirs, legal representatives, successors, and assigns." Critically, though, the PSA's binding effect was subject to a condition: Stockton could not assign its rights or delegate its duties under the PSA "without the prior written consent of [Showboat Propco]."
The PSA was signed, the sale closed, and Stockton took possession of the Showboat property.
About a month later, on January 15, 2015, CEOC, Showboat Propco, and more than 150 other Caesars affiliates filed voluntary chapter 11 petitions. As of the petition date, Showboat Propco and CEOC had not obtained a release of the Trump use covenant. In fact, they never obtained one.
With the Trump use covenant still in place, the chief executive officer of Trump Entertainment Resorts, Inc. (parent of the Trump entities) warned Stockton in March 2015 that the Trump entities would be "forced to exercise all available remedies" in connection with Stockton's breach. (Resp. at 5). This appears to have been so much noise. Nothing in the record suggests the Trump entities ever took any action against Stockton.
Still, Stockton maintained that CEOC and Showboat Propco had not only breached the PSA but had also committed fraud in connection with the sale of the Showboat property. Because of the undisclosed and unreleased Trump use covenant, Stockton claimed to have suffered nearly $10 million in costs in connection with a property it could not use. (Id. at 9).
Stockton filed two identical proofs of claim in the jointly-administered bankruptcy cases, No. 3597 against CEOC and No. 4223 against Showboat Propco on May 23, 2015. The claims were later amended on November 24, 2015, by proofs of claim Nos. 5575 and 5574, respectively.6 The amended claims are also identical.
In the proofs of claim, Stockton alleges that CEOC and Showboat Propco are liable to it in connection with the sale of the Showboat property under a host of tort and breach of contract theories. Specifically, the proofs of claim list the following "claims and/or causes of action relating to the Showboat Transaction and/or arising under and relating to the [PSA]":
In January 2016, less than a year after filing its proofs of claim, Stockton sold the Showboat property to Renaissance for $23 million. In September 2016, Renaissance was able to obtain from the Trump entities a release of the Trump use covenant. According to the debtors, Renaissance now operates a hotel on the Showboat property. (Obj. at 5).
As part of the sale, Stockton assigned to Renaissance its claims against Showboat Propco and CEOC. The assignment was made under a Partial Assignment of Claims...
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