In re Caesars Entm't Operating Co., 15 B 1145 (Jointly administered)

• Decision Date: 28 May 2015
• Docket Number: No. 15 B 1145 (Jointly administered),15 B 1145 (Jointly administered)
• Parties: In re: Caesars Entertainment Operating Co., Inc., et al., Debtors.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

561 B.R. 420

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

No. 15 B 1145 (Jointly administered)

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

Signed May 28, 2015

Attorneys for debtors Caesars Entertainment Operating Co., Inc., et al.: James H.M. Sprayregen, P.C., David J. Zott,

P.C., David R. Seligman, P.C., Stephen C. Hackney, Jeffrey J. Zeiger, P.C., Kirkland & Ellis LLP, Chicago, IL; Paul M. Basta, Nicole L. Greenblatt, Kirkland & Ellis LLP, New York, NY

Attorneys for Official Committee of Second Priority Noteholders: Brad B. Erens, Timothy W. Hoffmann, Jones Day, Chicago, IL; Bruce Bennett, James O. Johnston, Sidney P. Levinson, Joshua M. Mester, Jones Day, Los Angeles, CA

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge

This matter is before the court for ruling after a two-day evidentiary hearing on the debtors' application to retain Kirkland & Ellis LLP and Kirkland & Ellis International LLP ("Kirkland" or "the firm") as their counsel. The Official Committee of Second Priority Noteholders (the "Noteholders Committee" or the "Committee") has objected to the application. These are the court's findings of fact and conclusions of law under Rule 52(a)(1) of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 52 (made applicable by Fed. R. Bankr. P. 7052 and 9014(c) ). For the reasons that follow, the application will be granted.

1. Background

The facts are drawn mostly from the evidence adduced at the hearing and from the court's docket. The few facts not brought out at the hearing involve background matters well known to the parties and not subject to dispute.

The debtors in these jointly administered bankruptcy cases call themselves the primary operating units of the "Caesars gaming enterprise." The debtor named in the caption of the lead case is Caesars Entertainment Operating Company, Inc. ("CEOC"). The debtors in the other cases are subsidiaries of CEOC.

The majority owner of CEOC is Caesars Entertainment Corporation (or "CEC"). The majority owners of CEC (with a combined 64% share) are four limited liability companies: TPG Hamlet Holdings, LLC, TPG Hamlet Holdings B, LLC, Apollo Hamlet Holdings, LLC, and Apollo Hamlet Holdings B, LLC (the "Hamlet entities"). The TPG Hamlet entities, in turn, are wholly owned by TPG Capital LP. The Apollo Hamlet entities are wholly owned by Apollo Global Management, LLC. Apollo and TPG are private equity funds that have interests in a variety of other enterprises, enterprises unrelated to Caesars, that the parties refer to as "portfolio companies."

CEOC's board has seven members. Of those, two are affiliated with Apollo, two are affiliated with TPG, and two are independent. (The seventh was not identified.) The CEOC board has a three-member executive committee. One member is affiliated with Apollo, another with TPG. Six of the nine CEC board members are also associated with Apollo or TPG.

Apollo and TPG acquired their interests in CEC in 2008. Things have not gone well since the acquisition. From 2011 through 2013, CEC and its affiliates had net losses of approximately $5.2 billion. In 2013 and 2014, CEOC and its affiliates therefore engaged in approximately 50 transactions of various kinds described in the record as "capital markets transactions." Depending on one's point of view, these transactions were intended either to increase liquidity and provide CEOC with badly needed capital or to loot CEOC of valuable assets, transferring them to CEC and related companies.

As James Sprayregen, Kirkland's only witness at the hearing, observed, creditors have not been at all shy about initiating lawsuits over the transactions (which the parties term the "challenged" or "disputed" transactions). The transactions are the subject of several lawsuits pending in New York and Delaware. CEOC's bondholders in particular have criticized the transactions. The unhappy bondholders include the constituents of the Noteholders Committee objecting to Kirkland's application.

At some point, at least in 2014 but possibly earlier, CEOC began to consider restructuring. CEOC also considered retaining counsel in connection with any restructuring effort. One of the law firms under consideration was Kirkland. One of the independent CEOC directors, Ronen Stauber, knew a Kirkland partner, Edward Sassower. Stauber telephoned Sassower, said that he and another man had been appointed independent directors, and said the independent directors were going to interview counsel for a possible restructuring. Stauber wanted to interview Kirkland.

In late June or early July 2014, the Kirkland lawyers made what they call a "pitch" for the CEOC business in a meeting in New York. The pitch was made to the two independent CEOC directors. In connection with the pitch, on June 26 and 27 Kirkland quickly prepared a "pitch book" that was provided to the two independent directors. Because the Noteholders Committee finds the pitch book significant, it is worth summarizing its contents briefly.

The pitch book began with a "situation overview" that described the structure and recent financial performance of the broader Caesars enterprise and also described in general terms the challenged transactions.

The pitch book then set out possible "next steps/action items" for the CEOC board. These included addressing "financial and operational challenges," establishing "an appropriate corporate governance process," and developing a "strategic action plan for likely bondholder challenges." In the first category, Kirkland said (among other things) that it would "work closely with the Board, management, and financial and other advisors to jointly develop cutting edge solutions with creditors to reach a consensual solution." In the second category, Kirkland noted that it was "important to establish and maintain appropriate corporate governance and decision making processes, to facilitate decisions in the restructuring context, and to protect those decisions and the decision makers from challenges ...." In the third category, Kirkland offered to assist CEOC and its advisors "to develop an appropriate plan for responding to and defending against the bondholder challenges" to the disputed transactions.

The pitch book's next section was entitled "why hire Kirkland." The firm described itself as "problem solvers" and "deal doers" who focus on "maximizing enterprise value and minimizing costs and disruptions associated with restructuring situations." Kirkland, the pitch book said, was "deal-oriented." But, Kirkland added, it was "prepared to litigate if necessary." At the hearing, Sprayregen confirmed this firm philosophy, stating that "the most value-maximizing solution for most Chapter 11 situations is a holistic, fully consensual deal," but "[a]n important element of reaching consensual resolution has always been the ability and willingness to litigate."

This description of the pitch book covers pages 1 through 17. The remaining 94 pages of the 111–page book (the bulk of the piece, in other words) were devoted to a description of the firm's experience and the credentials of its personnel, complete with rankings of specific Kirkland practice areas from publications like "The American Lawyer" and "U.S. News & World Report." Fifty-four of the remaining 94 pages (nearly half the pitch book, in other words) consisted of the curricula vitae of assorted Kirkland lawyers.

On or around July 3, 2014, the independent directors apparently decided to hire Kirkland. The decision is embodied in an undated resolution of the CEOC board.

About a week later, Kirkland provided CEOC's general counsel, Tim Donovan, with a draft engagement letter. On July 15, CEOC's deputy general counsel, Scott Wiegand, responded that "we're looking at this letter and will provide comments shortly." There was apparently a discussion of the letter on August 4 involving Donovan, because on August 5 Donovan sent David Seligman at Kirkland an email asking whether there would be a "new, revised engagement letter" in light of "the retainer conversation yesterday." On August 6, Seligman sent Donovan a new engagement letter noting a change in the retainer amount. Around this time, Tim Lambert replaced Donovan as CEOC's general counsel, and in mid–August Lambert and Donovan exchanged detailed e-mails negotiating further changes to the engagement letter.

Kirkland and CEOC at last came to an agreement on the terms of the engagement, and on September 2, 2014, Kirkland and CEOC executed a finalized engagement letter. Sprayregen signed for Kirkland, and Mary Higgins, CEOC's chief financial officer, signed for CEOC.

Two features of the letter are relevant to the retention question. First, the letter acknowledged that Kirkland had been asked to represent "Caesars Entertainment Operating Company, Inc. and its subsidiaries in connection with a potential restructuring." Those entities were defined parenthetically as the "Company." The letter then added: "Please note, the Firm's representation is only of the Company; the Firm does not and will not represent any shareholder, director, officer, partner or joint venturer of the Company." Sprayregen testified without contradiction that Kirkland had never before represented CEOC or its subsidiaries; that Kirkland had never represented and does not currently represent CEC; that Kirkland had never represented and does not currently represent either the Apollo or the TPG Hamlet entities; that Kirkland had never represented and does not currently represent Apollo; and that Kirkland had never represented and does not currently represent TPG.

Sprayregen conceded that Kirkland had represented and still represents several portfolio companies of Apollo and TPG, but he made clear (and again his testimony was uncontradicted) that the representations were and are unrelated to this case. Sprayregen also conceded that Kirkland had represented David Bonderman, a member of the CEOC and CEC boards and a founder of TPG, in an...