In re Caesars Entm't Operating Co.

• Decision Date: 18 May 2016
• Docket Number: No. 15 B 1145,15 B 1145
• Citation: 562 B.R. 168
• Parties: IN RE: CAESARS ENTERTAINMENT OPERATING CO., INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

562 B.R. 168

IN RE: CAESARS ENTERTAINMENT OPERATING CO., INC., et al., Debtors.

No. 15 B 1145

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

Signed May 18, 2016

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

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

Attorneys for Statutory Unsecured Claimholders' Committee: Mark K. Thomas, Jeff J. Marwil, Paul V. Possinger, Brandon W. Levitan, Proskauer Rose LLP, Chicago, IL; Martin J. Bienenstock, Judy G.Z. Liu, Philip M. Abelson, Vincent Indelicato, Proskauer Rose LLP, New York, NY

Attorneys for Wilmington Trust, N.A.: Eric N. Macey, Stephen J. Siegel, Julie Johnston–Ahlen, Novack and Macey LLP, Chicago, IL; J. Christopher Shore, Harrison L. Denman, White & Case LLP, New York, NY; Thomas E. Lauria, Jason Zakia, White & Case LLP, Miami, FL; Seth H. Lieberman, Patrick Sibley, Pryor Cashman LLP, New York, NY

Attorneys for Delaware Trust Company, FSB: Eric Prezant, Bryan Cave LLP, Chicago, IL; Stephanie Wickouski, Bryan Cave LLP, New York, NY

Attorneys for BOKF, N.A.: Mark F. Hebbeln, Harold L. Kaplan, Foley and Lardner LLP, Chicago, IL; Andrew I. Silfen, Mark B. Joachim, Michael S. Cryan, Arent Fox LLP, New York, NY; Jackson D. Toof, Arent Fox LLP, Washington, DC

Attorneys for Wilmington Savings Fund Society, FSB: Timothy W. Hoffmann, Jones Day, Chicago, IL; Bruce Bennett, James O. Johnston, Sidney P. Levinson, Joshua M. Mester, Jones Day, Los Angeles, CA; Mark W. Page, Kelley Drye & Warren LLP, Chicago, IL; Eric R. Wilson, David I. Zalman, Kristin S. Elliott, Kelley Drye & Warren LLP, New York, NY

Attorneys for Ad Hoc Committee of First Lien Noteholders: Mark A. Berkoff,

Robert Radasevich, Nicholas M. Miller, Neal, Gerber & Eisenberg LLP, Chicago, IL; Kenneth H. Eckstein, P. Bradley O'Neill, Douglas H. Mannal, Daniel M. Eggermann, David E. Blabey, Jr., Kramer Levin Naftalis & Frankel LLP, New York, NY

Attorneys for UMB Bank, N.A.: Peter A. Siddiqui, Katten Muchin Rosenman LLP, Chicago, IL; Craig A. Barbarosh, David A. Crichlow, Karen B. Dine, Katten Muchin Rosenman LLP, New York, NY

Attorneys for Ad Hoc Committee of First Lien Bank Lenders: Brian L. Shaw, Shaw Fishman Glantz & Towbin LLC, Chicago, IL; Kristopher M. Hansen, Kenneth Pasquale, Erez E. Gilad, Jonathan D. Canfield, Stroock & Stroock & Lavan LLP, New York, NY; Ariel N. Lavinbuk, Lanora C. Pettit, Robbins, Russell, Englert, Orseck, Untereiner & Sauber, Washington, DC

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge

These jointly-administered chapter 11 cases are before the court for ruling after an evidentiary hearing on the objections of Wilmington Trust, N.A., as successor indenture trustee for the 10.75% senior unsecured notes ("Wilmington"), to two proofs of claim, both filed by first lien parties. One is the claim of Credit Suisse AG, Cayman Islands Branch, as agent on behalf of first lien lenders (the "First Lien Bank Lenders"); the other is the claim of UMB Bank, N.A., as successor indenture trustee for the first lien notes (the "First Lien Noteholders") (collectively, the "First Lien Creditors"). Both proofs of claim assert secured claims. In its objections, Wilmington contends that the First Lien Creditors have waived their rights under section 1111(b)(1)(A) of the Bankruptcy Code to assert unsecured deficiency claims.

For the reasons that follow, Wilmington's objections will be overruled.

1. Jurisdiction

The court has subject matter jurisdiction of this case under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

2. Facts

The facts are drawn from the evidence adduced at the hearing, the parties' stipulation, and the court's docket.

The debtors in these cases are the primary operating units of what the parties call the Caesars gaming enterprise. The debtor in the lead case is Caesars Entertainment Operating Co., Inc. ("CEOC"). The other debtors are subsidiaries of CEOC.

On January 28, 2008, affiliates of Apollo Global Management, Inc., and TPG Capital, LP, acquired CEOC and its subsidiaries in a leveraged buyout (the "LBO"). (Stip. ¶ 28).¹ As part of the LBO, CEOC entered into an agreement with the First Lien Bank Lenders to borrow $7.25 billion (the "Credit Agreement"). (Id. ; see also Tr. at 84). Along with the Credit Agreement, CEOC and its subsidiaries entered into a collateral agreement (the "Collateral Agreement") under which they pledged assets to secure the Credit Agreement debt. (Stip. ¶ 28). On February 1, 2008, CEOC issued more debt in the form of 10.75% unsecured notes. (Stip. ¶ 34; Tr. at 84–85). The subsidiaries guaranteed the unsecured notes. (Stip. ¶ 34).

Several months later, on June 10, 2009, CEOC issued still more debt in the form of secured notes (the "first lien notes"). (Stip. ¶¶ 4, 40). To complete the transaction, the Credit Agreement was amended and restated to permit the issuance of the first lien notes. (Tr. at 111–112). The Collateral Agreement was amended and restated to ensure the collateral secured the notes. (Stip. ¶ 40; Tr. at 111). And the First Lien Bank Lenders and Noteholders entered into an intercreditor agreement governing their respective rights to the collateral (the "Intercreditor Agreement"). (Stip. ¶ 41; Tr. at 112–114). The Intercreditor Agreement appointed an agent (the "Collateral Agent") to act on the First Lien Creditors' behalf. The Collateral Agent was authorized, among other things, to acquire, hold, and enforce the liens on collateral. (F.L. Ex. 15 at 14–15).

Three provisions in the contract documents from the 2009 issuance of the first lien notes are relevant here. First, section 7.18 of the Collateral Agreement limited the First Lien Creditors' recovery from the subsidiaries to the value of the collateral:

No Recourse. Notwithstanding anything to the contrary in this Agreement, no recourse shall be had, whether by levy or execution, or under any law, or by the enforcement of any assessment or penalty or otherwise, for the payment of any of the Obligations, against any Pledgor or any of the assets of any Pledgor, other than the Collateral, it being expressly understood that the sole remedies available to the [Collateral Agent] and the Secured Parties pursuant to this Agreement with respect to the Obligations shall be against the Collateral.

(W. Ex. 16 at 34).

Second, section 4.10(b) of the Intercreditor Agreement protected the Collateral Agent from liability arising from an election under section 1111(b) of the Code, 11 U.S.C. § 1111(b) : "Each of the First Lien Secured Parties waives any claim ... against the Collateral Agent ... arising out of ... any election by any Applicable Authorized Representative or any holders of First Lien Obligations, in any proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b) of the Bankruptcy Code...." (F.L. Ex. 15 at 14–15).

Third, section 7.22 of the Collateral Agreement subjected the Collateral Agent's exercise of rights and remedies to the Intercreditor Agreement's provisions and in the event of a conflict deferred to the Intercreditor Agreement:

Subject to First Lien Intercreditor Agreement. Notwithstanding anything herein to the contrary, ... (ii) the exercise of any right or remedy by the [Collateral Agent] hereunder is subject to the limitations and provisions of the [Intercreditor Agreement]. In the event of any conflict between the terms of the [Intercreditor Agreement] and the terms of [the Collateral Agreement], the terms of the [Intercreditor Agreement] shall govern.

(W. Ex. 16 at 36).

On January 15, 2015, CEOC and the debtor subsidiaries filed voluntary chapter 11 petitions in this district. (Stip. ¶ 10). Through their agents, the First Lien Creditors filed proofs of claim against CEOC and each subsidiary. (Stip. ¶¶ 13–14). The First Lien Bank Lenders asserted a claim of "at least $5,354,400,000" against each subsidiary. The First Lien Noteholders asserted a claim of "not less than $6,530,577,083.33" against each subsidiary. (Id. ).² Each proof of claim asserted a fully secured claim. In an attachment, each proof of claim also asserted an unsecured claim to the extent the claim amount exceeded the value of the subsidiaries' collateral.

Wilmington has objected to the First Lien Creditors' claims to the extent they asserted unsecured deficiency claims. (Bankr. Dkt. Nos. 2030, 2031). Wilmington contends that section 7.18 of the Collateral Agreement made the debts to the First Lien Creditors non-recourse, limiting any recovery to the collateral. Although section 1111(b)(1)(A) of the Code alters that result in bankruptcy, Wilmington contends that in section 7.18 the First Lien Creditors waived their rights under section 1111(b)(1)(A) to assert unsecured deficiency claims.

3. Discussion

Wilmington's objections will be overruled. The language in section 7.18 on which Wilmington relies is broad and if read in isolation might be found a waiver of rights under section 1111(b)(1)(A). But section 7.18 cannot be read in isolation. Under New York law (which the parties agree applies here (see Bankr. Dkt. Nos. 3138 at 12, 3139 at 2, 3142 at 7 n.12)), the Collateral Agreement must be read together with the other contract documents executed as part of the parties' 2009 transaction. When the documents are read together, the most reasonable interpretation is that the First Lien Creditors did not intend to waive their section 1111(b) rights.

a. Ripeness

At an April 13 hearing intended as the ruling date, the court questioned whether the objections presented a justiciable issue. The question was raised...