Caesars bankruptcy reorganization dealt setback by federal judge

A judge dealt Caesars Entertainment Corp's bankruptcy reorganization a possible fatal blow in ruling that the company violated federal law when it shuffled assets and refinanced debt as part of an alleged scheme to protect itself from lowerranking creditors.

The ruling came in a related lawsuit in Manhattan on the same day that the casino company sought bankruptcy protection last week in Chicago for its Caesars Entertainment Operating Co. unit. U.S. District Judge Shira Scheindlin rebuffed an attempt by the unit to dismiss the suit, which had been filed by noteholders. Scheindlin said their allegations about the transfer of valuable properties away from the unit in August -- and the parent's removal of guarantees for creditors -- amount to a violation of the federal Trust Indenture Act of 1939.

The judge found that the compa- ny's alleged elimination of the guarantees was "an impermissible out-ofcourt restructuring" that is "exactly" what a provision of the 1939 law "is designed to prevent," according to her ruling.

The August transactions underpin the proposed bankruptcy reorganization laid out in agreements in which firstlien noteholders would receive a 92 percent recovery while junior noteholders could take home no more than $549 million for their $5.24 billion in secondlien notes. Jonathan Hurwitz, a lawyer for Caesars Entertainment Corp., didn't immediately respond to phone and email messages on a holiday weekend seeking comment on Scheindlin's ruling. The operating unit filed its Chapter 11 petition on Jan. 15, three days after second-lien noteholders filed an involuntary bankruptcy petition in Delaware against Caesars Entertainment Operating Co., the largest of the Caesars operating companies.

Those filings followed months of negotiation and litigation over how best to reduce the billions of dollars of debt assumed in a 2008 buyout that was arranged by Leon Black's Apollo Global Management and David Bonderman's TPG Capital Management. The dissident creditors have accused Apollo and TPG of trying to create a "good Caesars" to hold the valuable properties and a "bad Caesars" to owe most of the debt.

Except for non-controversial permissions to operate the casinos as usual, the two bankruptcies are effectively frozen until the Delaware judge decides which of the two courts will preside over the reorganization effort.

While the judge put her ruling on hold for Caesars Entertainment Operating Co., as is required during bankruptcy proceedings, Scheindlin said she was free to issue her opinion regarding the non-bankrupt parent company. The holders of notes issued in 2005 and 2006 sued in September, seeking to set aside transactions the month before in which Caesars' main operating unit transferred assets to related entities the noteholders couldn't reach, and the parent canceled its guarantee of the debt.

The noteholders alleged that Section 316 of the Trust Indenture Act barred the unit from altering its obligation to pay the bonds without 100 percent consent from holders.

Scheindlin described the complaint as alleging that Caesars' "ultimate plan" was to put the main unit "into bankruptcy while protecting Apollo Management LP and TPG Inc. from CEOC's creditors."

The company contended in its bid for dismissal that the noteholders didn't have a valid lawsuit even if the facts in the complaint were true. The noteholders couldn't sue because there has been no payment default as yet, the companies said. Scheindlin rejected the company's arguments, including its claim that individual bondholders are barred from suing.