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Judge Gross Issues Venue Opinion in Caesars Bankruptcy – Holds Cases Shall Proceed in the Northern District of Illinois

By Evan T. Miller

On February 2, 2015, Judge Kevin Gross issued an Opinion re Determination Pursuant to Federal Rule of Bankruptcy Procedure 1014(b) as to the District in Which the Debtor’s Bankruptcy Cases Shall Proceed in In re Caesars Entertainment Operating Company, Inc., Case. No. 15-10047 (KG).  The opinion, based on the Court’s oral ruling at a hearing held on January 28, 2015, details the basis for Court’s determination that Caesars Entertainment Operating Company, Inc.’s (“Debtor”) bankruptcy proceedings should proceed in the Bankruptcy Court for the Northern District of Illinois (the “Illinois Court”).

The Debtor is the main operating subsidiary of Caesars Entertainment Corporation (“CEC”, and together with the Debtor and other of its affiliates, “Caesars”).  Following a leveraged buyout in 2008 (the “2008 LBO”), Caesars became unable to service its debt load and address other capital deficiencies. In the years leading up to the bankruptcy filing, Caesars engaged in a series of allegedly controversial transactions, ultimately resulting in asset “sales” from the Debtor to CEC or a non-Debtor affiliate, ostensibly to extend the Debtor’s liquidity runway.  However, the Debtor remained overleveraged and prepared for a consensual “pre-packaged” bankruptcy filing which resulted in the public execution of the Restructuring Support and Forbearance Agreement (the “RSA”) in December 2014.  The RSA provided, in pertinent part, that CEC would contribute $1.5 billion in return for releases of CEC, provide a 100% recovery for holders of first lien bank debt (the “FLBs”), a 92% recovery for the holders of first lien notes (the “FLNs”), and 10-12% recovery for more junior creditors (according to the creditors that initiated the Involuntary Case (as defined below), the “Petitioning Creditors”).  The RSA required the Debtor to file a voluntary bankruptcy petition after January 15, 2015 but before January 20, 2015.

On January 12, 2015, the Petitioning Creditors, holders of outstanding second lien notes, initiated an involuntary bankruptcy proceeding (the “Involuntary Case”) against the Debtor in the Bankruptcy Court for the District of Delaware (the “Delaware Court’).  On January 15, 2015, however, the Debtor and 172 of its direct or indirect subsidiaries (the “Illinois Debtors”) filed voluntary Chapter 11 petitions (the “Voluntary Case”, and together with the Involuntary Case, the “Cases”) in the Illinois Court.  The Petitioning Creditors filed a venue motion (the “Venue Motion”) pursuant to Bankruptcy Rule 1014(b) requesting that the Cases proceed before the Delaware Court.

At the Venue Motion hearing,  the record established that, inter alia, that: 1) over 80% of the FLNs and 15% of the FLBs had signed onto the RSA, binding only the FLNs to the RSA’s terms; 2) the Debtor’s CEO and CRO were not consulted regarding the selection of venue for the Voluntary Case, but they understood that the main reasons were Chicago’s centrality and Seventh Circuit law regarding executory contracts and third-party releases;  3) the Debtor’s management, creditors and professionals are spread throughout the country; and 4) the Debtor’s assets and operations are likewise spread out across the country, concentrating in Nevada, the Midwest, and the Mid-Atlantic regions.

The Court conducted its venue analysis under 28 U.S.C. §§ 1408 and 1412 and Bankruptcy Rule 1014(b), and in the course of determining that the Cases should proceed before the Illinois Court, found as follows:

(a) the Cases may proceed before either the Delaware or Illinois Court;

(b) the Debtor’s choice of forum is entitled to sufficient deference to support a determination that the Cases should proceed in the Illinois Court;

(c) although the Court’s conclusion turns on the “Interests of Justice” prong of Bankruptcy Rule 1014(b) instead of “Convenience of the Parties”: (i) the Debtor’s creditors, management, and professionals are geographically diverse, while the Debtor’s books and records are electronically accessible from anywhere in the United States; (ii) the fact that a substantial number of the Debtor’s creditors prefer the Delaware Court is not determinative, as “venue is not determined by popular vote under Rule 1014(b)”; (iii) where the ultimate goal is rehabilitation rather than liquidation, the location of a debtor’s assets is not as important, but is non-determinative here in any event; (iv) most importantly as to the convenience factors, the ability of the Delaware and Illinois Courts to administer the Cases is equal;

(d) as to the “Interest of Justice” factors: (i) the Petitioning Creditors’ involuntary petition clearly fits the “anticipatory filing” exception to the judicially-created “first-filed” rule – typically applicable in situations where there is concurrent civil litigation pending with respect to the same dispute – as the Petitioning Creditors were aware that the Debtor was planning a voluntary filing in the Illinois Court, and that rewarding such a preemptive filing would set a bad precedent for future bankruptcy cases; (ii) the Debtor provided a sufficient justification for its choice of forum, even though the Debtor’s pre-petition behavior would seem to indicate that the choice was made for the benefit of non-debtor insiders; (iii) notwithstanding the “serious allegations” against, inter alia, the 2008 LBO sponsors and CEC, the Illinois Court can handle the allegations just as carefully as the Delaware Court, and the Petitioning Creditors will in no way want for relief in the Illinois Court.

A copy of the opinion can be found here.

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