Bankruptcy Judge Warns Caesars He Could Convert Their Reorganization Case to Chapter 7 Liquidation

Caesars Entertainment has been warned that a US bankruptcy judge might force the casino company to begin liquidation proceedings if Caesars continues on its present course of action. If a judge ordered such proceedings, Caesars Entertainment might have to divest itself of assets controlled by the parent company and not CEOC, its operations division.

As the company’s bankruptcy proceedings began, the court-appointed examiner’s hired an investigator to make a preliminary report on Caesars’ pre-bankruptcy activities. The investigator, former Watergate prosecutor Richard Davis, analyzed the case and determined that the CEOC bankruptcy reorganization plan involved a “degree of civil fraud” which leaves the company vulnerable in legal proceedings. Caesars Entertainment’s lawyers have filed motions to keep the Davis Report out of the ongoing litigation.

Caesars’ Mounting Debt

Last Wednesday during the latest hearing on the case, US Bankruptcy Court Judge Benjamin Goldgar appeared frustrated by Caesars’ attempts to block the release of that investigator’s court-appointed examiner’s report. Judge Goldgar issued a warning to Caesars that continued attempts to block the report could lead Goldgar to issuing a liquidation proceeding.

The reorganization plan involves a division of Caesars Entertainment called the “Caesars Entertainment Operations Company”, usually referred to as “CEOC”.

CEOC holds over $18 billion of Caesars Entertainments’ total $23 billion in debt. In the summer of 2014, several of the casino giant’s major properties were moved out of CEOC and placed under the control of the parent company. At the time, analysts speculated that the CEOC reshuffling was in anticipation of an eventual bankruptcy filing by CEOC. Caesars executives denied that was the case.

In November and December of 2014, Caesars Entertainment CEO Gary Loveman began bankrutpcy proceedings. Apollo Investments, which owns a major share of Caesars, began to strongarm creditors to sign off on the bankruptcy reorganization plan. In January 2015, the full bankruptcy plan was filed and creditors owning 80% of the debt agreed to the plan.

CEOC Bankruptcy Plan

That plan called for CEOC to be divided into two units. Both units would be saddled with somewhere between $8 billion and $9 billion of debt. The first lienholders would be given stock in a new real estate investment division, a business proposition which holds a good chance of repaying creditors handsomely. The remaining 20% of the creditors, called the junior shareholders, would still hold their CEOC shares. Because CEOC was divested of its most valuable properties and still help $9 billion in debt, the chances this debt would ever be repaid was minimal.

The junior lienholders almost immediately filed a lawsuit, claiming they had been set up to take the fall for Caesars’ financial troubles. This lawsuit was followed by a suit filed by a New York City financial institution, claiming they had been defrauded by Caesars, too. Caesars filed to have the cases dismissed, but Judge Benjamin Goldgar ordered that the lawsuits proceed.

Richard Davis’s Findings

Richard Davis’s findings are pivotal in that lawsuit. Davis found “deficencies” in the reorganization plan which might rise to “a degree of civil fraud”. Richard Davis reported that Caesars’ potential civil fraud stemmed from two actions: Caesars “reneged on billions in debt obligations” and it also “stripped CEOC of its most lucrative assets“. If the judge agrees with Richard Davis, then the bankruptcy judge has the authority to strip Caesars main company of the assets it took from CEOC.

The Davis Report holds a great deal of legal jeopardy for Caesars Entertainment and its board of directors. Not only could assets be stripped from the company, but several sources have reported that legal proceedings could be launched against board members. Also, state regulators could launch inquiries into Caesars’ dealings, which might leave the casino company’s gaming licenses in jeopardy. Losing gaming licenses in Las Vegas or Atlantic City would be a disaster for the company, though the casinos likely would go on operating. The case of MGM Resorts and Borgata would be a good model, as MGM Resorts was forced to divest itself of its 50% share in Borgata from 2009 to 2014, due to its Macau gaming connections.

The Privileged Tag

On Wednesday, Goldgar was critical of Caesars’ attempt to have sealed 7 million pages of documents, using a “privileged tag” to withhold the information. Goldgar said the Davis Report was agreed on by all parties as a means of expediting the bankruptcy process. The judge said, for Caesars now to be blocking its release, they were trying to “have it both ways”. Caesars likely is blocking the information, because the Davis Report might hurt its stock prices, damage refinancing plans, lead to general unrest among shareholders, and general trouble for the board of directors.

Public Summary of Davis Report

The judge called on Richard Davis to release a public summary (with significant redactions) of the report, until an agreement could be reached on which documents should be released. A spokesman for Davis said that report would be complete for publication by late-February.

Benjamin Goldgar warned Caesars of the consequences of attempts to stonewall the information. He lambasted the casino company’s executives, saying their reticence might lead to “rather a different turn from the one that I imagine the debtor and its parent and its affiliates would like to see.”

Judge Goldgar: “Just a Hoot”

Judge Goldgar listed three bad options for an outcome, in that circumstance. One, he might dismiss the bankrupcy, leaving Caesars to default on its loans. Two, he might appoint a trustee to oversee the casino company’s bankruptcy, severely limiting their executive options.

Finally, Goldgar threatened Caesars with (in the judges words), “my favorite…the case could be converted to Chapter 7 [liquidation], which would just be a hoot, wouldn’t it?“