On Wednesday, January 28th, the Bankruptcy Court for the District of Delaware transferred venue for the involuntary bankruptcy of Caesars Entertainment Operating Company to Chicago, frustrating attempts by certain second lien noteholders to administer the $18.4 billion case in Delaware. The junior noteholders had filed an involuntary petition in Delaware against CEOC, three days before CEOC and 172 of its affiliates filed voluntary bankruptcy cases in the Bankruptcy Court in Chicago. As a result of the transfer of venue of the CEOC case, Judge Benjamin Goldgar of the Northern District of Illinois Bankruptcy Court will preside over all of the cases, including determining the validity of the involuntary case. In re Caesars Entertainment Operating Company, Inc., No. 15-10047 (KG), 10-11 (Bankr. D. Del. Feb. 2, 2015).
Background
In 2008, affiliates of Apollo Global Management and Texas Pacific Group acquired Harrah’s Entertainment Inc. (later renamed Caesars) in a leveraged buyout for $30.7 billion, $24 billion of which was financed with debt. As a result of the 2008 economic downturn, the decline in gaming revenue and other factors, Caesars has not been able to generate enough cash flow to service its debt.
In his February 2nd written opinion following his January 28th oral ruling, Delaware Bankruptcy Judge Kevin Gross stated that:
In the years preceding the Debtor’s bankruptcy filing, Caesars engaged in a series of what the Debtor itself describes as “controversial” transactions, including asset sales, exchange and tender offers, debt repurchases, and re-financings, with the stated purpose of extending the Debtor’s liquidity runway . . . . The ultimate result of the transactions is that a significant portion of the Debtor’s assets were “sold” to CEC [Caesars Entertainment Corporation, the parent of CEOC] or some other non-debtor affiliate in the years leading up to the Debtor’s bankruptcy filing.
Opinion at 3. Before the bankruptcy filings, creditors of CEOC filed four lawsuits against CEOC, CEC, their affiliates and the affiliates of Apollo Global Management and Texas Pacific Group, alleging fraudulent transfer and related claims based largely upon these transactions.
Over the months preceding the bankruptcy filings, CEC and CEOC negotiated with the two senior classes of CEOC creditors for a consensual plan of reorganization. Those efforts were partially successful. More than 80% of the first lien noteholders ultimately signed on to the Restructuring Support Agreement for the consensual plan, although Caesars was only able to obtain the consent of 15% of the more senior first lien bank lenders. By Caesars’ calculations, the plan described in the RSA would yield a 100% recovery to the first lien bank group (a calculation that is challenged by a majority of that group), a 92% recovery to the first lien noteholders and a 10% – 12% recovery for the junior noteholders. The contemplated plan would contain a release of liability for CEC and its officers and directors relating to the controversial transactions that are the subject of the four lawsuits filed by CEOC creditors.
On January 12th, certain of the junior noteholders filed an involuntary petition against CEOC in the Delaware bankruptcy court alleging that CEOC was insolvent and not paying its debts as they came due. The petitioning creditors also filed a motion seeking the appointment of an examiner to investigate the controversial prepetition transactions undertaken by CEC and CEOC. On January 15th, CEOC and 172 of its subsidiaries filed voluntary chapter 11 petitions in the Northern District of Illinois, with venue in Chicago being anchored by the subsidiary that operates a riverboat casino in Joliet, Illinois.
At the request of the involuntary petitioning creditors, Delaware bankruptcy Judge Gross entered an order staying the Chicago cases (except for certain first day motions) until he had determined whether the CEOC case should proceed in Delaware or Chicago (the petitioning creditors urged that the 172 subsidiary cases be transferred to Delaware, if that were the venue decided upon by Judge Gross). Judge Gross set evidentiary hearings for January 26th and 27th and allowed the parties to engage in limited discovery on shortened notice.
Analysis
In his ruling, Judge Gross first examined venue. 28 U.S.C. S 1408(1) addresses bankruptcy case venue and states that venue is proper in the district in which the debtor’s domicile, residence, principal place of business or its principal assets are located. Judge Gross held that venue would have been proper either in Illinois or Delaware, because at least one of the Caesars debtors was incorporated in each state.
Next, Judge Gross noted that under rule 1014(b) of the Federal Rules of Bankruptcy Procedure, if petitions are filed in different districts against the same debtor, the court “in the district in which the petition filed first is pending” may determine where the case should proceed based upon “the interest of justice or for the convenience of the parties.” Thus, the Delaware Bankruptcy Court is the court to decide the venue issue.
Judge Gross looked to a ruling in the Enron bankruptcy by Judge Arthur Gonzalez. Opinion at 11-12. Judge Gonzalez stated: “The decision of whether to transfer venue is within the Court’s discretion based on an individualized case-by-case analysis of convenience and fairness.” In re Enron Corp., 274 B.R. 327, 342 (Bankr. S.D.N.Y. 2002).
He noted that courts have held that “the debtor’s choice of forum is entitled to a certain level of deference if venue is proper” when considering a motion to transfer venue. Judge Gross stated that the “level of deference . . . is less clear” here, where the matter is instead how to deal with two separate bankruptcies filed in two different jurisdictions for the same debtor. Opinion at 18-19. Thus, the Court more closely scrutinized the debtor’s choice of forum than it would in a venue transfer motion.
The Court noted that Bankruptcy Rule 1014 sets forth a “flexible, dual-track test” based on the interest of justice or the convenience of the parties. Opinion at 12. The Court analyzed each of the two potential tracks for analysis. First, he considered the convenience of the parties. The key factors in determining the parties’ convenience include the proximity to the court of the various parties, the location of the debtor’s assets and the economic administration of the estate.
Applying these factors, Judge Gross determined that convenience of the parties was of little relevance, stating: “in this day of law firms with multiple offices across the nation, convenient and accessible airports, electronic access to information and court dockets [at] every lawyer’s fingertips,” Delaware and Illinois are equally convenient forums. Opinion at 17. Similarly, Judge Gross held that the location of the debtors’ assets did not strongly favor either venue. Therefore, he ruled that convenience of the parties favored neither venue.
The Court then turned to the second factor: the “interest of justice.” According to Judge Gross, the overriding consideration is that the debtor filed in Illinois, a decision that under the “unique circumstances” of the case, was “entitled to just enough deference” to establish venue in the debtor’s chosen forum. Opinion at 18.
Because the junior noteholders knew that CEOC would imminently file in Illinois, the involuntary petition was “clearly… anticipatory,” filed with knowledge that CEOC had planned an “imminent voluntary filing.” Opinion at 20. Judge Gross expressed concern that “rewarding the Petitioning Creditors’ preemptive filing in another forum would set a bad precedent for future bankruptcy cases and limit the ability of debtors to openly negotiate with creditors prior to filing a voluntary bankruptcy petition.” The debtors also demonstrated that their decision to file in Illinois “could benefit the debtors’ reorganization efforts.”
Judge Gross acknowledged that “serious allegations” had been raised that the debtors’ controlling equity holders “engaged in a series of self-dealing transactions resulting in the fraudulent transfer of very substantial assets out of the reach of the Debtor’s creditors.” Opinion at 21. However, he found that the fact that the debtor filed in Illinois to ensure application of allegedly favorable law was not only inoffensive, but “justifi[ed]… its choice of forum.” While acknowledging that the decision to file in Chicago may have been made for the benefit of nondebtor insiders, Judge Gross was “confident” that “the Illinois Court will, every bit as much as this Court would, view the allegations of the Debtor’s pre-petition conduct with care and concern” and that his decision “in no way reduces the opportunity for the… junior creditors to obtain appropriate relief.” Opinion at 20-22.
Conclusion
In Judge Gross’s opinion, the ruling avoids the potential policy ramifications of allowing an anticipatory involuntary filing to uproot the debtor’s choice of venue, including discouraging transparent prepetition negotiations and incentivizing debtors fearful of losing their preferred venue choice to negotiate in secret or rush to file. He noted that hastily filed bankruptcy petitions could increase the time and cost of bankruptcy and waste judicial resources, as courts adjudicate disputes that may have been abbreviated or even settled in prepetition negotiations.
Despite the fact that Judge Gross has determined that venue is to be in the Northern District of Illinois, the involuntary filing may yet fulfill at least one of the goals of the junior noteholders who filed the involuntary petition. Judge Gross did not dismiss the involuntary petition, but merely transferred it to Illinois. Judge Goldgar may also choose not to dismiss the involuntary petition. If so, the petition date would remain 88-days after certain potentially avoidable transfers noted by Judge Gross, thus potentially preserving preference claims for the estate.