The bankruptcy court overseeing the Chapter 11 proceedings of Caesars Entertainment Operating Co. has expanded the scope of the investigation by the court appointed examiner in the case to specifically include the company’s 2008 LBO, according to an Aug. 19 entry on the court docket.
The court’s order follows a negotiated agreement among key parties in the case with respect to the scope of the probe, including the company, the unsecured creditors’ committee, the ad hoc committee of first-lien bank lenders and the ad hoc committee of first-lien noteholders.
According to the agreed-upon court order, the 2008 LBO will now be among the “challenged transactions” within the scope of the examiner investigation.
The examiner appointment
As reported, the Chicago bankruptcy court on March 12 ordered the appointment of an examiner to investigate certain pre-petition transactions entered into by the company. The scope of the investigation was defined as those transactions that had already been subjected to challenge by second-lien lenders in the case as potential fraudulent conveyances intended to transfer assets away from the company to CEC or other units of CEC, while leaving CEOC saddled with debt.
The 2008 LBO was not among those transactions.
The broad scope of the examiner appointment, however, also included “any other transactions involving the debtors, to the extent those transactions suggest potential claims belonging to the estates, including causes of action against any current officers or directors of the debtors, and former officers or directors of the directors, or any affiliates of the debtors, and … any apparent self-dealing of conflicts of interest involving the debtors or their affiliates,” and invited the examiner of parties to the case to seek modifications to the scope if they deemed it necessary.
On March 24, the bankruptcy court named New York lawyer Richard Davis as the examiner.
According to a June 30 motion filed by the company, while the 2008 LBO was not specifically identified as one of the transactions that Davis should investigate, “for clarity the debtors seek to expand the scope of the examiner’s investigation to expressly include the LBO.”
According to the company, at least one party had raised questions regarding potential LBO claims in the case “which if unresolved may impede the debtors’ efforts to reach a consensual plan.”
The company also asserted that Davis’ conclusions with respect to the potential strengths and weaknesses of the potential LBO claims would, “like the other transactions he is investigating … be particularly helpful in assisting the parties in plan negotiations.”
The unsecured creditors’ committee in the case, however, opposed the motion, calling it a “tactical maneuver to frustrate” the committee’s efforts to bring lien challenges in the case.
The committee said it had been investigating, and “already [had] identified several grounds to challenge certain of the pre-petition liens.” More specifically, the panel said, “one such ground is that the pre-petition liens were granted by subsidiaries for no value while they may have been insolvent or under-capitalized.”
The committee said that its raising of these potential challenges – and a hope of curtailing them — was the impetus behind the company’s motion to expand the scope of Davis’ investigation.
Meanwhile, earlier this month Davis separately filed his third interim report on his progress with the bankruptcy court. As is typical for such investigations, Davis said he has faced numerous issues with respect to discovery of documents and other evidence.
In the report, Davis said that unless the discovery issues were resolved by Aug. 17, “it would be difficult for” him to file a final report within the timeframe currently contemplated by the current restructuring-support agreement in the case – namely, by Nov. 15, or by Dec. 15, “at the latest.”
It is unclear what further effect, if any, the expansion of the scope of the investigation might have on the current timing of Davis’ report. – Alan Zimmerman