FILED: NEW YORK COUNTY CLERK 08/31/ :46 PM INDEX NO /2016 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 08/31/2016 EXHIBIT 21

Transcription

1 FILED: NEW YORK COUNTY CLERK 08/31/ :46 PM INDEX NO /2016 NYSCEF DOC. NO. 32 RECEIVED NYSCEF: 08/31/2016 EXHIBIT 21

2 EFiled: Jun :18PM EDT Transaction ID Case No VCG IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE WILMINGTON SAVINGS FUND SOCIETY, FSB, solely in its capacity as successor Indenture Trustee for the 10% Second-Priority Senior Secured Notes due 2018, on behalf of itself and derivatively on behalf of CAESARS ENTERTAINMENT OPERATING COMPANY, INC., v. Plaintiff, CAESARS ENTERTAINMENT CORPORATION, et al., and Defendants, CAESARS ENTERTAINMENT OPERATING COMPANY, INC., Nominal Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) C.A. No VCG REDACTED VERSION FILED: June 16, 2016 DEFENDANT CAESARS ENTERTAINMENT CORPORATION S REPLY BRIEF IN FURTHER SUPPORT OF ITS CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT MORRIS, NICHOLS, ARSHT & TUNNELL LLP Kenneth J. Nachbar (#2067) William M. Lafferty (#2755) John P. DiTomo (#4850) Lindsay M. Kwoka (#5772) 1201 North Market Street Wilmington, Delaware Attorneys for Defendant Caesars Entertainment Corporation

3 OF COUNSEL: Eric Seiler Philippe Adler Jason C. Rubinstein Christopher M. Colorado FRIEDMAN KAPLAN SEILER & ADELMAN LLP 7 Times Square New York, NY (212) June 9, 2016

4 i. TABLE OF CONTENTS Page TABLE OF AUTHORITIES... iii INTRODUCTION...1 ARGUMENT...4 I. THE GUARANTEE S RELEASE ACCORDED WITH THE TIA....4 A. WSFS Cannot Prove a Violation Under the Traditional Reading of Section 316(b)....4 B. The Court Should Reject the Expanded Reading of Section 316(b) WSFS Disregards the Insurmountable Difficulties Introduced by an Expanded Reading of Section 316(b) The Practical Ability Standard Is Unsupported by Section 316(b) s Text Section 316(b) s Legislative History Confirms Its Narrow Scope Only a Handful of Courts Have Embraced an Expanded Reading of Section 316(b) C. Even Under an Expanded Reading of Section 316(b), WSFS Cannot Sustain Its TIA Claim The Guarantee Transactions Did Not Constitute a Debt Reorganization The Guarantee s Release Did Not Impair Noteholders Payment Rights II. EACH OF THE MAY 2014 TRANSACTIONS TERMINATED THE GUARANTEE....19

5 TABLE OF CONTENTS (Continued) ii. Page A. WSFS s Reading of Section 12.02(c) Is Commercially Unreasonable and Inconsistent With the Indenture B. The Meaning of And Depends on Context...22 C. The Extrinsic Evidence Is Uncontroverted, Admissible, and Supports Judgment for CEC Testimony from the Indenture s Negotiators Is Admissible and Unequivocally Supports CEC s Interpretation The Parties Practical Construction of the Indenture Resolves Any Ambiguity Evidence of Industry Usage Confirms CEC s Reading D. The 5% Sale Was Not a Sham III. THE GUARANTEE WAS RELEASED PURSUANT TO THE EXISTING NOTES CLAUSE A. The Guarantees of the Existing Notes Had Terminated When CEOC Made Its Election Under the Existing Notes Clause B. CEOC s Election to Terminate the Guarantee Was Not Precluded By Any CEC Default CONCLUSION...36

6 iii. TABLE OF AUTHORITIES Page(s) Cases Albany Sav. Bank, FSB v. Halpin, 117 F.3d 669 (2d Cir. 1997)...25 Belasco Theatre Corp. v. Jelin Prods., Inc., 270 A.D. 202 (N.Y. App. Div. 1st Dep t 1945)...27 Bluebird Partners, L.P. v. First Fid. Bank, N.A. N.J., 85 F.3d 970 (2d Cir. 1996)...4 BOKF, N.A. v. Caesars Entertainment Corp., 2015 WL (S.D.N.Y. Aug. 27, 2015)...passim British Int l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78 (2d Cir. 2003)...28 CIT Grp./Commercial Servs., Inc. v Jamaica Ave. Ltd. P ship, 25 A.D.3d 301 (N.Y. App. Div. 1st Dep t 2006)...29 Coan v. Bell Atl. Sys. Leasing Int l, Inc., 813 F. Supp. 929 (D. Conn. 1990)...8 Engine Mfrs. Ass n v. S. Coast Air Quality Mgmt. Dist., 541 U.S. 246 (2004)...12 Federated Strategic Income Fund v. Mechala Grp. Jamaica, Ltd., 1999 WL (S.D.N.Y. Nov. 2, 1999) Frank Felix Assocs., Ltd. v. Austin Drugs, Inc., 111 F.3d 284 (2d Cir. 1997) Greylock Global Opportunity Master Fund Ltd. v. Province of Mendoza, 2005 WL (S.D.N.Y. Feb. 8, 2005), aff d, 162 F. App x 85 (2d Cir. 2006)...15

7 TABLE OF AUTHORITIES (Continued) iv. Page(s) Haberman v. Wash. Pub. Power Supply Sys., 744 P.2d 1032 (Wash. 1987), amended by 750 P.2d 254 (Wash. 1988)...8 Katz v. Oak Indus. Inc., 508 A.2d 873 (Del. Ch. 1986)...7 Kineon v. Bluegrass Elkhorn Coal Corp., 121 A.D.2d 980 (N.Y. App. Div. 1st Dep t 1986)...29 Kirchman v. Commissioner, 862 F.2d 1486 (11th Cir. 1989)...29 Magten Asset Management Corp. v. Northwestern Corp., 313 B.R. 595 (Bankr. D. Del. 2004)...14 Marblegate Asset Management v. Education Management Corp., 75 F. Supp. 3d 595 (S.D.N.Y. 2014)...passim Oaktree Capital Mgmt., LLC v. Spectrasite Holdings, Inc., 2002 WL (D. Del. June 25, 2002) Ocean Transp. Line, Inc. v. Am. Philippine Fiber Indus., Inc., 743 F.2d 85 (2d Cir. 1984)...26 Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 307 F. Supp. 2d 534 (S.D.N.Y. 2004)...27 Process America, Inc. v. Cynergy Holdings, LLC, 2014 WL (E.D.N.Y. Apr. 30, 2014), appeal filed, No (2d. Cir. June 29, 2015) RBC Capital Markets, LLC v. Education Loan Trust IV, 2011 WL (Del. Ch. Dec. 6, 2011)...15 Reves v. Ernst & Young, 494 U.S. 56 (1990)...7

8 TABLE OF AUTHORITIES (Continued) v. Page(s) Royal Park Invs. SA/NV v. HSBC Bank USA, N.A., 109 F. Supp. 3d 587 (S.D.N.Y. 2015)...4 Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982)...28 SR Int l Bus. Ins. Co. v. World Trade Ctr. Props., LLC, 467 F.3d 107 (2d Cir. 2006)...25 Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006), aff d sub nom. Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007)...10 U.S. Football League v. Nat l Football League, 634 F. Supp (S.D.N.Y. 1986)...6 United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975)...7 Webb v. GAF Corp., 936 F. Supp (N.D.N.Y. 1996)...25 WM High Yield Fund v. O Hanlon, 964 F. Supp. 2d 368 (E.D. Pa. 2013)...29 Woods v. Homes & Structures of Pittsburg, Kan., Inc., 489 F. Supp (D. Kan. 1980)...8 Statutes and Rules 11 U.S.C. 1121, U.S.C. 77ccc(1), (11) U.S.C. 77ppp(b)...15

9 TABLE OF AUTHORITIES (Continued) vi. Page(s) Other Authorities Ben H. Logan, The Trust Indenture Act, Debt Restructuring and Reorganization Tourism (Part I), 36 Bankr. L. Letter 1 (Mar. 2016)...5, 8, 10, 13 Black s Law Dictionary (6th ed. 1990)...2, 22 Restatement (Second) of Contracts 202 (1981)...24 Dale B. Tauke, Should Bonds Have More Fun? A Reexamination of the Debate over Corporate Bondholder Rights, 1989 Colum. Bus. L. Rev Philip R. Wood, Principles of International Insolvency (2d ed. 2007)...17.

10 1. INTRODUCTION CEC has demonstrated, on undisputed facts, that its guarantee of the Notes (the Guarantee ) was properly terminated under both the Indenture and TIA. 1 WSFS s assertion that the Guarantee remains in place because the May 2014 Transactions and August 2014 Transaction (the Guarantee Transactions ) violated the TIA is without merit. No court has ever endorsed WSFS s view that Section 316(b) categorically prohibits guarantee releases. And because the Guarantee Transactions did not amend the Indenture particularly its payment terms none of them violated Section 316(b) as it has historically been applied. Further, under the expanded and, we submit, unworkable, textually unsupported reading of the statute recently articulated by two district judges in New York, WSFS cannot sustain its TIA claim because the Guarantee Transactions, individually or collectively, did not constitute a comprehensive 1 Unless stated otherwise, capitalized terms have the meaning ascribed to them in CEC s Brief in Opposition to WSFS s Motion for Partial Summary Judgment, and in Support of its Cross-Motion for Partial Summary Judgment, dated April 25, 2016 ( CEC Br. ). The accompanying Affidavits of William J. Miller and Jerry Lin and Supplemental Affidavits of Lindsay Kwoka and David Sambur are referred to as Miller Aff., Lin Aff., Kwoka Supp. Aff., and Sambur Supp. Aff. Indenture _ refers to the Indenture (Wright Aff. Ex. A). WSFS Opp. refers to WSFS s (1) Reply in Support of its Motion for Partial Summary Judgment and (2) Opposition to CEC s Cross-Motion for Summary Judgment, dated May 24,

11 2. reorganization of CEOC s debt or practically impair Noteholders prospects of repayment. Infra Part I. Next, WSFS s argument that the 5% Sale did not terminate the Guarantee relies almost entirely on a reading of and that would require the Court to ignore hornbook law in New York and elsewhere, context, commercial reasonableness, and the extrinsic evidence all of which compel the conclusion that, in Section 12.02(c)(i)-(iii), and operates disjunctively. Indeed, even Black s Law Dictionary, until it stopped defining it, recognized that and is [s]ometimes construed as or. Black s Law Dictionary 86 (6th ed. 1990). As a fallback, WSFS attacks the 5% Sale as a sham, but the undisputed facts belie this assertion. Infra Part II. Finally, irrespective of how the Court construes Section 12.02(c)(i)- (iii), and regardless of whether the 5% Sale released the Guarantee (it did), CEC is entitled to judgment on WSFS s contract claims because CEOC validly elected to release the Guarantee under the Existing Notes Clause. WSFS argues that CEOC s election was ineffective because, first, CEC s guarantee of three series of Existing Notes remained in effect and, second, CEC had repudiated the Guarantee (thus disqualifying CEOC from electing to release it). WSFS is incorrect. The Existing Notes guarantees were all released by the discharge of those notes, each of the May 2014 Transactions, and/or the August 2014 Transaction (which provided $582

12 3. million in debt relief to CEOC and was not, as WSFS contends, a sham). And, contrary to WSFS s assertion, CEC did not den[y] or disaffirm[] the Guarantee, and thereby commit an Event of Default, by announcing on May 6, 2014 (the May 6 Filing ) that the 5% Sale had released the Guarantee. That announcement stated CEC s reading of the Indenture s release provision; it was not a repudiation by CEC of the Guarantee. Nor was it a material breach of the Indenture, let alone a material breach by CEOC (which never had any Guarantee obligations) barring it from making its election under the Existing Notes Clause. Infra Part III. For these reasons, and those stated below and in CEC s opening brief, the Court should grant CEC s cross-motion for partial summary judgment.

13 4. ARGUMENT I. THE GUARANTEE S RELEASE ACCORDED WITH THE TIA. reasons set forth below. 2 CEC is entitled to judgment on WSFS TIA claim (Claim X) for the A. WSFS Cannot Prove a Violation Under the Traditional Reading of Section 316(b). Under the TIA s traditional reading, WSFS s claim fails because there has been no amendment to any Indenture term particularly any principal, interest, or maturity term. Nor has the Noteholders or WSFS s legal right to sue for payment been abridged. CEC Br Of the Guarantee Transactions, the only one to modify any CEOC bond indentures was the August 2014 Transaction and it amended the Series 7 and 8 notes indentures, not the WSFS Indenture. 2 WSFS did not seek judgment on its TIA claim. But to prevail on that claim, WSFS must establish its standing to assert it. As CEC demonstrated elsewhere, Kwoka Supp. Aff. Ex. B, to establish TIA standing, a trustee must demonstrate that the noteholders it represents (i.e., current holders) held their notes when the claimed impairment occurred. See Bluebird Partners, L.P. v. First Fid. Bank, N.A. N.J., 85 F.3d 970, 974 (2d Cir. 1996) (rejecting automatic assignment of claims and holding that TIA protects those who are injured, including those who have sold their securities at a reduced price after the Act has been violated, not those who subsequently purchase securities at the reduced price (citation omitted)). Any claim by WSFS for TIA damages would also require evidence never offered by WSFS that the Guarantee Transactions caused Noteholders out-of-pocket losses. See Royal Park Invs. SA/NV v. HSBC Bank USA, N.A., 109 F. Supp. 3d 587, 600 (S.D.N.Y. 2015) (Scheindlin, J.).

14 5. Nevertheless, WSFS argues that the release of a guarantee impairs noteholders legal right to payment and violates Section 316(b) even when the indenture permits the guarantee s release and the release is effectuated pursuant to the indenture s pre-existing terms. WSFS Opp WSFS is incorrect. Since the TIA s enactment in 1939, no court has ever held that a release of a guarantee without unanimous noteholder consent per se violates the TIA, and WSFS s cases reject that proposition. Marblegate I recognized that releases of guarantees through automatic or majority-vote provisions are commonplace, and that a per se prohibition of guarantee releases would go too far. 75 F. Supp. 3d at 612 n.14, ( One can imagine contexts where clauses that provide for the release of the Parent Guarantee can be invoked without implicating Section 316(b). ). BOKF, N.A. v. Caesars Entertainment Corp., 2015 WL (S.D.N.Y. Aug. 27, 2015), ruled that the mere release of the Guarantee, standing alone, does not prove an impairment under Section 316(b). Id. at *8. As the undisputed expert evidence herein has established, guarantee release events are ubiquitous, Gadsden Aff. 15 a point confirmed by a well-regarded bankruptcy commentator. 3 Thus, WSFS s theory, if adopted, would have grave implications 3 See Ben H. Logan, The Trust Indenture Act, Debt Restructuring and Reorganization Tourism (Part I), 36 Bankr. L. Letter 1, 15 (Mar. 2016)

15 6. for the bond market, and would deter the use of guarantees. Even courts that have construed Section 316(b) broadly have sought to avoid such disruptive outcomes. Marblegate I warned that Section 316(b) should not be construed to condemn widespread market practice. 75 F. Supp. 3d at 612 n.14. WSFS argues that a guarantee is a standalone indenture security the release of which impair[s] noteholders payment rights in violation of the statute. WSFS Opp WSFS also argues that guarantees are core indenture terms, the release of which pursuant to a release provision is undeniably a modification of a core term in violation of Section 316(b). Id. 87 n.31. The Court should reject WSFS s radical construction. 4 (... continued) (Kwoka Aff. Ex. J) (noting that [i]nnumerable indentures qualified under the TIA by the SEC have included releasable guarantees, and that if release provisions were per se unlawful then the SEC should have issued stop orders whenever these indentures were filed with it ). 4 Citing reports that CEC has lobbied to amend the TIA, WSFS asserts that CEC knows it cannot release the Guarantee. WSFS Opp. 64 n.22. The Court should disregard WSFS s statement because it relies entirely on inadmissible hearsay; lobbying is constitutionally protected, and evidence that chills such a right is presumptively prejudicial, U.S. Football League v. Nat l Football League, 634 F. Supp. 1155, 1181 (S.D.N.Y. 1986); and it is irrelevant. There is no inconsistency between CEC s lobbying to clarify the TIA following what it considers a misplaced judicial interpretation of the statute (which postdated the Guarantee Transactions), and its belief that the TIA permitted those transactions.

16 First, CEC could not have impaired noteholders rights by acting as the Indenture prescribes. To determine what noteholders rights are, a court must 7. start with the indenture defining them. 5 If the indenture provides that a full and unconditional guarantee will expire after five years, the noteholders rights have not been impaired or modified when the guarantee expires on schedule. Here, the Indenture s provision for the Guarantee s release in specified circumstances defeats WSFS s assertion that the Guarantee s release in those circumstances impaired Noteholders rights. Second, no court has ever held that a guarantee is an indenture security for purposes of the TIA. The TIA defines that term as any security issued or issuable under the indenture to be qualified, and security is separately defined by the Securities Act of 1933, 15 U.S.C. 77ccc(1), (11). In examining whether an instrument is a security, courts look to its economic substance. See Reves v. Ernst & Young, 494 U.S. 56, 61, (1990); United Hous. Found., Inc. v. Forman, 421 U.S. 837, 848 (1975). Under this principle, [t]here is little doubt that a guaranty, in and of itself, does not constitute a security under the federal securities law because it is merely an agreement to repay a loan to the lender 5 See Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986) ( the relationship between a corporation and its debt holders is contractual, and the parties rights are spelled out in the contract)..

17 should the borrower default. Coan v. Bell Atl. Sys. Leasing Int l, Inc., 813 F. Supp. 929, 935 (D. Conn. 1990) (quoting James v. Meinke, 778 F.2d 200, (5th Cir. 2005)). 6 Under this authority, the Guarantee a contingent, terminable right that could not be purchased or sold separately from the Notes is not a security. Indeed, WSFS s primary basis for labeling the Guarantee a security is that, under the Indenture, CEC is an obligor. WSFS Opp But that says nothing about the Guarantee s status under the TIA. And as noted in an exhaustive analysis of the TIA, if WSFS were correct, no TIA qualified indenture could ever allow the release of a guarantee because any such release would obliterate the holder s payment rights from the guarantor. Logan, supra n.3, at 14. Third, no court has ever held that a bond guarantee is a core term. CEC Br Courts and bond market experts have consistently identified core terms as those governing a note s principal, interest, and maturity. Any other rule would undermine market practice by precluding parties negotiating bond 6 See also Haberman v. Wash. Pub. Power Supply Sys., 744 P.2d 1032, 1048 (Wash. 1987) (en banc) (guarantee of bond was not an independent security where it was neither sold, nor marketed, and could not have been purchased apart from the bonds ), amended by 750 P.2d 254 (Wash. 1988); Woods v. Homes & Structures of Pittsburg, Kan., Inc., 489 F. Supp. 1270, 1294 (D. Kan. 1980) (similar).

18 indentures from agreeing to include guarantees terminable by non-unanimous noteholder vote. Id Because the Guarantee s release pursuant to the Indenture did not impair Noteholders legal rights, the Court should enter judgment for CEC. B. The Court Should Reject the Expanded Reading of Section 316(b). WSFS fails to rebut CEC s showing, id , that reading Section 316(b) to protect noteholders practical ability would impose an unworkable standard that is without support in the statute s text, legislative history, and case law. 1. WSFS Disregards the Insurmountable Difficulties Introduced by an Expanded Reading of Section 316(b). By upsetting the market s understanding that the TIA restricted a narrower range of conduct than suggested by Marblegate I and BOKF, those decisions have introduced grave uncertainty into routine corporate financial and operational decisions. CEC Br WSFS minimizes these practical considerations; the Court should not disregard them so lightly. First, WSFS s reading of Section 316(b) in which any practical impairment to noteholders substantive payment rights caused by releases of guarantees or substantial transfers of assets or similar actions violates the TIA, 9.

19 10. WSFS Opp. 72 would expose countless, routine transactions (e.g., issuing or repurchasing debt, or purchasing or selling assets) to TIA scrutiny, regardless of whether they were legal when consummated and designed to benefit all corporate stakeholders. Recognizing this danger, BOKF and Marblegate I attempted to limit the practical ability standard to out-of-court debt reorganizations. See BOKF, 2015 WL , at *4-5; Marblegate I, 75 F. Supp. 3d at 595, WSFS disregards any need for line drawing, and urges a reading of Section 316(b) that would put it in conflict with Delaware law, which provides that [e]ven when a firm is insolvent, its directors may take action that might, if it does not pan out, result in the firm being painted in a deeper hue of red. Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 174 (Del. Ch. 2006), aff d sub nom. Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007). Second, WSFS asserts, incorrectly, that reading Section 316(b) expansively has caused no market disruption. WSFS Opp In fact, out-ofcourt restructurings of public debt have largely ground to a halt and law firms have been reluctant to provide opinion letters on transactions involving asset transfers by the issuer, releases of third-party guarantees, and/or related indenture amendments. Logan, supra n.3, at 1. Denying this, WSFS insists that out-of-court distressed debt exchanges have increased since 2014, WSFS Opp. 83, but the Moody s report it relies on, Transmittal Affidavit of Jason C. Wright, dated May

20 11. 24, 2016 ( Wright Supp. Aff. ), Ex. 30, does not address whether Marblegate I and its progeny have disrupted the market. 34 of the 62 of exchanges Moody s references are not even subject to the TIA, and five of the 28 exchanges involving TIA-qualified debt have already been challenged on TIA grounds. 7 Lin Aff. 4-7; Kwoka Supp. Aff. Ex. C. Finally, WSFS argues that it is no cause for concern if an expanded reading of the TIA spawns more bankruptcy filings because Congress welcomed that prospect in enacting the TIA. WSFS Opp WSFS s view cannot be squared with established public policy favoring out-of-court resolutions over value-destructive bankruptcies. CEC Br The Practical Ability Standard Is Unsupported by Section 316(b) s Text. CEC demonstrated that Section 316(b) provides merely that the right the legal entitlement to receive payment, and institute suit therefor, shall not be impaired or affected. CEC Br Casting aside this showing as too technical, WSFS asks the Court to focus on the phrase impaired or 7 WSFS s co-counsel of record (Jones Day) represents the defendant in one of these cases. That defendant recently argued that the better reading of the statute is a narrow one, Kwoka Supp. Aff. Ex. D at 12 n.7, and represented that the expanded reading of the TIA has already produced a parade of horribles, as evidenced by recent challenges to routine debt-fordebt exchanges. Id. at 17 n.11.

21 affected, which it construes broadly. WSFS Opp According to WSFS, the TIA is violated anytime a bondholder s right to receive payment is weakened, diminished or influenced in some way. Id. 62. That is wrong. In seizing on impaired or affected, and dismissing the word they modify, WSFS substitutes right in Section 316(b) with ability. If that is what Congress intended, it could have replaced right with a word that referred to the practical effect of one s conduct. That it did not do so is fatal to WSFS s interpretation. See Engine Mfrs. Ass n v. S. Coast Air Quality Mgmt. Dist., 541 U.S. 246, 252 (2004) ( Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose. (citation and punctuation omitted)) Section 316(b) s Legislative History Confirms Its Narrow Scope. The TIA s two main proponents William Douglas and Edmund Burke explained that Section 316(b) was intended to prevent nonconsensual changes to indenture payment terms, nothing more. CEC Br WSFS WSFS also argues that reading right as legal right would render Section 316(b) virtually meaningless. WSFS Opp Not so. By prohibiting the impairment of a right, Section 316(b) protects minority bondholders from modifications of principal, interest, and maturity terms without their consent. CEC Br. 54,

22 13. dismisses these authoritative statements as snippets from the legislative history, WSFS Opp. 65, but cannot explain why the history supports its own reading. WSFS highlights Douglas s statement that the TIA was meant to prevent [e]vasion of judicial scrutiny of the fairness of debt-readjustment provisions. WSFS Opp. 68. But this reference immediately followed Douglas s testimony that the TIA merely restricts the power of the majority to change an indenture s payment terms. Kwoka Aff. Ex. Q at 35. Thus, Douglas must have been referring to a plan that revised a noteholder s legal right to receive principal and interest when he used the phraseology debt-readjustment plan because WSFS s reading guts Douglas preceding statement to which this sentence refers. Logan, supra n.3, at 18. WSFS also argues that two major change[s] between the 1938 and 1939 versions of the statute confirm its reading. WSFS Opp WSFS is incorrect. Neither of the changes requiring that indentures contain certain provisions, and clarifying that the TIA protected the rights to receive payment of principal and interest and initiate suit to enforce such payment, id. 70 supports WSFS s reading. Nor could they, because the 1938 and 1939 bills shared the same.

23 goal. Kwoka Aff. Ex. R at 1 (statement by Congressman Cole that 1939 bill s specific provisions mirrored those in the 1938 bill); CEC Br Only a Handful of Courts Have Embraced an Expanded Reading of Section 316(b). In an effort to portray the expanded reading of Section 316(b) as the majority rule, WSFS relies on Oaktree Capital Mgmt., LLC v. Spectrasite Holdings, Inc., 2002 WL (D. Del. June 25, 2002). WSFS Opp But Oaktree does not support WSFS s position as WSFS s lawyers at Jones Day, who are familiar with the case from having litigated it (when they were at another firm), should know. There, the plaintiff sought to enjoin a tender and exchange offer on Section 316(b) grounds. The court denied the application, and did not, as WSFS claims, analyze[]... the text and purpose of the TIA in detail. WSFS Opp. 71. Rather, it summarized the parties arguments and said it would not address the TIA issue, 2002 WL , at *4. Oaktree did not rule on Section 316(b). Nor has it been cited by any court anywhere for any proposition. Accordingly, the Court should not, as WSFS urges, disregard one of CEC s cases, Magten Asset Management Corp. v. Northwestern Corp., 313 B.R WSFS claims that Burke s testimony supports a reading that the TIA protects the practical ability to be paid. WSFS Opp. 70 n.24. Burke s testimony that [a]ll [Section 316(b)] does is preserve the individual holders right to bring an action at law to collect his interest and principal, Kwoka Aff. Ex. R at 284 (emphasis added), belies this.

24 595 (Bankr. D. Del. 2004), because it ignored Oaktree, WSFS Opp. 79. The Court should also reject WSFS s attempt, id , to distinguish RBC Capital Markets, LLC v. Education Loan Trust IV, 2011 WL (Del. Ch. Dec. 6, 2011). The decision is on point: it rejects the notion that 316(b) protects against practical impairments. See id. at *5. WSFS s attempt to distinguish Greylock Global Opportunity Master Fund Ltd. v. Province of Mendoza, 2005 WL (S.D.N.Y. Feb. 8, 2005), aff d, 162 F. App x 85 (2d Cir. 2006), because it did not mention the TIA and construed an indenture containing different language than 316(b), WSFS Opp. 82, also fails. The relevant provision in the Greylock indenture (governing sovereign debt not subject to the TIA) is materially identical to Section 316(b), compare 2005 WL , at *4 (section 4.6), with 15 U.S.C. 77ppp(b), and was derived from Section 316(b), Kwoka Supp. Aff. Ex. E at *23. C. Even Under an Expanded Reading of Section 316(b), WSFS Cannot Sustain Its TIA Claim. None of the Guarantee Transactions individually or collectively constituted a debt reorganization that impaired Noteholders payment rights. 1. The Guarantee Transactions Did Not Constitute a Debt Reorganization. BOKF identified three issues relevant to whether an out-of-court reorganization has occurred: [1] did the transactions involve the restatement of 15.

25 16. assets and liabilities, [2] did CEOC hold talks with creditors in order to make arrangements for maintaining repayments, and [3] did the transactions attempt to extend the life of a company facing bankruptcy through special arrangements and restructuring? 2015 WL , at * Applying these criteria, it is clear that the Guarantee was not released as part of a reorganization. First, none of the Guarantee Transactions involved a restatement of assets and liabilities. Sambur Supp. Aff WSFS does not dispute this. Second, any negotiations with CEOC creditors concerning the Guarantee Transactions involved only those individual transactions, and did not entail comprehensive discussions with anything like the full spectrum of CEOC s creditors. Cf. Marblegate I, 75 F. Supp. 3d at (describing negotiations with creditor committee holding more than 80% of issuer s debt); Federated Strategic Income Fund v. Mechala Grp. Jamaica, Ltd., 1999 WL , at *2 (S.D.N.Y. Nov. 2, 1999) (describing a creditor committee engaged in talks concerning how to initiate a winding-up of the company ). The 5% Sale involved 10 Given BOKF s view of Section 316(b) s legislative history, its criteria are best understood as analogous to features of formal Chapter 11 proceedings. See 2015 WL , at *10 (emphasizing the need for protections outside the formal mechanisms of debt restructuring (citation and punctuation omitted))..

26 17. three investors; the 6% Stock Transfer involved none; 11 and the August 2014 Transaction involved four Series 7 and 8 noteholders. Sambur Supp. Aff. 8, 11, 13. Third, although BOKF does not define special arrangements or restructuring, any plan to accomplish an out-of-court restructuring of all of an issuer s debt, 2015 WL , at *11, would have to be undertaken through an agreement that, at minimum, describes a comprehensive reorganization binding all relevant stakeholders and detailing how the company s value will be distributed, cf. Philip R. Wood, Principles of International Insolvency (2d ed. 2007) (discussing private restructuring agreements). 12 Here, the Guarantee Transactions involved no plan for reallocating value among CEOC s stakeholders, Sambur Supp. Aff. 12, 14, and WSFS does not assert otherwise. 13 At most, WSFS 11 Even the B-7 Refinancing that WSFS references, WSFS Opp. 90, concerned only a fraction ($1.75 billion) of the 21 tranches of nearly $18 billion in CEOC debt at the time. Kwoka Supp. Aff. Ex. F at Analogs for such agreements can be found in Chapter 11 proceedings in which the reorganization is subject to a comprehensive plan. See 11 U.S.C. 1121, The guarantee releases in Marblegate I and Federated were undertaken in connection with such agreements. Marblegate I, 75 F. Supp. 3d at ; Federated, 1999 WL , at * WSFS refers to CEC s retention of Blackstone and negotiation of a restructuring agreement with certain CEOC creditors in the fall of WSFS Opp But the Guarantee Transactions were not part of the independent negotiations with different creditor constituencies that resulted.

27 claims that the August 2014 Transaction violated 316(b) because a whereas clause in an ancillary CEC-CEOC agreement refers to it as a restructuring. WSFS Opp. 91. If WSFS were correct, any transaction involving TIA-qualified debt described in a recital as a restructuring could be subject to TIA liability. That was not what BOKF and Marblegate I intended when they sought to limit Section 316(b) s reach The Guarantee s Release Did Not Impair Noteholders Payment Rights. WSFS cannot sustain its TIA claim because it has failed to demonstrate that the Guarantee Transactions practically impaired Noteholders rights. BOKF ruled that impairment... must be evaluated as of the date that payment becomes due, 2015 WL , at *5, not when the challenged transaction occurred. Because this approach could subject transactions that were lawful when completed, at a time when the issuer could pay its debts to unforeseeable, retrospective TIA scrutiny months or years after the fact, CEC respectfully submits that, even under an expanded reading of the TIA, impairment 18. (... continued) in CEOC s Restructuring and Forbearance Agreement in December Sambur Supp. Aff Far from being a reorganization, the August 2014 Transaction bound participating noteholders to support a future reorganization, should one ever occur. Kwoka Supp. Aff. Ex. G at CEC-NOTEHOLDER_

28 should be evaluated as of when the transaction occurred. But here, the evaluation date is immaterial because WSFS has not shown that the Guarantee Transactions impaired Noteholders payment rights at any point. There is no proof that the Guarantee was a meaningful source of recovery for the Noteholders. As of April 2014, CEC guaranteed over $17 billion of CEOC s debt far more than its $174.6 million in cash or $2.6 billion market capitalization. Sambur Supp. Aff. 4. WSFS has made no attempt to show that an effective Guarantee enhanced CEOC s ability to repay the Notes relative to the improvement in CEOC s capacity to pay created by its receipt of nearly $2 billion of new B-7 term loans for which the Guarantee s release was a condition. Id WSFS s contention that the Guarantee s release impaired Noteholders payment rights is entirely speculative. II. EACH OF THE MAY 2014 TRANSACTIONS TERMINATED THE GUARANTEE. WSFS predicates its contract claims upon a flawed construction of the word and, insisting in disregard of hornbook law in New York and elsewhere that it applies conjunctively regardless of context, business sense, and the extrinsic evidence. 19.

29 20. A. WSFS s Reading of Section 12.02(c) Is Commercially Unreasonable and Inconsistent With the Indenture. WSFS argues that its reading of Section 12.02(c)(i)-(iii) is reasonable because it preserves the guarantee... where the Notes have not been fully repaid and discharged, and where holders... remain at risk of nonpayment. WSFS Opp. 16. WSFS s argument makes no sense, both because it cannot be squared with the Indenture s actual terms and because Section 12.02(c) specifically contemplates the Guarantee s release in scenarios that would leave Noteholders exposed to the risk of nonpayment. 15 First, WSFS concedes that discharge of the Notes eliminates the Guarantee. WSFS Opp. 15. Yet its reading would preserve the Guarantee even upon discharge (the Third Release Event), unless the other two Release Events occur. Second, there would be no need for Section 12.02(c) if the Guarantee was intended to survive until holders... have no risk of nonpayment. Section 15 WSFS argues that absurdity, not commercial unreasonableness, is the relevant standard. WSFS Opp But as CEC explained, CEC Br , a conjunctive interpretation is indeed absurd because it would deprive CEC of its right to release the Guarantee, leaving Section 12.02(c) with no obvious purpose.

30 (g) (stating the Note Guarantee shall remain in full force... until payment in full of all the Guaranteed Obligations ) would have sufficed. Third, WSFS s reading is irreconcilable with the Existing Notes Clause. If CEC s guarantee of the Existing Notes terminates (as in fact happened), CEOC can release the Guarantee even if Noteholders remain exposed to the risk of nonpayment. Fourth, defeasance (the Third Release Event) effectively eliminates the risk of nonpayment. CEC Br. 38; Gadsden Aff Following defeasance, preserving the Guarantee until the occurrence of the other Release Events would provide Noteholders no incremental benefit. Fifth, ignoring that the undeniable purpose of Section (captioned Limitation on Liability ) is to allow the Guarantee s termination and limit CEC s liability thereunder, WSFS assigns Section 12.02(c) a role played by other Indenture provisions. Other than imposing certain financial tests, Section 12.02(c) does not, as WSFS contends, protect Noteholders by regulating CEOC asset sales. WSFS Opp Sections 4.06 and 4.07 and fraudulent conveyance law address the circumstances in which CEOC can sell assets. Finally, WSFS s assertion that Section 12.02(c) safeguards Noteholders from the risk of nonpayment by making the Guarantee difficult to release, WSFS Opp. 17 & 19 n.9, ignores that there is no proof that the Guarantee

31 22. was designed to provide meaningful credit support and considerable proof to the contrary. For example, it speaks volumes that the Indenture places no restrictions on actions by CEC that would cripple its ability to satisfy the Guarantee. CEC Br. 14. B. The Meaning of And Depends on Context. New York courts (and, as noted, Black s Law Dictionary) interpret and disjunctively when doing so is compelled by context or necessary to effectuate the parties intent, or where a conjunctive reading would yield commercially unreasonable results. CEC Br Nevertheless, WSFS argues that the Indenture invariably uses and conjunctively, particularly in clauses (including Section 12.02(c)) containing lists of conditions. WSFS Opp. 7. But WSFS cites no authority for this construction and its examples, id., do not support it. Each describes sequential, logically interdependent conditions e.g., Section 8.01(a) permits the discharge of the Notes when (i) the Notes have been delivered to WSFS for cancellation, (ii) all sums due have been paid, and (iii) CEOC has confirmed the satisfaction of all conditions precedent to discharge. The and here is conjunctive because these conditions are 16 The cases WSFS cites in arguing that and is always conjunctive, WSFS Opp , are inapposite because a conjunctive reading in those cases accorded with the parties intent, CEC Br

32 23. interlinked and (in contrast to Section 12.02(c)(i)-(iii)) it would make no sense to read them disjunctively. Disputing CEC s showing that certain Indenture provisions (as well as the Constitution s Impeachment Clause) use and disjunctively, CEC Br , WSFS relying on made-up, ad hoc rules of construction argues that these clauses list types of things that fit within... a definition or category, and that common usage dictates that such a list, separated by and signifies that all (each and every one) of the items listed are included... WSFS Opp. 7-8 (emphasis original). But WSFS cannot explain why Section 12.02(c)(i)-(iii) is not a list of events each and every one of which suffices to terminate the Guarantee. Further, like Section 12.02(c)(i)-(iii), each of the examples cited by CEC would make sense and, indeed, have the same meaning if they had used or, not the each and every one form of and. 17 Finally, WSFS argues that the Court should not consider commercial reasonableness in determining whether and is disjunctive. WSFS Opp WSFS also argues that upon precedes lists of conjunctive conditions. WSFS Opp But there is a distinction between the use of upon in upon (i), (ii), and (iii) (where the enumerated clauses are logically distinct and formatted as separate subparagraphs) and in Section 12.02(c) s final paragraph (providing for the Guarantee s release upon the election of [CEOC] and Notice to the Trustee ). In the latter, upon only modifies the election of [CEOC], and, in any event, election and notice can logically occur as sequential steps in the same act.

33 Its cases do not support that view. Rather they state the irrelevant proposition that courts should not adopt commercially reasonable constructions that conflict with unambiguous terms. Here, it is entirely proper for the Court to consider whether it is commercially reasonable to read and disjunctively because the word admits of different meanings depending on its use. WSFS argues that reasonableness considerations are employed only after a finding of ambiguity. WSFS Opp. 13. But [t]he meaning of words... commonly depends on their context and the rules of construction do not depend upon any determination that there is an ambiguity, but are used in determining what meanings are reasonably possible as well as in choosing among possible meanings. Restatement (Second) of Contracts 202 cmts. a, b (1981). C. The Extrinsic Evidence Is Uncontroverted, Admissible, and Supports Judgment for CEC. Even if the Court deems Section 12.02(c) ambiguous, it may consider the extrinsic evidence, which one-sidedly supports CEC s reading. CEC Br Indeed, WSFS has not offered evidence that anyone ever construed Section 12.02(c) conjunctively, and its arguments for excluding CEC s evidence are without merit WSFS also argues that the Court should disregard the extrinsic evidence, and resolve any ambiguity against CEC because it is the Indenture s drafter. WSFS Opp But even if CEC had single-handedly drafted the.

34 Testimony from the Indenture s Negotiators Is Admissible and Unequivocally Supports CEC s Interpretation. The testimony of two witnesses involved in negotiating the Indenture Miller and Sambur confirms that the parties intended for Section 12.02(c)(i)-(iii) to operate disjunctively. CEC Br , The Court may consider their testimony in adjudicating the meaning of Section 12.02(c) if it deems that provision ambiguous. See Webb v. GAF Corp., 936 F. Supp. 1109, 1123 (N.D.N.Y. 1996) (admitting negotiators testimony regarding their subjective understanding of provision where it was both competent and helpful to the triers of fact ). WSFS argues that Miller and Sambur s testimony is inadmissible because it reflects their uncommunicated, after-the-fact understanding. That is not the law. See SR Int l Bus. Ins. Co. v. World Trade Ctr. Props., LLC, 467 F.3d 107, 126 (2d Cir. 2006) ( [A] party s subjective understanding, while not controlling, may shed light on the... negotiations and could bear on that party s objective actions. ). Moreover, Miller expressed his understanding (... continued) Indenture (it did not), courts reject this approach where extrinsic evidence is available. See Albany Sav. Bank, FSB v. Halpin, 117 F.3d 669, 674 (2d Cir. 1997) (extrinsic evidence should be considered before construing ambiguity against the drafter).

35 26.. Miller Aff. 6-9; Kwoka Supp. Aff. Ex. H 92: WSFS also urges the exclusion of Miller and Sambur s testimony because they are agents of CEC. WSFS Opp But their purported loyalties do not go to the admissibility of their testimony. Moreover, Miller s clients were not CEC and CEOC s agents. Miller Aff The Parties Practical Construction of the Indenture Resolves Any Ambiguity. The Court may also consider evidence that the parties, in practice, treated Section 12.02(c)(i)-(iii) disjunctively. See Ocean Transp. Line, Inc. v. Am. Philippine Fiber Indus., Inc., 743 F.2d 85, 91 (2d Cir. 1984) ( The parties interpretation of the contract in practice... is compelling evidence of the parties intent. ). Here, CEC s reading of Section 12.02(c) is corroborated by its filing consolidated financial statements with CEOC before the 5% Sale and separate financials after. CEC Br Also, the Notes Offering Memorandum which WSFS concedes is admissible, WSFS Opp. 35 disclosed that the Release 19 WSFS argues that CEC s reading conflicts with Regulation S-X (which permitted CEOC to file consolidated financials) because a terminable guarantee cannot be unconditional, as the regulation requires. WSFS Opp But as BOKF recognized, a guarantee can be both unconditional and releasable, 2015 WL , at *7..

36 Events are disjunctive, CEC Br. 44, and that the Guarantee is subject to limitations, including the absence of covenants restricting CEC s conduct, Wright Aff. Ex. H at This demonstrates that the parties read Section 12.02(c) disjunctively. 3. Evidence of Industry Usage Confirms CEC s Reading. Affidavits from qualified market experts also support CEC s reading of Section 12.02(c). CEC Br See Omni Berkshire Corp. v. Wells Fargo Bank, N.A., 307 F. Supp. 2d 534, 540 (S.D.N.Y. 2004) ( evidence of trade usage may be used to ascertain the intent of the parties ). WSFS attacks these affidavits as thinly veiled attempts to interpret the Indenture and for not establishing a uniform trade practice. WSFS Opp Its criticisms are baseless. None of the affiants provides a legal construction of the Indenture. Each provides a business perspective, informed by decades of experience, concerning the commercial implications of WSFS s reading of Section 12.02(c). Gadsden Aff. 1-5; Grien Aff. 1-4; Reifsnyder Decl WSFS cites no authority barring the Court from considering this evidence. Moreover, whether these affidavits reflect market understanding does 27. not determine their admissibility in the first instance. 20 And it is particularly 20 This is evident from WSFS s cases, WSFS Opp. 33, in which the court considered the expert testimony to determine whether it established a trade usage. See Belasco Theatre Corp. v. Jelin Prods., Inc., 270 A.D. 202, 204

37 28. important when construing a bond indenture for the Court to consider such evidence. See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982) ( [U]niformity in interpretation [of indentures] is important to the efficiency of capital markets. ); Dale B. Tauke, Should Bonds Have More Fun? A Reexamination of the Debate over Corporate Bondholder Rights, 1989 Colum. Bus. L. Rev. 1, 136 (urging a detailed inquiry as to what the market understood of the provision in question in bond contract disputes). In any event, as each affiant articulated, the commercially reasonable interpretation of Section 12.02(c) is disjunctive. Gadsden Aff. 3-6, 17-33; Grien Aff. 1-3, 19-38; Reifsnyder Decl Corroborated by market analysts reports and internal analyses by CEOC noteholders, CEC Br. 17, this evidence which WSFS failed to rebut, despite having nearly two years to solicit the views of market experts is admissible to show how the market understood that provision. D. The 5% Sale Was Not a Sham. WSFS argues that even if the Release Events operate disjunctively, the 5% Sale was a sham and did not terminate the Guarantee. WSFS Opp. 48- (... continued) (N.Y. App. Div. 1st Dep t 1945); see also British Int l Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78, 84 (2d Cir. 2003).

38 The undisputed facts belie WSFS s assertion. 21 The 5% Sale had economic substance, was undertaken for a valid business purpose and in accord with the Indenture, and was negotiated at arm s length: The 5% Sale was undertaken in connection with the B-7 Refinancing, under which CEOC raised $1.75 billion in new term loans, enabling it, inter alia, to repay all of its outstanding debt maturing in Sambur Supp. Aff The B-7 Refinancing was conditioned on CEC exercising its right under various indentures including the Indenture to release the Guarantee by selling CEOC shares to third parties so that CEC s guarantee of the B-7 debt would not be diluted by CEC s bond guarantee. 22 Id. 6; Kwoka Supp. Aff. Ex. I at 198:15 200:19, 485:9 486:2. 21 WSFS s authorities are distinguishable; in all of them, the transaction lacked independent economic substance or was a fraudulent transfer. Kirchman v. Commissioner, 862 F.2d 1486 (11th Cir. 1989), determined that a taxpayer, who had undertaken transactions involving no economic risk, was not entitled to a deduction because the tax code forbids deductions for transactions lacking economic substance. Id. at The Indenture includes no provisions analogous to the tax code. Also, Kirchman does not suggest that contractually permitted transactions involving real consideration are shams merely because they extinguish a party s obligations under another contract. See also CIT Grp./Commercial Servs., Inc. v Jamaica Ave. Ltd. P ship, 25 A.D.3d 301, (N.Y. App. Div. 1st Dep t 2006) (payment under a handshake lease was a sham absent proof of a bona fide debt to landlord); Kineon v. Bluegrass Elkhorn Coal Corp., 121 A.D.2d 980, (N.Y. App. Div. 1st Dep t 1986) (owners could not invoke provision releasing guarantee upon debtor s receipt of new financing where owners made loans to debtor, offset by loans by debtor to owners). 22 Citing the CEOC bankruptcy examiner s report, WSFS asserts that CEC, not the B-7 lenders, championed the Guarantee s termination. WSFS Opp. 48. WSFS s assertion is based on inadmissible hearsay and opinion and should be disregarded. See WM High Yield Fund v. O Hanlon, 964 F. Supp. 2d

39 30. To satisfy this condition, on May 5, 2014, CEC sold 5% of CEOC s stock to three unaffiliated investors, for a total of $6.15 million (the 5% Sale). Sambur Supp. Aff. 8. Before completing this sale, CEC retained an independent advisor (Blackstone) to advise on capital structure items, liquidity, things like that concerning [a]ny of the entities under CEC. Kwoka Supp. Aff. Ex. I at 193:18 24; Wright Supp. Aff. Ex. 10. That included the potential sale of CEOC equity. Wright Supp. Aff. Ex. 12. Blackstone Id. at CEC-NOTEHOLDER_ ; Kwoka Supp. Aff. Ex. J at BAP Blackstone concluded Kwoka Supp. Aff. Ex. K at 126:19 128:13. Arm s length negotiations between CEC and the buyers determined the value of CEOC s shares. Kwoka Supp. Aff. Ex. I at 250:7 22, 493:15 494:19; id. Ex. L at 129:3-13; id. Ex. M at 64:13 65:17, 97:16 21; id. Ex. N, at 56:9 23. While the buyers held other Caesars investments, they were unaffiliated with CEC or its private equity sponsors. Sambur Aff. 9.. Kwoka Supp. Aff. Ex. N at 69:4 13, 90:13 112:23 & Ex. M at 61:7-20, 89:5 94:24. As part of a separate note purchase connected with the B-7 Refinancing, CEOC repurchased Series 6 notes held by Chatham.. Kwoka Supp. Aff. Ex. N at 53:2 20; id. Ex. O 3.1; compare id. Ex. P, with Ex. Q. (... continued) 368, 398 (E.D. Pa. 2013) (examiner s findings and conclusions were inadmissible hearsay and opinion testimony ).