Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 1 of 33 PageID #:8795

Transcription

1 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 1 of 33 PageID #:8795 No. 1:15-cv UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION IN RE: CAESARS ENTERTAINMENT OPERATING COMPANY, INC., ET AL., Debtors. STATUTORY UNSECURED CLAIMHOLDERS COMMITTEE, Appellant, V. CAESARS ENTERTAINMENT OPERATING COMPANY, INC., Defendant-Appellee, AD HOC COMMITTEE OF FIRST LIEN NOTEHOLDERS, UMB BANK, N.A., AND AD HOC COMMITTEE OF FIRST LIEN BANK LENDERS, Intervenor-Appellees. On Appeal from the United States Bankruptcy Court for the Northern District of Illinois (Goldgar, J.) Chapter 11 Case No BRIEF OF APPELLEE AD HOC COMMITTEE OF FIRST LIEN BANK LENDERS Kristopher M. Hansen Kenneth Pasquale Jonathan D. Canfield Jason M. Pierce STROOCK & STROOCK & LAVAN LLP 180 Maiden Lane New York, New York Phone: (212) kpasquale@stroock.com Brian L. Shaw SHAW FISHMAN GLANTZ & TOWBIN LLC 321 North Clark Street, Suite 800 Chicago, Illinois Phone: (312) bshaw@shawfishman.com Attorneys for Appellee Ad Hoc Committee of First Lien Bank Lenders

2 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 2 of 33 PageID #:8796 CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 8012 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ) and Northern District of Illinois Local Rule 3.2, this Appellee (the Ad Hoc Bank Group ) states that it is an ad hoc committee of certain lenders under that certain Third Amended and Restated Credit Agreement, dated as of July 25, 2014 (as amended, modified, and/or supplemented from time to time), among Caesars Entertainment Operating Company, Inc., a Delaware corporation ( CEOC ), as borrower, Caesars Entertainment Corporation, a Delaware corporation ( CEC ), as parent guarantor and pledgor, Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent, and the lenders thereunder from time to time (the First Lien Bank Lenders ). The Ad Hoc Bank Group consists of the following seventeen First Lien Bank Lenders: (i) Aristeia Capital, L.L.C. certifies that it is a wholly-owned subsidiary of Aristeia Holdings, L.P., whose general partner is Aristeia Holdings GP, L.L.C. Further, Aristeia Advisors, L.L.C. acts as General Partner to certain investment entities as to which Aristeia Capital, L.L.C. acts as Investment Manager. No publicly-held corporation owns 10% or more of the equity interests in Aristeia Holdings GP, L.L.C., Aristeia Holdings, L.P., or Aristeia Advisors, L.L.C. -ii-

3 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 3 of 33 PageID #:8797 (ii) Drawbridge Special Opportunities Advisors LLC certifies that 10% or more of its equity interests are indirectly owned by Fortress Investment Group LLC, which is publicly-held. (iii) Franklin Mutual Advisers, LLC, acting on behalf of certain managed funds and/or accounts, certifies that it is indirectly owned by Franklin Resources, Inc., which is publicly-held. (iv) FS Investment Corporation certifies that it is a publicly-held business development corporation. (v) FS Investment Corporation II certifies that it is a non-traded, publiclyoffered business development corporation. No publicly-held corporation owns 10% or more of its equity interests. (vi) FS Investment Corporation III certifies that it is a non-traded, publiclyoffered business development corporation. No publicly-held corporation owns 10% or more of its equity interests. (vii) FS Global Credit Opportunities Fund certifies that it is a non-traded, publicly-offered closed-end fund. No publicly-held corporation owns 10% or more of its equity interests. (viii) GSO Capital Partners LP certifies that it is an indirect wholly-owned subsidiary of The Blackstone Group L.P., which is publicly-held. -iii-

4 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 4 of 33 PageID #:8798 (ix) H/2 Credit Manager LP certifies that it has a single general partner, H/2 Credit Manager GP LLC. H/2 Credit Manager GP LLC does not have a parent company, and no publicly-held corporation owns 10% or more of its equity interests. (x) HG Vora Capital Management, LLC certifies that it is the investment adviser to HG Vora Special Opportunities Master Fund, Ltd. HG Vora Special Opportunities Master Fund, Ltd. is a master fund into which two feeder funds, HG Vora Special Opportunities Fund, Ltd. and HG Vora Special Opportunities Fund LP, and HG Vora (GP) LLC invest. HG Vora (GP) LLC is also the single general partner to HG Vora Special Opportunities Fund LP. No publicly-held corporation owns 10% or more of the equity interests in HG Vora Special Opportunities Fund, Ltd., HG Vora Special Opportunities Fund LP, or HG Vora (GP) LLC. (xi) Invesco Senior Secured Management, Inc., acting on behalf of certain managed funds and/or accounts, certifies that it is indirectly owned by Invesco, Ltd., which is publicly-held. (xii) KKR Credit Advisors (US) LLC certifies that its parent company is Kohlberg Kravis Roberts & Co. L.P. Kohlberg Kravis Roberts & Co. L.P. is an indirect majority-owned subsidiary of KKR & Co. L.P., which is publicly-held. (xiii) Owl Creek Investments I, LLC certifies that it is controlled by Owl Creek Asset Management, L.P., which does not have a parent company, and no -iv-

5 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 5 of 33 PageID #:8799 publicly-held corporation owns 10% or more of the equity interests in Owl Creek Investments I, LLC or Owl Creek Asset Management, L.P. (xiv) OZ Special Master Fund, Ltd. certifies that it is a wholly-owned indirect subsidiary of certain investment funds that are collectively indirectly managed and controlled by the Och-Ziff Operating Group, the indirect owners of which are limited partners and Och-Ziff Capital Management Group LLC, which is publicly-held. (xv) Solus Alternative Asset Management certifies that it has a single general partner, Solus GP LLC. Solus GP LLC does not have a parent company and no publicly-held corporation owns 10% or more of the equity interests in Solus GP LLC. (xvi) Taconic Opportunity Master Fund L.P. certifies that it has a single general partner, Taconic Associates LLC. Taconic Associates LLC does not have a parent company, and no publicly-held corporation owns 10% or more of its equity interests. (xvii) Taconic Master Fund 1.5 L.P. certifies that it has a single general partner, Taconic Capital Partners LLC. Taconic Capital Partners LLC does not have a parent company, and no publicly-held corporation owns 10% or more of its equity interests. -v-

6 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 6 of 33 PageID #:8800 TABLE OF CONTENTS CORPORATE DISCLOSURE STATEMENT... ii TABLE OF CONTENTS... vi TABLE OF AUTHORITIES... vii RESTATED ISSUE ON APPEAL... 1 STATEMENT OF THE CASE... 1 SUMMARY OF ARGUMENT ARGUMENT The Bankruptcy Court Correctly Held That Bankruptcy Code Section 303 Provides CEOC, As The Alleged Debtor, With The Absolute Right To Controvert The Involuntary Petition CONCLUSION vi-

7 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 7 of 33 PageID #:8801 TABLE OF AUTHORITIES CASES Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982) In re Adam Furniture Industries, Inc., 1993 WL (Bankr. S.D. Ga. Dec. 10, 1993) In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596 (7th Cir. 2013) In re Better Care, Ltd., 97 B.R. 405 (Bankr. N.D. Ill. 1989) In re Caesars Entertainment Operating Company, Inc., 2015 WL (Bankr. D. Del. Feb. 2, 2015)... 8, 20 In re Holco Capital Group, Inc., 2011 Bankr. LEXIS 988 (Bankr. N.D. Ind. Mar. 29, 2011)... 17, 18 In re Meltzer, 535 B.R. 803 (Bankr. N.D. Ill. 2015) In re Paczesny, 282 B.R. 646 (Bankr. N.D. Ill. 2002) In re Val W. Poterek & Sons, Inc., 169 B.R. 896 (Bankr. N.D. Ill. 1994) Lamie v. United States Trustee, 540 U.S. 526 (2004) Paradise Hotel Corporation v. Bank of Nova Scotia, 842 F.2d 47 (3d Cir. 1988).. 17 Schmid v. Yorke (In re Reid), 773 F.2d 945 (7th Cir. 1985) United States v. Granderson, 511 U.S. 39 (1994) United States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989) vii-

8 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 8 of 33 PageID #:8802 Water Quality Association Employees' Benefit Corporation v. United States, 795 F.2d 1303 (7th Cir. 1986) STATUTES 11 U.S.C. 303(d) U.S.C. 303(f) U.S.C. 303(h)... 16, U.S.C. 303(i) RULES FED. R. BANKR. P. 1011(b) viii-

9 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 9 of 33 PageID #:8803 RESTATED ISSUE ON APPEAL The issue before the Court is whether a debtor that files a voluntary bankruptcy petition after an involuntary case is commenced against it may controvert the involuntary bankruptcy petition pursuant to Section 303(h) of chapter 11 of title 11 of the United States Code (the Bankruptcy Code ), without being required to first seek bankruptcy court approval under Section 363 or 554 of the Bankruptcy Code. STATEMENT OF THE CASE Summary of Procedural History On January 12, 2015, three creditors (the Petitioning Creditors ) filed an involuntary petition under Section 303 of the Bankruptcy Code against CEOC in the United States Bankruptcy Court for the District of Delaware (the Delaware Court ). 1 On January 15, 2015, CEOC filed a voluntary chapter 11 petition in the United States Bankruptcy Court for the Northern District of Illinois (the Bankruptcy Court ), 2 and the Office of the United States Trustee subsequently 1 App. 1 5 (Involuntary Petition, No (KG) (Bankr. D. Del. Jan 12, 2015), ECF Doc. # 1) [hereinafter Involuntary Petition ]. The Appellant s Appendix is cited as App. [page number]. 2 App (Voluntary Petition, No (ABG) (Bankr. N.D. Ill. Jan. 5, 2015), ECF Doc. # 1) [hereinafter Voluntary Petition ].

10 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 10 of 33 PageID #:8804 appointed the statutory claimholders committee of CEOC (the UCC ). 3 After CEOC determined to controvert the Involuntary Petition filed against it, 4 the UCC moved the Bankruptcy Court to compel CEOC to consent to the involuntary case (the Motion to Compel ) 5 on the basis that CEOC s decision not to acquiesce to the Involuntary Petition constituted an unjustifiable use or abandonment of property of the estate in violation of Bankruptcy Code Sections 363, 554, and 558. At the hearing on the Motion to Compel, the Bankruptcy Court denied the motion for the reasons stated on the record (the Order Denying Motion to Compel ). 6 The UCC moved for reconsideration of the Order Denying Motion to Compel (the 3 App (Amended Appointment of Official Unsecured Creditors Committee, No (ABG) (Bankr. N.D. Ill. Feb. 6, 2015), ECF Doc. # 307); App (Second Amended Appointment of Official Unsecured Creditors Committee, No (ABG) (Bankr. N.D. Ill. Sept. 25, 2015), ECF Doc. # 2298). 4 App (Answer and Affirmative Defenses of Alleged Debtor Caesars Entertainment Operating Company, Inc. to Involuntary Petition, No (ABG) (Bankr. N.D. Ill. Feb. 2, 2015), ECF Doc. # 6) [hereinafter Answer and Affirmative Defenses ]. 5 App (Motion of Statutory Unsecured Claimholders Committee Pursuant to Bankruptcy Code Sections 363(b)(1) and 1107(a) to Compel Debtor to Consent to Involuntary Chapter 11 Petition, No (ABG) (Bankr. N.D. Ill. Apr. 7, 2015), ECF Doc. # 1091). 6 App (Order Denying for the Reasons Stated on the Record Motion to Compel, No (ABG) (Bankr. N.D. Ill. Apr. 29, 2015), ECF Doc. # 1351); App (Apr. 29, 2015 Hr g Tr., No (ABG), at 24:11 25, 25:1 25, 26:1 25, 27:1 6) [hereinafter April 29, 2015 Hearing Transcript ]. -2-

11 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 11 of 33 PageID #:8805 Motion for Reconsideration ), 7 which was likewise denied by the Bankruptcy Court (the Order Denying Motion for Reconsideration and, together with the Order Denying Motion to Compel, the Orders ). 8 Background Facts CEOC is the largest majority-owned subsidiary of CEC, which, together with its affiliates (collectively, Caesars ), is an international casino-entertainment company. 9 In January 2008, Caesars (then known as Harrah s Entertainment, Inc.) was acquired for over $30 billion by certain private equity sponsors (the Sponsors ) in a leveraged buyout (the LBO ). 10 The Sponsors contributed approximately $6.1 billion in cash to fund the LBO, and the remainder was funded through the issuance of approximately $24 billion in debt, approximately $18.4 billion of which remained outstanding when CEOC and its debtor-affiliates filed 7 App (Motion Pursuant to Bankruptcy Rule 9023 of Statutory Unsecured Claimholders Committee to Reconsider Order Denying Motion to Compel Debtor to Consent to Involuntary Chapter 11 Petition, No (ABG) (Bankr. N.D. Ill. May 8, 2015), ECF Doc. # 1351). 8 App (Order Denying Motion of Statutory Unsecured Claimholders Committee to Reconsider (Dkt. No. 1508) and Striking Presentment Date, No (ABG) (Bankr. N.D. Ill. May 11, 2015), ECF Doc. # 1522). 9 App. 36 (Memorandum in Support of Chapter 11 Petitions at 2, No (ABG) (Bankr. N.D. Ill. Jan. 15, 2015), ECF Doc. # 4) [hereinafter Memorandum in Support ]. 10 App. 38 (Memorandum in Support at 4). -3-

12 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 12 of 33 PageID #:8806 voluntary chapter 11 petitions on January 15, The $18.4 billion of funded debt outstanding as of the petition date consisted of: (1) first lien bank debt totaling approximately $5.35 billion; (2) first lien notes totaling approximately $6.35 billion; (3) second lien notes totaling approximately $5.24 billion; (4) subsidiary-guaranteed unsecured debt totaling approximately $479 million; and (5) senior unsecured notes totaling approximately $530 million. 12 The LBO closed at the beginning of the 2008 economic recession. 13 Consequently, Caesars suffered sharp declines in revenue in the ensuing months, followed by steadily decreasing same store revenues in the next several years. 14 Coupled with a substantial debt load, this loss of revenue posed significant operational challenges to the Caesars family of entities. 15 As a result, in the several years preceding their bankruptcy cases, the Caesars entities engaged in over 45 capital market transactions in an effort to restructure their obligations. 16 Caesars 11 Id. 12 Id. 13 App (Memorandum in Support at 4 5). 14 App. 39 (Memorandum in Support at 5). 15 Id. 16 App (Memorandum in Support at 6 7). -4-

13 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 13 of 33 PageID #:8807 ultimately recognized that a more comprehensive restructuring was necessary. 17 Accordingly, Caesars began negotiating with organized groups of CEOC s senior secured creditors, namely certain First Lien Bank Lenders and certain holders of first lien notes (the First Lien Noteholders and, together with the First Lien Bank Lenders, the First Lienholders ). 18 During these negotiations, it became clear that the senior secured creditors would require CEC to provide substantial financial and operational support for a proposed restructuring and, in turn, CEC sought releases as a condition for providing such support. 19 Accordingly, in an effort to establish an independent decision-making process at CEOC, two independent directors were appointed to CEOC s board of directors in June 2014, and CEOC retained independent counsel and financial advisors. 20 These independent directors then established a special governance committee (the Special Governance Committee ) to investigate potential claims that CEOC and its affiliates may have against CEC or its affiliates, including claims that ultimately could provide the basis of proofs of claim filed by 17 App (Memorandum in Support at 7 8). 18 App. 42, (Memorandum in Support at 8, 21 22). 19 App. 42 (Memorandum in Support at 8). 20 Id. -5-

14 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 14 of 33 PageID #:8808 creditors in a bankruptcy case, and determined that a substantial contribution would be required from CEC and its affiliates to settle and release such claims. 21 While the Special Governance Committee was negotiating to obtain contributions from CEC toward a restructuring, CEOC and certain First Lien Noteholders were negotiating the framework of a comprehensive restructuring, which was memorialized in a restructuring support agreement dated as of December 19, 2014 (the Prepetition RSA ). 22 During the course of negotiating the Prepetition RSA, on October 16, 2014, CEOC entered into deposit account control agreements on October 15 and 16, 2014 with respect to the First Lienholders lien on substantially all of its unrestricted cash. 23 The Prepetition RSA was initially supported by approximately 38% of the First Lien Noteholders and, by January 2015, had been endorsed by holders of over 80% in aggregate principal amount of the Caesars debtors first lien bonds and approximately 15% of the outstanding first lien bank debt held by First Lien Bank Lenders who were not part of the Ad Hoc Bank Group App (Memorandum in Support at 8 9). 22 App (Memorandum in Support at 9 10). 23 App. 58 (Memorandum in Support at 24). 24 App. 44 (Memorandum in Support at 10). Later, on August 21, 2015, the First Lien Bank Lenders came to agree with CEOC and CEC on certain terms of -6-

15 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 15 of 33 PageID #:8809 The Prepetition RSA contained certain milestones that CEOC was required to meet, including the commencement by CEOC and its subsidiaries of voluntary chapter 11 cases on or after January 15, 2015, but no later than January 20, CEOC publicly announced its intention to file for bankruptcy between January 15 and 20, 2015, by filing with the Securities and Exchange Commission a Form 8-K in connection with its entry into the Prepetition RSA. 26 Relevant Procedural History Armed with the advance knowledge of CEOC s imminent voluntary bankruptcy filing, the Petitioning Creditors attempted to preempt CEOC s plans by filing, on January 12, 2015, the Involuntary Petition against CEOC in the Delaware Court. 27 CEOC, consistent with its obligations under the Prepetition RSA, then filed its Voluntary Petition in the Bankruptcy Court three days later, on January 15, CEOC s restructuring, as documented in a separate restructuring support agreement (the Bank Lenders RSA ). The Prepetition RSA with the First Lien Noteholders was subsequently amended, on October 7, 2015, as a result of the execution of the Bank Lenders RSA. 25 App (Caesars Entertainment Corp., Current Report (Form 8-K) (Dec. 19, 2014)). 26 Id. 27 App. 1 5 (Involuntary Petition). -7-

16 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 16 of 33 PageID #: After an evidentiary hearing held on January 26 and 27, 2015, the Delaware Court transferred venue of the involuntary case to the Bankruptcy Court. In ordering transfer of venue, the Delaware Court held, inter alia, that the Involuntary Case was clearly an anticipatory filing because the Petitioning Creditors were aware prior to the Petition Date that the Debtor was planning an imminent voluntary filing in the Illinois Court and with that knowledge made sure to win the race to the courthouse. In re Caesars Entm t Operating Co., No (KG), 2015 WL , at *8 (Bankr. D. Del. Feb. 2, 2015). Significantly, the Delaware Court held that rewarding the Petitioning Creditors preemptive filing in another forum would set a bad precedent for future bankruptcy cases and limit the ability of future debtors to openly negotiate with creditors prior to filing a voluntary bankruptcy petition. Id. Upon transfer of the Involuntary Petition to the Bankruptcy Court, CEOC moved to suspend proceedings in the involuntary case filed against it (the Motion to Suspend ). 29 CEOC also controverted the involuntary case by filing its Answer 28 App (Voluntary Petition). 29 App (Caesars Entertainment Operating Company, Inc. s Motion to Suspend Proceedings Related to Involuntary Petition Pursuant to Section 305 of the Bankruptcy Code, No (ABG) (Bankr. N.D. Ill. Feb. 2, 2015), ECF Doc. # 7). -8-

17 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 17 of 33 PageID #:8811 and Affirmative Defenses to the Involuntary Petition. 30 The Petitioning Creditors then filed a motion to consolidate CEOC s involuntary case with the Debtors voluntary cases, hoping that the Bankruptcy Court would then choose the Involuntary Petition date as the prevailing petition date in the consolidated proceedings (the Motion to Consolidate ). 31 The UCC objected to the Motion to Suspend and filed a statement in support of the Motion to Consolidate. The Bankruptcy Court denied the Motion to Suspend and deferred ruling on the Motion to Consolidate until the trial on the Involuntary Petition. 32 Trial on the Involuntary Petition began on October 5, 2015 and lasted seven business days, concluding on October 16, The Bankruptcy Court has not yet issued a ruling. On October 2, 2015, three days before the trial on the Involuntary Petition was scheduled to begin, the UCC moved to intervene in the involuntary trial (the Motion to Intervene ) in order to request that the Bankruptcy Court condition any 30 App (Answer and Affirmative Defenses). 31 App (Motion to Consolidate Pursuant to Rule 1015(a), for Judicial Notice that an Order for Relief Has Been Entered in this Case, and for Determination that the Order for Relief Applies to the Consolidated Proceeding in All Respects, No (ABG) (Bankr. N.D. Ill. Feb. 5, 2015), ECF Doc. # 15). 32 App (Mar. 25, 2015 Hr g Tr., No (ABG), at 120:3 9, 121:24 25, 122:1 4, 124:19 22). -9-

18 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 18 of 33 PageID #:8812 dismissal of the involuntary case on the outcome of this appeal. 33 At an omnibus hearing on October 21, 2015, the Bankruptcy Court denied the Motion to Intervene for the reasons stated on the record. Among other things, the Bankruptcy Court found that the UCC would suffer no particular prejudice if its Motion to Intervene is denied, observing that this appeal will be moot regardless of the outcome of the trial on the Involuntary Petition. 34 The Bankruptcy Court s Decisions Below After the Bankruptcy Court denied the Motion to Suspend, the UCC filed its Motion to Compel on March 25, The Bankruptcy Court promptly entered an order barring parties from responding to the Motion to Compel. 36 At an April 29, 2015 hearing, the Bankruptcy Court issued a bench ruling denying the Motion to Compel. 37 The Bankruptcy Court described the UCC s theory as premised on the notion that an alleged debtor s right to consent to an involuntary petition is 33 App (Statutory Unsecured Claimholders Committee s Motion to Intervene for Limited Relief, No (ABG) (Bankr. N.D. Ill. Oct. 2, 2015), ECF Doc. # 171). 34 See Oct. 21, 2015 Hr g Tr., No (ABG), at 51:13 52:6. 35 App (Motion to Compel). 36 App (Order Barring Responses to Motion Pending Further Order of Court, No (ABG) (Bankr. N.D. Ill. Apr. 9, 2015), ECF Doc. # 1117). 37 App (Order Denying Motion to Compel); App (April 29, 2015 Hearing Transcript at 24:11 27:6). -10-

19 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 19 of 33 PageID #:8813 property of the bankruptcy estate, and that the alleged debtor can be forced to exercise that right in a particular way that benefits creditors. 38 The Bankruptcy Court, noting the absence of any authority offered by the UCC to support its theory, found the UCC s arguments to be unsupported and fallacious and to be charitable, incorrect. 39 First, the Bankruptcy Court held that the UCC s contention that CEOC could be compelled to consent to the Involuntary Petition was inconsistent with the Bankruptcy Code, specifically, subsections (b) and (h) of Section According to the Bankruptcy Court, not only is there no requirement in Section 303 that, regarding an involuntary petition, creditors would be better off with its entry, but further, that the UCC s position would read the requirements for an involuntary case out of the Code and eliminate the alleged debtor s right to contest the petition. 41 Were the UCC correct, [r]egardless of the merits of the petition or the malice with which it was filed, an order for relief would have to be entered any 38 App (April 29, 2015 Hearing Transcript at 24:15 21). 39 App (April 29, 2015 Hearing Transcript at 26:14); App (April 29, 2015 Hearing Transcript at 24:21 23). 40 App (April 29, 2015 Hearing Transcript at 24:25 25:4). 41 App (April 29, 2015 Hearing Transcript at 25:4 14). -11-

20 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 20 of 33 PageID #:8814 time creditors would arguably be better off. Section 303 makes abundantly clear that it is not what Congress had in mind. 42 Second, the Bankruptcy Court held that the committee s theory is a rather obvious exercise in question-begging. 43 Noting that the UCC s theory assumes the existence of a slam dunk preference action, the Bankruptcy Court explained that a preference cannot exist until an order for relief is entered, and absent a preference, there cannot be a preference action. 44 The Bankruptcy Court concluded that this logical flaw is glaring in the UCC s theory. 45 The UCC filed the Motion for Reconsideration on May 8, 2015, which the Bankruptcy Court summarily denied by order dated May 11, On May 15, 2015, the UCC filed a notice of appeal from the Orders. 47 On appeal, the UCC now 42 App (April 29, 2015 Hearing Transcript at 25:14 19). 43 App (April 29, 2015 Hearing Transcript at 25:20 21). 44 App (April 29, 2015 Hearing Transcript at 25:21 26:6). 45 App (April 29, 2015 Hearing Transcript at 26:12). The Bankruptcy Court noted that the UCC had previously raised the same argument in connection with the Motion to Suspend and Motion to Consolidate and that the argument wasn t mentioned in my ruling on those motions because it didn t rate a mention. App (April 29, 2015 Hearing Transcript at 26:13 18). 46 App (Motion for Reconsideration). 47 App (Order Denying Motion for Reconsideration). -12-

21 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 21 of 33 PageID #:8815 requests different relief than it sought from the Bankruptcy Court below: Although the UCC sought an order below to compel CEOC to consent to the Involuntary Petition, the UCC now seeks remand so that the Bankruptcy Court can hold a hearing as to whether CEOC can justify not consenting to the Involuntary Petition under Bankruptcy Code Sections 363, 554, and 558. SUMMARY OF ARGUMENT 48 The Bankruptcy Court was entirely correct in rejecting the UCC s position that a court may compel a debtor to consent to an involuntary petition filed against it. Section 303 of the Bankruptcy Code not only expressly permits an alleged debtor to controvert an involuntary bankruptcy petition, but Section 303(f) expressly provides that Section 363 does not apply to involuntary bankruptcy proceedings unless and until an order for relief is entered. Moreover, as recognized by the Bankruptcy Court, nothing in Section 303 provides that creditors interests can override the alleged debtor s determination to oppose an involuntary petition. Indeed, were the UCC correct, there would be no disincentive for creditors to file an involuntary petition (even in bad faith) in any case in which it is known that a company is negotiating with creditors to file a voluntary 48 This Appellee, the Ad Hoc Bank Group, recognizes that the Debtors and the Ad Hoc Committee of First Lien Noteholders are also Appellees on this appeal and will be submitting briefs also requesting that this Court affirm the Bankruptcy Court s Orders. Accordingly, in order to avoid unnecessarily burdening the record and this Court, the Ad Hoc Bank Group focuses in this brief upon what we believe is the core issue on appeal. -13-

22 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 22 of 33 PageID #:8816 bankruptcy petition. No basis exists in the Bankruptcy Code for the relief requested by the UCC. ARGUMENT The Bankruptcy Court Correctly Held That Bankruptcy Code Section 303 Provides CEOC, As The Alleged Debtor, With The Absolute Right To Controvert The Involuntary Petition The Bankruptcy Court correctly held below that the UCC s position was unsupported and fallacious that CEOC, as the alleged debtor, could be required to consent to the Involuntary Petition in order to create a possible preference claim because that position would read the requirements of Section 303 out of the Bankruptcy Code. 49 When a statute s language is plain and unambiguous, the only function of the court is to enforce the statute according to its terms. In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596, 599 (7th Cir. 2013) (citing United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)). The plain meaning of legislation should be conclusive, except in the rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters. Ron Pair, 489 U.S. at 242 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)). 49 App (April 29, 2015 Hearing Transcript at 26:14); App (April 29, 2015 Hearing Transcript at 25:9 14). -14-

23 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 23 of 33 PageID #:8817 Bankruptcy Code Section 303 provides the procedures and requirements governing involuntary bankruptcy filings. As an initial matter, Section 303(d) of the Bankruptcy Code expressly affords an involuntary debtor the right to respond to an involuntary petition filed against it: The debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition under this section. 11 U.S.C. 303(d). 50 No other subsection of Section 303 (or any other provision of the Bankruptcy Code) limits a debtor s ability to exercise that right; indeed, Section 303(h) makes clear the consequences of not timely asserting the right to defend against the involuntary petition. 51 As the Bankruptcy Court held below, in rejecting the UCC s notion that an order for relief should be 50 Bankruptcy Rule 1011(b) provides: Defenses and objections to the petition shall be presented in the manner prescribed by Rule 12 [of the Federal Rules of Civil Procedure] and shall be filed and served within 21 days after service of the summons, except that if service is made by publication on a party or partner not residing or found within the state in which the court sits, the court shall prescribe the time for filing and serving the response. FED. R. BANKR. P. 1011(b). 51 See 11 U.S.C. 303(h). -15-

24 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 24 of 33 PageID #:8818 entered whenever creditors would arguably be better off: Section 303 makes abundantly clear that is not what Congress had in mind. 52 The UCC contends that CEOC s right to controvert the Involuntary Petition is property of the estate that, pursuant to Bankruptcy Code Section 363, CEOC cannot abandon or use, outside the ordinary course of business, without prior court approval after notice and a hearing. But, significantly, Bankruptcy Code Section 303(f) expressly provides that Section 363 does not apply to involuntary proceedings unless and until an order for relief is entered in the involuntary case. 53 Although the UCC s entire argument is premised on the proposition that Section 52 App (April 29, 2015 Hearing Transcript at 25:9 14). See Lamie v. U.S. Tr., 540 U.S. 526, 542 (2004) ( It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think... is the preferred result. (quoting United States v. Granderson, 511 U.S. 39, 68 (1994) (concurring opinion))); Water Quality Ass n Emps. Benefit Corp. v. United States, 795 F.2d 1303, 1309 (7th Cir. 1986) ( It is a basic principle of statutory construction that courts have no right first to determine the legislative intent of a statute and then, under the guise of its interpretation, proceed to either add words to or eliminate other words from the statute s language. (citations omitted)). 53 Section 303(f) provides: 11 U.S.C. 303(f). Notwithstanding section 363 of this title, except to the extent that the court orders otherwise, and until an order for relief in the case, any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced. -16-

25 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 25 of 33 PageID #: becomes applicable as a result of CEOC s subsequent voluntary bankruptcy filing, there is no support for that proposition anywhere in the Bankruptcy Code or case authority. Indeed, the UCC fails to cite to any authority at all in support of its contention that Section 303, as a whole, and Section 303(f) specifically, are somehow rendered moot when a voluntary petition is later filed. That is not surprising because Section 303(f) is unambiguous in providing that Section 363 does not apply to proceedings concerning an involuntary petition. The few cases arising out of similar facts to those at bar support the conclusion that the provisions of Section 303 remain operative regardless of a subsequent filing of a voluntary petition. See, e.g., In re Holco Capital Grp., Inc., No (HCD), 2011 Bankr. LEXIS 988 (Bankr. N.D. Ind. Mar. 29, 2011) (granting motion to consolidate voluntary case with involuntary case only after holding evidentiary hearing to determine the validity of involuntary petition); Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47, 51 (3d Cir. 1988) (holding that alleged debtor s subsequent involuntary bankruptcy filing did not necessarily preclude the debtor from asserting claims against petitioning creditor, observing that a voluntary petition filed on January 26 did not necessarily mean that the debtor had ceased paying its debts as they came due on January 20 ). In Holco, a petitioning creditor filed an involuntary chapter 7 petition against an alleged debtor. Holco, 2011 Bankr. LEXIS 988, at *6. The alleged -17-

26 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 26 of 33 PageID #:8820 debtor subsequently filed a voluntary chapter 7 petition, while also challenging the appropriateness of the first-filed involuntary petition by moving for dismissal of the involuntary petition. Id. In response, the petitioning creditor opposed the motion to dismiss and filed a motion to consolidate the involuntary petition with the subsequently filed voluntary petition. Id. The Holco court held an evidentiary hearing to decide both the motion to dismiss and the motion to consolidate. Id. Importantly, the court first addressed the alleged debtor s motion to dismiss, determining that the petitioning creditor had met its burden under Section 303 of the Bankruptcy Code and rejecting the debtor s defenses to the involuntary petition. Only then did the Holco court determine the motion to consolidate the voluntary case with the voluntary petition. Id. at * The Holco court did not disregard Section 303 or consider it moot following the voluntary bankruptcy filing; to the contrary, the bankruptcy court held an evidentiary hearing (as did the Bankruptcy Court below) to determine whether the involuntary petition was properly filed On appeal, the UCC cites to Holco to argue that the involuntary petition date should be applied to CEOC s bankruptcy cases and that the filing of the voluntary petition itself proves the validity of the involuntary petition. Appellant s Brief at 53. Not only did Judge Goldgar reject the UCC s contention in deciding the Motion to Suspend, but more aptly, the Holco court did not so find. Rather, the Holco court held an evidentiary hearing to determine the propriety of the involuntary filing, as required by Section

27 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 27 of 33 PageID #:8821 The UCC s position that a subsequent voluntary petition implicates Section 363 of the Bankruptcy Code would also improperly override Congress intent to provide a disincentive to creditors who consider whether to file an involuntary petition. Bankruptcy Code Section 303(i) provides that if the court dismisses an involuntary petition, the court may grant judgment against the petitioning creditors for costs or reasonable attorneys fees, or, if the court finds the involuntary petition was filed in bad faith, for damages or punitive damages. 55 See In re Meltzer, 535 B.R. 803, 815 (Bankr. N.D. Ill. 2015) (holding that an award of punitive damages under Section 303(i)(2) must be determined in an amount sufficient to serve the objectives of deterrence and punishment (citations omitted)); In re Paczesny, 282 B.R. 646, 650 (Bankr. N.D. Ill. 2002) (observing that Section 303(i)(1) codifies the policy of discouraging meritless petitions ); In re Val W. Poterek & Sons, Inc., 169 B.R. 896, 905 (Bankr. N.D. Ill. 1994) (stating that [p]etitioning creditors assume certain risks when deciding to file an involuntary bankruptcy petition, including the risk that costs or damages may be awarded by a court under Section 303(i)); In re Adam Furniture Indus., Inc., No (JSD), 1993 WL , at *4 (Bankr. S.D. Ga. Dec. 10, 1993) ( Congress has... established a deterrent to abusive and unwarranted filings in 303(e) and (i). (citation omitted)) U.S.C. 303(i). -19-

28 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 28 of 33 PageID #:8822 Were the UCC correct, even creditors who engage in a bad faith filing of an involuntary petition would be insulated from damages if the alleged debtor subsequently filed a voluntary petition, because the debtor would then be required to consent to the involuntary petition. The very facts before this Court prove the fallacy of the UCC s position. As the Delaware Court held, the Petitioning Creditors here were aware prior to the Petition Date that the Debtor was planning an imminent voluntary filing in the Illinois Court and with that knowledge made sure to win the race to the courthouse. Caesars, 2015 WL at *8. The Petitioning Creditors race to the courthouse was purposely designed to thwart CEOC s plan to avoid a free-fall into bankruptcy through the negotiated Prepetition RSA. Indeed, the Delaware Court held that rewarding the Petitioning Creditors preemptive filing in another forum would set a bad precedent for future bankruptcy cases and limit the ability of future debtors to openly negotiate with creditors prior to filing a voluntary bankruptcy petition. Id. The Petitioning Creditors would indeed be rewarded for their preemptive filing were CEOC required to consent to the Involuntary Petition, as the UCC contends, because CEOC would be forced to abandon its rights under Section 303 to not only defend against the Involuntary Petition, but also to seek costs, reasonable attorneys or damages from the Petitioning Creditors if the petition is dismissed. -20-

29 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 29 of 33 PageID #:8823 Moreover, the UCC s position that the subsequent Voluntary Petition implicates Bankruptcy Code Sections 363 or 554 would entirely shift the burden of proof provided by Section 303. Once an alleged debtor timely controverts the involuntary petition (as CEOC did here), Bankruptcy Code section 303(h) provides, in pertinent part, that the court shall not enter an order for relief against the alleged debtor unless, after trial, it finds that the debtor is generally not paying such debtor s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount The petitioning creditors bear the burden of proving that the involuntary case is properly filed. See In re Better Care, Ltd., 97 B.R. 405, 418 (Bankr. N.D. Ill. 1989) ( The burden is upon the petitioning creditors to prove each and every element of their case.... ); cf. Schmid v. Yorke (In re Reid), 773 F.2d 945, (7th Cir. 1985) (holding that petitioning creditors failed to establish standing to file involuntary petition where they alleged claims subject to a bona fide dispute). Yet, under the UCC s formulation, CEOC would be required to justify its decision to controvert the Involuntary Petition under Section 363 or 554, thereby placing the burden upon the alleged debtor to demonstrate the reasons it would not accede to the involuntary case, rather than, as required by Section 303(h), the Petitioning Creditors having U.S.C. 303(h)(1). -21-

30 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 30 of 33 PageID #:8824 the burden of proving the propriety of the involuntary case. Here, too, the UCC s position, if adopted, would override the statutory scheme set forth in Section 303 that places the burden of proof to justify an involuntary case upon the petitioning creditors. Finally, and in any event, there is no practical reason or benefit to grant the UCC the remand it now seeks on this appeal. The Bankruptcy Court held a seven day evidentiary hearing in October 2015 to determine the merits of the Involuntary Petition. A remand for a hearing so that CEOC can justify its determination not to consent to the Involuntary Petition would be redundant of the same issues already heard by the Bankruptcy Court that are now sub judice before that court. -22-

31 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 31 of 33 PageID #:8825 CONCLUSION For the foregoing reasons, and those raised by the other Appellees, it is respectfully requested that this Court affirm the Orders of the Bankruptcy Court in their entirety. Dated: November 16, 2015 By: /s/ Brian L. Shaw Chicago, Illinois Brian L. Shaw SHAW FISHMAN GLANTZ & TOWBIN LLC 321 North Clark Street, Suite 800 Chicago, Illinois and Kristopher M. Hansen Kenneth Pasquale Jonathan D. Canfield Jason M. Pierce STROOCK & STROOCK & LAVAN LLP 180 Maiden Lane New York, New York Attorneys for Appellee Ad Hoc Committee of First Lien Bank Lenders -23-

32 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 32 of 33 PageID #:8826 CERTIFICATE OF COMPLIANCE I hereby certify that this brief complies with the type-volume limitation of FED. R. BANKR. P. 8015(a)(7)(B) because: This brief contains less than 14,000 words, excluding the portions of the brief exempted by FED. R. BANKR. P. 8015(a)(7)(B)(iii). Pursuant to FED. R. BANKR. P. 8015(a)(7)(C)(i), the undersigned has relied upon the word count feature of the word-processing system used to prepare this brief. Dated: November 16, 2015 By: /s/ Brian L. Shaw Chicago, Illinois Brian L. Shaw

33 Case: 1:15-cv Document #: 29 Filed: 11/16/15 Page 33 of 33 PageID #:8827 CERTIFICATE OF SERVICE I hereby certify that I electronically filed the Brief of Appellee Ad Hoc Committee of First Lien Bank Lenders with the Clerk of the Court using the CM/ECF system on November 16, Pursuant to FED. R. CIV. P. 5(b)(3) and Northern District of Illinois Local Rule 5.9, I have thereby electronically served all counsel of record listed on the CM/ECF service list for this matter with a copy of the Brief of Appellee Ad Hoc Committee of First Lien Bank Lenders. Dated: November 16, 2015 By: /s/ Brian L. Shaw Chicago, Illinois Brian L. Shaw