United States District Court, S.D. New York
MEEHANCOMBS GLOBAL CREDIT OPPORTUNITIES FUNDS, LP, RELATIVE VALUE-LONG/SHORT DEBT, A SERIES OF UNDERLYING FUNDS TRUST, SB 4 CF LLC, CFIP ULTRA MASTER FUND, LTD., and TRILOGY PORTFOLIO COMPANY, LLC, Plaintiffs,
CAESARS ENTERTAINMENT CORP. and CAESARS ENTERTAINMENT OPERATING CO., INC., Defendants. FREDERICK BARTON DANNER, individually and on behalf of all others similarly situated, Plaintiffs,
CAESARS ENTERTAINMENT CORP. and CAESARS ENTERTAINMENT OPERATING CO., INC., Defendants
For MeehanCombs Global Credit Opportunities Funds, LP, Relative Value-Long/Short Debt, A Series of Underlying Funds Trust, SB 4 CF LLC, CFIP Ultra Master Fund, Ltd., and Trilogy Portfolio Company, LLC, Plaintiffs: James H. Millar, Esq., Kristin K. Going, Esq., Clay J. Pierce, Esq., Tracy S. Combs, Esq., Drinker Biddle & Reath, LLP, New York, NY.
For Frederick Barton Danner, Plaintiff: Mark C. Gardy, Esq., James S. Notis, Esq., Meagan Farmer, Esq., Gardy & Notis, LLP, New York, NY; Jay W. Eisenhofer, Esq., Gordon Z. Novod, Esq., Elizabeth Shofner, Esq., Grant & Eisenhoffer P.A., New York, NY.
For Caesars Entertainment Corporation, Defendant: Lewis R. Clayton, Esq., Jonathan Hurwitz, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY.
For Caesars Entertainment Operating Company, Inc., Defendant: Eric Seiler, Esq., Philippe Adler, Esq., Emily A. Stubbs, Esq., Friedman Kaplan Seiler & Adelman LLP, New York, NY.
OPINION AND ORDER
Shira A. Scheindlin, United States District Judge.
The plaintiffs in these related actions are holders of Notes issued by Caesars Entertainment Operating Company, Inc. (" CEOC" ) pursuant to indentures, and -- until the issuance of supplemental indentures in August 2014 (the " August 2014 Transaction" or the " Amendments" ) -- guaranteed by Caesars Entertainment Corporation (" CEC" ; together with CEOC, " Caesars" ). Plaintiffs allege that the August 2014 Transaction violated the Trust Indenture Act of 1939 (" TIA" ) and breached the governing Indentures as well as the implied covenant of good faith and fair dealing.
Plaintiffs contend that the August 2014 Transaction removed the Guarantees given by the asset-rich parent company, CEC, leaving plaintiffs and the other bondholders with a worthless right to collect principal and interest from the issuer, CEOC, a company divesting itself of assets and holding approximately $17 billion of senior secured debt. The crux of plaintiffs' allegations is that the release of the Guarantees effected a non-consensual change to plaintiffs' payment rights and affected plaintiffs' practical ability to recover payment in violation of section 316 of the TIA and the governing Indentures.
Both defendants moved to dismiss the Complaint for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On January 13, 2015, holders of Second Lien Notes issued by CEOC filed an involuntary chapter 11 petition against CEOC in the United States Bankruptcy Court for the District of Delaware. As a result, this action is stayed as to CEOC pursuant to section 362(a) of the Bankruptcy Code. However, this action is not stayed as to non-debtor defendant CEC, and for the following reasons CEC's motion to dismiss the Danner Complaint is DENIED in its entirety, and its motion to dismiss the MeehanCombs Complaint is GRANTED in part and DENIED in part.
A. The Notes and Indentures
CEC, formerly known as Harrah's Entertainment, Inc., owns, manages, and operates dozens of casinos throughout the United States. CEOC is a direct operating subsidiary of CEC.
Pursuant to Indentures dated September 28, 2005 and June 9, 2006, CEOC issued $750 million of 2017 Notes and $750 million of 2016 Notes. MeehanCombs is the beneficial holder of approximately $15,318,000 of the 2016 Notes and $5,632,000 of the 2017 Notes. Danner is the beneficial holder of 2016 Notes. Holders of the 2016 Notes are entitled to receive interest payments each year on June 1 and December 1; holders of the 2017 Notes are entitled to receive interest payments on April 1 and October 1 annually. The vast majority of outstanding Notes -- approximately $137 million -- are held by individual investors.
When issued, the 2017 and 2016 Notes were investment grade. The governing Indentures each included unconditional Guarantees by CEC and provisions prohibiting CEOC from divesting its assets.
B. The August 2014 Transaction
In January 2008, Caesars was acquired in a leveraged buyout by two private equity funds, Apollo Global Management, Inc. and TPG Capital, LP. Caesars subsequently entered into a series of transactions aimed at transferring assets away from CEOC to affiliates, and leaving it (CEOC) holding company debt.
CEC's ultimate plan is to push CEOC into bankruptcy while protecting Apollo and TPG from CEOC's creditors. The Amendments effectively left CEC free to transfer CEOC's assets without any obligation to back CEOC's debts. Furthermore, the purchase price paid for the Notes of the noteholders who approved the August 2014 Transaction (the " Favored Noteholders" ) -- par plus accrued interest and transactional fees and costs -- represented an extraordinary one hundred percent premium over market. In exchange for receiving all amounts owed under their Notes, the Favored Noteholders promised to: (1) support any future restructuring proposed by Caesars; (2) consent to " the removal and acknowledgment of the termination of the CEC guarantee of the Securities" ; and (iii) consent to the " modif[ication of] the covenant restricting disposition of 'substantially all' of CEOC's assets to measure future asset sales based on CEOC's assets as of the date of the amendment." 
III. STANDARD OF REVIEW
A. Rule 12(b)(6) Motion to Dismiss
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court " must accept all non-conclusory factual allegations as true and draw all reasonable inferences in the plaintiff's favor."  " When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."  A claim is plausible " when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."  Plausibility requires " more than a sheer possibility that a defendant has acted unlawfully." 
When deciding a motion to dismiss, " a district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint."  A court may also consider a document that is not incorporated by reference " where the complaint 'relies heavily upon its terms and effect,' thereby rendering the document 'integral' to the complaint." [2 ...