January 15, 2015 / 7:15 AM / 5 years ago

UPDATE 5-Caesars files Chicago bankruptcy, halted by Delaware judge

(Adds details of Manhattan court ruling, Chicago hearing, paragraphs 10 and 17)

By Tom Hals and Karen Pierog

WILMINGTON, Delaware/CHICAGO Jan 15 (Reuters) - The operating unit of Caesars Entertainment Corp, the largest U.S. casino company, filed for Chapter 11 bankruptcy in Chicago on Thursday to cut $10 billion of debt, but a Delaware judge intervened to halt the case before it got started.

The unusual legal standoff marked the start of a more public phase of complex and contentious debt negotiations. Until now, the company’s attempts to cut interest payments after years of red ink have been kept mostly private.

Caesars maintains it has the support of its senior noteholders to implement the bankruptcy plan, which would reduce the operating unit’s debt to $8.6 billion from $18.4 billion.

The bankruptcy was filed overnight by Caesars Entertainment Operating Company Inc and 179 affiliates in the U.S. Bankruptcy Court in Chicago.

However, junior noteholders, led by the Appaloosa Management hedge fund, filed an involuntary bankruptcy petition against the operating unit on Monday in Delaware. They argued at an emergency hearing in Wilmington on Thursday that their case should take precedence and the bankruptcy should proceed in Delaware.

Kevin Gross, the Delaware judge, agreed to put the Chicago proceeding on hold, but said he would allow routine “first-day” requests, such as those that would enable employees to be paid.

Gross asked what agreements he might be disrupting by issuing a stay and taking time to sort out which court would handle the case.

“There is no deal with the first-lien noteholders, there is no deal with second-lien noteholders and there is no deal with unsecured creditors,” said Bruce Bennett, a Jones Day attorney who represents the junior noteholders.

He argued that the backing of senior noteholders was bought with impermissible payments, and said the Delaware case might require a full-blown trial before it could be dismissed. Bennett said he was planning to take testimony from Gary Loveman, Caesars’ chief executive.

Adding to Caesars legal headaches, a U.S. District judge in Manhattan ruled Thursday that the parent company will have to defend a suit that alleges it violated federal law by removing guarantees of some of the operating unit’s most junior debt.

Creditors have brought numerous lawsuits recently alleging fraud over transfers of assets out of the operating unit. The transfers have included choice properties such as the Linq entertainment complex in Las Vegas assets.

Caesars has said the transfers removed capital-intensive projects from the operating unit in return for fair value, but the creditors allege they were moved to benefit the parent company and Apollo Global Management and TPG Capital .

The two private equity firms led the $30 billion leveraged buyout of Harrah’s Entertainment in 2008 to create Caesars.

The buyout ran into trouble almost immediately as the economy slid into a deep recession and gambling proliferated in the United States to the point of saturation. Caesars also failed to get a foothold in Macau with its access to the Chinese market.

Under the restructuring plan, the operating unit will be split into a casino company and a publicly traded real estate investment trust.

There are no plans to close any casinos, and Caesars said it is operating normally.

After the Delaware hearing, U.S. Bankruptcy Judge Benjamin Goldgar in Chicago entered various routine orders that mark the start of any bankruptcy case. The parties will return to Gross’s court later this month to argue if the involuntary petition was valid.

“I would hate to bring the case (to Wilmington) and then dismiss the involuntary. That would be a little bit of egg on my face,” Gross said.

The case is in the U.S. Bankruptcy Court, Northern District of Illinois; Case no: 15-01143. The involuntary case is in the U.S. Bankruptcy Court in the District of Delaware, no. 15-10047 (Reporting by Supriya Kurane in Bengaluru, Tom Hals in Wilmington, Delaware and Karen Pierog in Chicago; additional reporting by Joey Ax in New York; Editing by Gopakumar Warrier, Nick Zieminski and Tom Brown)

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