Two days before Christmas, the Seventh Circuit Court of Appeals issued a ruling that is likely to have a dramatic impact in the highly-contested Caesars Entertainment bankruptcy case.  The decision may also give a green light to other debtors seeking to enjoin lawsuits brought against non-debtor affiliates.

The facts are relatively straightforward.  Caesars Entertainment Operation Company (“CEOC”) is the owner and operator of a chain of casinos.  CEOC and a number of its affiliates filed Chapter 11 bankruptcy petitions on January 15, 2015.  Caesars Entertainment Corp. (“CEC”) is CEOC’s principal owner.  Prior to the bankruptcy, CEOC borrowed billions of dollars to finance its operations and CEC guaranteed CEOC’s obligations to the lenders.  The lenders alleged that prior the bankruptcy filing, CEC caused CEOC to transfer highly valuable assets to CEC at less than fair value.  This left CEOC with billions of dollars of debt while CEOC’s most valuable assets were owned by CEC.  Further, CEC disclaimed its guarantees in favor of the lenders.  The lenders filed lawsuits against CEC seeking approximately $12 billion in damages.  Separately, CEOC itself asserted claims against CEC as part of its bankruptcy case, alleging that CEC had caused CEOC to engage in fraudulent transfers whereby the valuable assets were transferred to CEC at less than fair value.

CEOC sought an injunction from the bankruptcy court enjoining the lenders’ lawsuits against CEC.  The basis of CEOC’s injunction request was its argument that the lawsuits on the guarantees would thwart CEOC’s multi-billion dollar restructuring effort which was dependent upon a substantial contribution from CEC in settlement of CEOC’s fraudulent transfer claims.  CEOC argued that allowing the lenders’ lawsuits to continue would allow the lenders to “jump the line in front of other creditors, including more senior ones.”  CEOC requested that the bankruptcy court enjoin the lenders’ lawsuits until 60 days after an examiner, appointed by the bankruptcy court to make an independent assessment of the bankruptcy claims, completes his report.

The bankruptcy court denied the requested injunction, and held that the court lacked statutory authority to enter the injunction under section 105(a) of the Bankruptcy Code.  Section 105(a) provides that the bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out provisions of this title.”  Notwithstanding this broad grant of power, the bankruptcy court held that in order for litigation against a non-debtor to be enjoined, the litigation must arise out of the “same acts” of the non-debtor that gave rise to the disputes in the bankruptcy proceeding.  The bankruptcy court found that the “same acts” requirement was not met in this instance since the disputes in CEOC’s bankruptcy proceeding arose out of CEC’s alleged fraudulent transfers, while the lenders’ claims arose out of CEC’s repudiation of the loan guarantees.  The district court affirmed the bankruptcy court’s ruling.

The Seventh Circuit disagreed with the lower courts, and vacated and remanded the case for further proceedings.  The court held that the lower courts had too narrowly interpreted the powers granted by section 105(a).  Rather than applying the “same acts” test, the bankruptcy court should instead have questioned whether the injunction is likely to enhance the prospects for a successful resolution of the disputes attending CEOC’s bankruptcy.  If the injunction will contribute to the odds of a successful reorganization, and if denial of the injunction will endanger the success of the bankruptcy case, the injunction would, in the language of section 105(a), be appropriate to carry out the provisions of the Bankruptcy Code since a successful resolution of disputes arising in a bankruptcy proceeding is one of the Code’s central objectives.

The Seventh Circuit did not order that the injunction be granted, and left that matter to the bankruptcy court to resolve. However, dicta from the opinion certainly indicates that the appellate court believes that the injunction should be issued.  The court devoted a substantial portion of its opinion to explaining that the injunction would enhance prospects for CEOC’s successful reorganization since it would prevent CEC from being drained of funds by the lenders. Such a result would maximize recovery for CEOC’s creditors, which depends in large part on CEOC’s recovery from CEC.

The effects of the Seventh Circuit’s opinion in Caesars Entertainment could be felt far and wide.  The test enunciated by the court as to when non-debtor stays should be granted is arguably broad enough to capture any non-debtor against whom the debtor has claims.  One can imagine a variety of situations in which the debtor’s parent company would have potential liability to the debtor and other parties.  Using the logic enunciated by the Seventh Circuit, a stay of claims against the non-debtor parent would arguably be appropriate if the stay would allow the debtor to assert its claims and to thereby enhance creditor recoveries.

It remains unclear how many cases will include a sufficiently similar fact pattern.  Moreover, underlying the Seventh Circuit’s opinion was the fact that the bankruptcy court had appointed an examiner to make an independent assessment of the fraudulent transfer claims.  The appellate court clearly believed that the examiner’s report would provide the parties with sufficient information to negotiate an overall settlement of the case.  Most cases, of course, do not include the appointment of an independent third party to provide an analysis of claims.  Nonetheless, bankruptcy practitioners should keep the Caesars Entertainment case in mind when dealing with stays against non-debtor entities.