561 B.R. 457
Bankr. N.D. Ill.2016Background
- CEOC and affiliated debtors (part of Caesars) filed chapter 11 in Jan. 2015; debtors hold substantial first- and second-lien bank and note indebtedness secured by personal property (licenses, insurance, commercial tort claims) and real estate (including riverboat/dockside casinos).
- In 2014 CEOC and subsidiaries granted first- and second-priority security interests in commercial tort claims (and later-perfected via UCC-1 filings) arising from allegedly fraudulent “challenged transactions.”
- Debtors negotiated a restructuring (Notes RSA and later plan amendments) in which CEC would contribute funds in exchange for global releases of estate claims; the restructuring process included an examiner and active mediation efforts.
- The final cash collateral order contains five stipulations including that certain first- and second-lien security interests and related obligations are valid, perfected, and non-avoidable, and sets deadlines for challenges (Committee deadline initially May 6, later extended).
- The Statutory Unsecured Claimholders Committee moved for derivative standing to sue on estate claims (amended proposed complaint raising avoidance and declaratory counts under §§ 544, 547 and attacking cash-collateral stipulations); many secured parties and committees objected.
- The bankruptcy court found the Committee failed to show the debtors’ refusal to sue was unjustified now but continued (not denied) the standing motion to preserve the Committee’s ability to seek standing later if settlement efforts collapse.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Committee is entitled to derivative standing to pursue estate causes of action | Committee: debtors declined to pursue causes of action (and cash-collateral stipulations foreclose objective pursuit); Committee must be permitted to prosecute on estates’ behalf | Debtors and secured parties: debtors reasonably declined to litigate to preserve and pursue a global consensual plan; litigation would be costly and could derail settlements | Court: Denied on present record to show unjustified refusal; motion continued (not denied) to preserve future standing if settlement efforts fail |
| Whether debtors’ refusal to sue was unjustified | Committee: stipulations render debtors incapable of objectively pursuing claims, so refusal is unjustified | Debtors: decision to refrain from litigation is a reasonable exercise of fiduciary duty to seek a global settlement and maximize creditor recoveries | Court: Committee failed to meet burden to show unjustified refusal; debtors’ cost-benefit settlement rationale is reasonable for now |
| Whether Committee’s claims are colorable | Committee: asserts avoidance claims under §§ 544, 547 and challenges to stipulations; contends claims are colorable | Objectors: raise defenses and perfection evidence; contest probability/recovery | Court: did not resolve colorability (not necessary now); noted Committee argued colorability at length but left issue for later if needed |
| Effect of missed challenge deadline and tolling | Committee: timely filed standing motion (tolls deadline); seeks to preserve right to seek standing later | Secured parties: deadlines set by final cash collateral order; Committee had extensions but missed deadline for some challenges | Court: continuing the motion preserves Committee’s right to seek derivative standing later; denying now would foreclose future relief |
Key Cases Cited
- Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1 (Sup. Ct.) (debtor in possession is ordinarily sole representative of estate)
- Fisher v. Apostolou, 155 F.3d 876 (7th Cir.) (debtor in possession has sole responsibility to bring actions for the estate)
- In re Perkins, 902 F.2d 1254 (7th Cir.) (derivative standing permissible in narrow circumstances; factors for grant)
- In re Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir.) (creditor seeking derivative standing must show debtor unjustifiably refused to sue)
- Caesars Entm’t Operating Co. v. BOKF, N.A. (In re Caesars Entm’t Operating Co., Inc.), 808 F.3d 1186 (7th Cir.) (bankruptcy’s central objective includes negotiated resolution; uncertainty can promote settlements)