In re Caesars Entm't Operating Co.

588 B.R. 32
United States Bankruptcy Court, N.D. Illinois·Decided July 30, 2018·No. No. 15 B 1145 (Jointly administered)·Published·Cited by 2 cases

Opinion

1. Jurisdiction

The court has subject matter jurisdiction under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). Because a claim objection is a matter "arising in" a case under Title 11, see In re Montalbano , 486 B.R. 436, 438 (Bankr. N.D. Ill. 2013) ; In re Tripplett , 115 B.R. 955, 958 (Bankr. N.D. Ill. 1990), the objection here is a core proceeding - both statutorily, see 28 U.S.C. § 157(b)(2)(B), and constitutionally, see Schmid v. Bank of Am., N.A. , 498 B.R. 221, 223-24 (W.D. Wis. 2013). The court may therefore enter a final judgment. In re Smith , 848 F.2d 813, 816 (7th Cir. 1988).

2. Background

The relevant facts are drawn from the parties' papers, the proofs of claim, the identical "Addendum" attached to each proof of claim, and the court's docket.1 The parties agree no facts are in dispute. (See Dkt. No. 7890, Tr. dated Feb. 21, 2018, at 4).2

a. Origin of the Stockton Claims

The origin of the dispute lies in a casino sale three decades ago. In 1988, Trump Taj Mahal Associates LP and Trump Taj Mahal Realty Corp. (the "Trump entities") sold the Showboat Hotel and Casino in Atlantic City, New Jersey (the "Showboat property") to Atlantic City Showboat, Inc., a predecessor to debtor Showboat Propco. The sale documents contained a use covenant that said the Showboat property could only be operated as a "first class hotel casino" until December 15, 2082 - nearly a century (the "Trump use covenant"). The Trump use covenant was duly recorded on November 17, 1988, and March 14, 1989, with the Clerk of Atlantic County, New Jersey.

Sixteen years later, in September 2014, Showboat Propco entered into negotiations *36to sell the Showboat property to Stockton. At the time, the casino on the Showboat property was shuttered.3 Stockton planned to build and operate a university campus extension there. The negotiations between Showboat Propco and Stockton lasted about four months. During that period, no one from CEOC or Showboat Propco told Stockton about the Trump use covenant, and Stockton did not conduct a title search that would have revealed its existence.

The Trump use covenant must either have been forgotten or ignored, because during the negotiations Showboat Propco recorded a Declaration of Restrictive Covenant with the county clerk that prohibited gaming or gambling on the Showboat property until November 2024 and gave CEOC enforcement rights (the "Showboat restrictive covenant").4 The Showboat restrictive covenant directly contradicted the Trump use covenant. One prohibited gaming or gambling; the other required it.

The contradiction went unnoticed. A month later, Stockton and Showboat Propco came to final terms on the sale. Stockton agreed to buy the Showboat property for $18 million. Stockton knew about the Showboat restrictive covenant but had no concerns: the Showboat property would be used as a university campus, not a casino.

But Stockton claims to have been unaware of the Trump use covenant. According to Stockton, it first learned of the Trump use covenant when it at last obtained a title report a week or so before the closing set for December 12, 2014. Stockton was understandably troubled at the discovery: Stockton had thought the Showboat property encumbered with a covenant prohibiting gaming, not one demanding it. Stockton told CEOC and Showboat Propco there would be no deal unless the Trump use covenant were released.

CEOC and Showboat Propco were receptive to Stockton's concerns. They asked the Trump entities about a release, and the Trump entities were willing to consider one. But there was a hitch. The Trump entities were themselves debtors in bankruptcy cases. Releasing a use covenant in their favor would arguably require bankruptcy court approval - after 21-days notice and hearing. See 11 U.S.C. § 363(b)(1) ; Fed. R. Bank. P. 2002(a)(2). A release could not be obtained in time for the December 12 closing.5

To avoid postponing the closing date, the parties agreed to add to the Purchase and Sale Agreement (the "PSA") a provision addressing the Trump use covenant:

From and after the Closing, [Showboat Propco] shall use commercially reasonable efforts, at its sole cost and expense, to obtain from [the Trump entities] (with ... bankruptcy court approval) an executed written release of the [Trump use covenant] in recordable form .... If and *37when [Showboat Propco] obtains such Use Covenant Release, [Showboat Propco] shall deliver the original thereof to [Stockton]. From and after the Closing Date and continuing until such time as [Showboat Propco] delivers to [Stockton] such Use Covenant Release, if at all, [Showboat Propco] shall indemnify, defend and hold harmless [Stockton] from any Liabilities arising out of or in connection with any claim or action by [the Trump entities] (or successors or assigns) to enforce the Use Covenant against the Property and/or any judgment thereon (the "Use Covenant Indemnification Obligations").

The "Liabilities" were defined as "all damages, claims, demands, liens, costs, judgments, losses, liabilities and expenses, including, without limitation, reasonable attorneys' fees and costs." CEOC agreed in the PSA to guarantee Showboat Propco's "payment and performance" of its indemnification obligation.

The parties agreed that the PSA would " inure to the benefit of and be binding on the parties ... and their respective heirs, legal representatives, successors, and assigns." Critically, though, the PSA's binding effect was subject to a condition: Stockton could not assign its rights or delegate its duties under the PSA "without the prior written consent of [Showboat Propco]."

The PSA was signed, the sale closed, and Stockton took possession of the Showboat property.

About a month later, on January 15, 2015, CEOC, Showboat Propco, and more than 150 other Caesars affiliates filed voluntary chapter 11 petitions.

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In re Caesars Entm't Operating Co., 588 B.R. 32 (Ill. 2018).

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