OPINION AND ORDER

SHIRA A. SCHEINDLIN, U.S.D.J.

I. INTRODUCTION

These related actions are for enforcement of the Guarantee obligations of Caesars Entertainment Corporation's ("CEC") on Notes issued by Caesars Entertainment Operating Company ("CEOC"). Plaintiffs1 now seek partial summary judgment arguing that CEC violated section 316(b)2 of the Trust Indenture Act of 1939 (the "TIA"), as well as certain provisions of the Indenture governing the Notes, when in August 2014, CEC amended the Indenture to remove the Guarantee (the "August Transaction") without plaintiffs' consent. CEC raises several arguments in support of its position that the August Transaction did not violate either the TIA or the Indenture. One of those arguments is that the August Transaction is "irrelevant" because the Guarantee had already been removed when, after two transactions in May 2014, CEOC ceased to be a wholly owned subsidiary of CEC (the "May Transactions").3 Because there is genuine dispute of material fact as to whether CEOC continued to be a wholly owned subsidiary after the May Transactions, summary judgment is DENIED.

II. BACKGROUND

A. CEC

CEC, through its subsidiaries, is one of the largest gaming companies in the world.4 CEC's principal operating subsidiary is CEOC, a chapter 11 debtor.5 In 2008, CEC was acquired in a leveraged buyout transaction sponsored by Apollo Global Management ("Apollo") and TPG Capital, LP ("TPG"). In connection with that transaction, CEOC issued roughly $24 billion in debt, the proceeds of which were used by Apollo and TPG to acquire CEC's publicly traded shares.6

B. The 2016 Notes Indenture

Pursuant to an Indenture dated September 28, 2005, CEOC issued $750 million of 2016 Notes.7 MeehanCombs is the beneficial holder of approximately $15,318,000 of the 2016 Notes.8 Danner is also a beneficial holder of 2016 Notes.9

The Notes are governed by an Indenture which is qualified under the TIA.10 CEC's Guarantee is found in section 1501 of the Indenture. CEC agreed to guarantee the payment of all principal and interest due on the Notes, and that its guarantee obligations would be "unconditional, irrespective of ... any waiver or consent by any Holder...." However, section 1503 of the Indenture states that the guarantee may be released under certain limited circumstances, including if CEOC "ceases for any reason to be a `wholly owned subsidiary' of [CEC] (as such term is defined in Rule 1-02(z) of [ ] Regulation S-X promulgated by the [Securities Exchange Commission ("SEC")])."

Section 508 of the Indenture provides that "[n]otwithstanding any other provision of th[e] Indenture[, each holder's right] to receive payment of the principal of and any premium and ... interest on... [any] Security ... [is] absolute and unconditional ... [and] shall not be impaired without the consent of such Holder." Section 902 of the Indenture states that while supplemental indentures may be entered into with the consent of a majority of holders, "no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby," alter the principal or interest on any security.

C. The May 2014 Transactions

In May 2014, CEC sold five percent of its stock (the "5% Stock Sale"). After the 5% Stock Sale, CEC issued a press release stating that because CEOC was no longer a "wholly owned subsidiary" of CEC, CEC's guarantee obligations had been terminated under CEOC's bond indentures.11

Then, later that month, CEOC allocated another 6% of its shares for distribution to certain employees as part of a "performance incentive plan" (the "PIP").12 Following the PIP, CEC again publicly stated that its guarantee obligations for CEOC's bonds had been terminated.13

D. The August 2014 Transaction

On May 15, 2014, CEC received a letter on behalf of certain funds that held a majority of CEOC's 2016 outstanding unsecured notes (the "Majority Holders").14 The letter stated that contrary to CEC's press release, the guarantee for the 2016 Notes remained in place notwithstanding the effect the 5% Stock Sale may have had on CEOC's other indentures.15 In the August Transaction, CEC and CEOC agreed to purchase the Majority Holders' notes for approximately $155 million, which covered all principal and interest due on the notes, in exchange for the Majority Holders' consent to amendments that removed CEC's guarantee.16

The August Transaction was memorialized in a Note Purchase and Support Agreement dated August 12, 2014, and the transaction closed on August 22, 2014.17 On the day the transaction closed, CEC, CEOC, and the indenture trustee executed supplemental indentures that removed from the Indentures all provisions relating to the Guarantee.18 Plaintiffs did not consent to the indenture amendments, and were not given an opportunity to participate in the August Transaction.19

E. CEOC's Corporate Governance Following the May Transactions

Before June 27, 2014, CEOC's Board consisted of two employee directors. On that date, one of the directors resigned and six new Board members were appointed, two of which CEC contends were independent directors.20 The two directors selected independent legal counsel. On July 30, 2014, CEOC's Board formed a Governance Committee consisting of the two independent directors. These directors, together with the other members of the CEOC Board, approved the August Transaction.21

F. CEOC's Bankruptcy

CEOC filed for bankruptcy protection on January 15, 2015. Under the terms of the Indenture, this constituted an "Event of Default" which triggered CEC's obligations under the Guarantee.22 Plaintiffs demanded payment on the Guarantee, and CEC refused payment.23

III. LEGAL STANDARD

Summary judgment is appropriate where, "viewing the record in the light most favorable to the non-moving party... `there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'"24 "In making this determination ... we resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought."25 "A fact is material if it might affect the outcome of the suit under the governing law, and an issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party."26

"The moving party bears the burden of showing the absence of a genuine dispute as to any material fact."27 To defeat a motion for summary judgment, the non-moving party must "`do more than simply show that there is some metaphysical doubt as to the material facts, and may not rely on conclusory allegations or unsubstantiated speculation.'"28

"The function of the district court in considering the motion for summary judgment is not to resolve disputed questions of fact but only to determine whether, as to any material issue, a genuine factual dispute exists.'"29 "`Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.'"30

IV. APPLICABLE LAW

A. The Trust Indenture Act

The TIA provides that instruments to which it applies must be issued under an indenture that has been qualified by the SEC.31 The requirements of such indentures are "designed to vindicate a federal policy of protecting investors."32

Section 316 of the TIA relates to collective action clauses. For example, it is permissible for a majority of noteholders to direct the trustee to exercise its powers under the indenture or for not less than seventy-five percent of noteholders "to consent on behalf of the holders of all such indenture securities to the postponement of any interest payment for a period not exceeding three years from its due date."33 Section 316(a)'s terms are permissive — meaning an indenture can expressly exclude such majority action.

However, section 316(b) is mandatory. It states that:

Thus, section 316(b) acts to protect a bondholder's right to receive payment of both principal and interest.

Section 316(b) addressed earlier practices whereby majority bondholders — often controlled by insiders — used collective or majority action clauses to change the terms of an indenture, to the detriment of minority bondholders.35 As a result of section 316(b), an issuer cannot — outside of bankruptcy36 — alter its obligation to pay bondholders without the consent of each bondholder.37 In this way, section "316(b) was designed to provide judicial scrutiny of debt readjustment plans to ensure their equity."38

"Congress and the SEC were aware that the holdout problem would frustrate some workouts, but the regulators wanted to impede workouts that took place outside of regulatory and judicial control. The SEC wanted trust indenture legislation that would bring contractual recapitalizations under the jurisdiction of the federal bankruptcy court."39 One reason was the concern that, "[b]y buying or otherwise controlling a majority of a distressed company's bonds[,] ... equity owners could vote to suspend or reduce payments on the bonds, thus allowing value to move down the corporate chain to the equity holders."40 This outcome would not be permitted under bankruptcy law. It would be "an inversion of the normal priorities in a corporate bankruptcy by which a company's debt holders are paid off before the equity holders."41

B. Contract Interpretation

Under New York law, "[t]he court's function in interpreting a contract is to apply the meaning intended by the parties, as derived from the language of the contract in question."42 "[T]he best evidence of what parties to a written agreement intend is what they say in their writing. Thus, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms."43

"The question of whether a written contract is ambiguous is a question of law for the court."44 "Contract language is unambiguous when it has a definite and precise meaning, unattended by danger of misconception in the purport of the contract itself, and concerning which there is no reasonable basis for a difference of opinion."45 However, contract language is ambiguous if "the terms of the contract could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business."46 "Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing; evidence as to custom and usage is considered, as needed, to show what the parties' specialized language is fairly presumed to have meant."47

V. DISCUSSION

Section 1503(3) of the Indenture releases the Guarantee when CEOC ceases to be "wholly owned" by CEC "as such term is defined in Rule 1-02(z) of the Regulation S-X promulgated by the SEC[ ]." Under Regulation S-X, a subsidiary is "wholly owned" if "substantially all of [its] outstanding voting shares are owned by its parent and/or the parent's other wholly owned subsidiaries."48

CEC argues that the validity of the August Transaction "is irrelevant if the Guarantee was released [under section 1503(3)] as a result of either or both of the May Transactions."49 According to CEC, "[p]laintiffs have failed to show that CEOC is still `wholly owned' by CEC; at most, whether CEC holds `substantially all' of CEOC's stock is an issue of fact that cannot be resolved on summary judgment."50

A. Indenture Section 508 Does Not Bar Release of the Guarantee

Section 508 of the Indenture states that

Thus, section 508 includes the language mandated by section 316(b) of the TIA, but goes further, stating that the right to receive payment of the principal of and interest is "absolute and unconditional."51 Applying New York law to a similar provision modifying section 316(b), the Second Circuit has instructed that the absolute and unconditional language should be given effect.52 The Second Circuit has also interpreted the phrase "notwithstanding any other provision," explaining that "[t]his Court has recognized many times that under New York law, clauses similar to the phrase `[n]otwithstanding any other provision' trump conflicting contract terms."53

Relying on Bank of New York v. First Millennium, Inc., plaintiffs argue that section 508 of the Indenture "`overrides' any conflicting provisions of the Indenture," including the Guarantee release provisions.54 In First Millennium, the FDIC, as receiver for the issuer of certain notes, claimed that it was not liable for the full amount then due on the notes, because a "`limited recourse provision' of the master indenture limits the funds that the noteholders can pursue for repayment of their notes to those set aside as collateral."55 The Second Circuit stated that "[b]y its plain terms, the `absolute and unconditional' right to repayment granted to the noteholders by the indenture overrides the conflicting limited recourse provision, and allows the noteholders to seek repayment from all the assets of the trust."56 More specifically, the reason for this conflict was that under New York law, "`an order or promise to pay out of a particular fund is not unconditional.'"57 As a consequence, an absolute and unconditional right to payment "cannot be limited to funds labeled `collateral' in the transaction documents."58

Under New York law, a contract should be read to give effect to all of its provisions, and courts should avoid interpretations that render contract terms meaningless or superfluous.59 In BOKF, I explained that a guarantee release provision does not conflict with a guarantee providing an "absolute and unconditional" right to payment. CEC had argued that the guarantees at issue in that case were not really meant to be guarantees at all, but were simply included for SEC reporting purposes. To support that argument textually, CEC argued that if the guarantees had been unconditional, then the indentures would not have included release provisions. I rejected this argument, explaining that

Plaintiffs attempt to distinguish the import of BOKF — which is that the Guarantee does not conflict with provisions that permit its release. They note that here the "absolute and unconditional" language is not in the Guarantee provision, but in the "notwithstanding provision" of the Indenture.61

However, this is a distinction without a difference. Guarantees "must be strictly construed according to their terms" and the "guarantor's obligation must be narrowly construed and cannot be extended by construction beyond the plain and explicit language of the contract."62 Here, the Indenture explicitly permits the removal of the Guarantee under section 1503. Under New York law, when a guarantee is "absolute and unconditional," this means that it is a guarantee of payment, rather than collection. "As explained more than 13[5] years ago by the New York Court of Appeals:

Thus, CEC's payment obligation under the Guarantee did not arise until after an event of default, and when it did, plaintiffs had the right to pursue claims directly against CEC under the Guarantee.64

It follows that had CEC attempted to invoke section 1503(3) to remove the Guarantee after its obligations under the Guarantee were triggered, this would patently violate section 508 (unless CEC received unanimous noteholder consent). But removal of the Guarantee under the terms of section 1503(3) prior to the time the payment obligation under the Guarantee becomes due could violate the terms of section 508 in some contexts, but not in others. Unlike plaintiffs' interpretation, this reading of the terms of the Indenture gives meaning to each of its terms. It is also consistent with First Millennium and the rule that "under New York law, clauses similar to the phrase `[n]otwithstanding any other provision' trump conflicting contract terms."65 In First Millennium, the nonrecourse provision presented a clear conflict with the absolute and unconditional right to payment under the facts of that case — the notes at issue were due and owing, the noteholders had not been paid in full, and the FDIC was attempting to limit recovery "out of a particular fund."

In sum, plaintiffs' interpretation of section 508 fails to give appropriate meaning to the terms of the Guarantee and the provisions that permit the release of that Guarantee. In addition — and in contrast to the cases cited by plaintiffs66 — plaintiffs have not shown that there is a conflict between sections 508 and 1503(3).

B. CEC Is Not Precluded from Asserting that the May Transactions Released the Guarantee

Plaintiffs contend that CEC is barred from relying on the May Transactions based on the law of judicial admissions and judicial estoppel. According to plaintiffs, CEC has taken the contrary position — i.e., that the May Transactions did not release the Guarantee — in related lawsuits brought by BOKF, N.A. and UMB Bank, N.A.67 to enforce CEC's guarantees of different notes.68 For example, CEC stated in its brief opposing BOKF's motion for partial summary judgment that:

In addition, "David Sambur, an Apollo partner who serves on CEC's Board and testified as CEC's Rule 30(b)(6) witness in this action, made a nearly identical statement in a sworn declaration CEC submitted with its opposition papers."70 However, these statements do not support preclusion under either the law of judicial admissions or judicial estoppel.

The statements are not judicial admissions because they concern the legal effect of certain transactions, and only statements of fact can be binding judicial admissions.71 Moreover, the statements do not unequivocally state that CEC believed that the May Transactions were insufficient to release the Guarantee.72

Both before and after this litigation, CEC's position has been that the August Transaction "`provided an independent basis' for releasing the Guarantee on the 2016 Notes."73 After the 5% Stock Sale, CEC filed an SEC Form 8-K reporting that its "guarantee of CEOC's outstanding secured and unsecured notes was automatically released."74 Likewise, CEC explained in its opposition to BOKF's motion for partial summary judgment that:

On the day of the August Transaction, CEC filed a Form 8-K stating the Guarantee had been released following the 5% Stock Sale, and also "not[ing] that CEOC had provided additional notices to the trustees for outstanding secured notes reaffirming its position [as stated in earlier notices based in part on the 5% Stock Sale] that CEC's guarantee had been released as a result of the guarantee of CEOC's unsecured notes being released."76 On the basis of these statements and the overall context, plaintiffs fail to show that CEC has taken inconsistent positions in describing the effect of the May Transactions.

Plaintiffs' arguments regarding judicial estoppel also lack merit. "`A party invoking judicial estoppel must show that (1) the party against whom the estoppel is asserted took an inconsistent position in a prior proceeding and (2) that position was adopted by the first tribunal in some manner, such as by rendering a favorable judgment.'"77 However, as just described, the relevant statements are not unequivocally inconsistent. Accordingly, CEC's argument based on the May Transactions is not barred by the doctrines of judicial admission or judicial estoppel.

C. There Is a Genuine Dispute of Material Fact as to Whether CEOC Was Wholly Owned by CEC Following the May Transactions

Section 1503 of the Indenture states that "[CEC] shall be released from all of its obligations under the Guarantee" if, among other things, CEOC "ceases for any reason to be a `wholly owned subsidiary' of [CEC] (as such term is defined in Rule 1-02(z) of the Regulation S-X promulgated by the SEC)." Regulation S-X sets forth accounting rules and requirements for financial statements filed under the federal securities laws.78 Under Regulation S-X, a subsidiary is "wholly owned" if "substantially all of [its] outstanding voting shares are owned by its parent and/or the parent's other wholly owned subsidiaries."79 "Voting shares" are defined to mean "the sum of all rights, other than as affected by events of default, to vote for election of directors and/or the sum of all interests in an unincorporated person."80

The parties agree that following the 5% Stock Sale, CEC owned roughly 95% of CEOC's common shares, and that following the PIP, CEC owned roughly 89%. Plaintiffs argue that 89% ownership "falls within the plain meaning of `substantially all,'" and then direct the Court to guidance issued by SEC Staff interpreting Regulation S-X.81 CEC argues that the guidance is irrelevant because it has "nothing to do with guarantees of public debt, but the unrelated issue of `push-down accounting,' the principles governing the financial statements of target companies in certain circumstances following an acquisition."82 But the Indenture makes the applicable section of Regulation S-X relevant by referencing it in section 1503(3).83

Plaintiffs rely heavily on the quantitative measures set forth in EITF D-97. According to that document:

Putting aside that this Staff guidance refers to "substantially wholly owned" and not "wholly owned," it is unclear from the above why push-down accounting is permitted, but not required, at the 80% to 95% level.

Moreover, plaintiffs fail to establish the qualitative factors discussed in the SEC Staff guidance. Plaintiffs argue that CEC continued to control 100% of the shares that vote for the election of directors because (i) CEOC's Certificate of Incorporation permits directors to appoint directors to fill vacancies, and (ii) the new Board was elected on June 27, 2014 through that process.84 Plaintiffs likewise claim that the "`form of ownership[ ]' of CEOC remained in CEC's control" following the May Transactions because the minority shareholders did not vote for the new directors in June 2014.85

However, if the directors were elected pursuant to the provision in the Certificate of Incorporation that allows directors to fill vacancies, then the failure of the minority shareholders to vote is irrelevant. Filling vacancies in this way is not done through voting shares. For this reason, Delaware law contemplates that while vacancies can be filled by the Board, annual elections must be held at which Board members can be removed for any reason.86

Plaintiffs also argue that "CEC's 89% voting interest in CEOC has enabled CEC to dominate CEOC completely, dictating all aspects of CEOC's existence, including day-to-day operations as well as extraordinary actions such as asset sales, related-party transactions, and CEOC's bankruptcy filing."87 Not one of these examples relates directly to voting shares or Board elections. To the extent that they relate to controlling the "form of ownership," at all, they do so based on the premise that CEC controls CEOC's Board. However,

In other words, there are genuine disputes of material fact that preclude summary judgment.

VI. CONCLUSION

Because there are genuine disputes of material fact as to whether the May Transactions independently released the Guarantee, I do not address whether the August Transaction violated the terms of either the TIA or the Indenture. For the foregoing reasons, plaintiffs' motions are DENIED. The Clerk of the Court is directed to close these motions [Dkt. Nos: 67 and 74 in No. 14-cv-7091 and Dkt. Nos. 60 and 67 in No. 14-cv-7973].

SO ORDERED.