The ruling by U.S. Bankruptcy Judge Kevin Gross was a victory for Caesars, whose operating unit filed for bankruptcy protection in Chicago earlier this month just days after the creditors groups filed a petition in Delaware to force the company into involuntary bankruptcy.
Creditor attorneys had argued that Caesars filed in Illinois partly because it will be easier there to shield company officials from lawsuits over what they allege were improper transfers to shield the operating unit's assets from creditors.
Caesars attorneys contended that under bankruptcy law, Gross should defer to the company's choice of Illinois as the best place to try to fashion a consensual plan maximizing value for all stakeholders.
"That decision is entitled to just enough deference ... to permit debtor to proceed in its chosen forum," Gross said in an oral ruling that will be explained in detail later in a written opinion.
Although he ruled that the interest of justice "narrowly supports" Illinois as the forum for the case, even if the choice was made to protect insiders, the judge had strong words for Caesars, asserting that the company's conduct leading up its bankruptcy filing "on its face is suspect."
Gross noted a ruling in which a federal judge in New York said earlier this month that Caesars may have violated federal law by selling off assets and stripping away investors' guarantees without their approval, as creditors have alleged in lawsuits. Gross said he is confident that the Illinois judge would put Caesars "under a magnifying glass" and would not allow company officials to breach their fiduciary duties or commit fraud "should those facts come to the court's attention."
Gross also said it would set a bad precedent for bankruptcy cases if he were to side with the venue choice of creditors who were pushing for an involuntary bankruptcy.
"The involuntary petition was clearly an anticipatory filing," Gross said, adding that the creditors were fully aware that the company would be filing its own bankruptcy petition in a matter of days but "raced to the courthouse."
Rewarding such conduct could set a precedent for future cases and impair the ability of struggling companies to openly negotiate with creditors before seeking bankruptcy protection, Gross ruled.