Counsel Concerns

Beyond his findings on Caesars' outside counsel, Richard Davis, the examiner, slammed the still-solvent parent company and its private equity backers, Apollo Global Management and TPG Capital. The report suggests that they may now be on the hook for as much as $5.1 billion in damages over their hand in related transactions that stripped valuable assets from the operating company while loading it up with debt.

Examiner Davis was a Weil, Gotshal & Manges partner from 1981 to 2012, when he left to form his own firm. In his report, he noted that Paul Weiss had advised on both sides of the asset-stripping transactions at a time when the company was insolvent ' and that the firm had plenty of opportunities to know it.

Paul Weiss also counted Apollo as an important client at a time when the firm was advising both the parent and operating company's boards on the transactions at issue. The examiner noted the firm didn't disclose its Apollo ties to the independent directors, though he indicated that that relationship was less troubling.

Under bankruptcy law, if a lawyer advises two entities with divergent interests, he or she can continue to represent both only if all the issues have been disclosed, and if it's clear that the lawyers can competently represent both parties. In this case, Davis found, the requirement wasn't met.

Paul Weiss, which continues to represent Caesars' solvent parent company in the bankruptcy proceeding, argued to the examiner that there was no conflict, because the parent company board and the private equity backers proposed transactions designed to benefit both the operating unit and the parent company. A conflict, they argued, would only arise when the firm understood that a bankruptcy was sufficiently probable, which, they assert, was not the case at the time.

Davis didn't agree. “It is important to understand that it is not unusual for lawyers to represent portfolio companies of their private equity clients, although doing so can raise some ethical issues once there are public shareholders,” Davis wrote in the 82-page report, which took a year of effort. “Nor is it unusual for the same law firm to represent a parent corporation and its 100%-owned subsidiary. In each of these circumstances, however, the situation changes once the company being represented becomes insolvent.”

Davis said the Paul Weiss lawyers in this case would have certainly been on notice that the operating company was insolvent by the fall of 2013, and probably by the fall of 2012.

In October 2012, in one of several instances Davis noted, a Paul Weiss partner had in hand a financial presentation that noted that the operating unit, which runs about three dozen casinos and resorts, would be likely to be bleeding cash, and that it wasn't projected to be able to repay debt that was coming due. By October 2013, the examiner continued, numerous Paul Weiss partners were given a Caesars analysis stating that the unit was billions of dollars short of being able to pay debt that was maturing. A month later, the firm was advising Apollo on the potential impacts of an operating company bankruptcy.

Still, to prove liability in court would be nearly impossible. Creditors would have to show that Paul Weiss lawyers knowingly participated in a breach of fiduciary duty. While Delaware courts have found lawyers liable for aiding and abetting claims, in those cases they had to participate in actions that harmed their client or creditor interests beyond providing ordinary legal services. “This simply is not the case here,” Davis concluded.

In a statement, Paul Weiss said that it “worked in good faith and in full compliance with its professional responsibilities to advance the interests of the Caesars companies. Paul Weiss did not in any way prejudice its clients or their creditors.”

The Paul Weiss lawyers representing Caesars are an experienced bunch. In the years in question, they included the former O'Melveny partner Ezring, as well as two career Paul Weiss attorneys, litigation partner Lewis Clayton and bankruptcy chair Alan Kornberg, among others.

Paul Weiss isn't the only firm to be tarred by the rancorous Caesars insolvency. Junior bondholders fighting a proposed restructuring plan, represented by Jones Day's Bruce Bennett, tried this past fall to disqualify debtors' counsel Kirkland & Ellis on grounds that the firm was similarly conflicted. In the months before the filing, the firm played concurrent roles advising the bankrupt estate, a special board committee to investigate the asset transfers and the operating unit's board.

The bondholders' motion, which U.S. Bankruptcy Judge Benjamin Goldgar dismissed late last year, asserted that Kirkland's lead counsel, bankruptcy bigwig James Sprayregen, didn't play straight about Kirkland's involvement in litigation in the run-up to the bankruptcy and was acting in the interests of the solvent parent company over the interests of creditors.

Bondholders holding billions in notes have filed at least eight suits against the company and its subsidiaries. All stand to collect far less than face value under a $10 billion debt restructuring plan proposed by Kirkland.

Examiner Davis has had a long history of spearheading contentious matters. He served on the Watergate Special Prosecution Force, where he secured testimony from President Richard Nixon about the eighteen-and-a-half-minute gap on one of the White House tapes, campaign contributions and allegations of wiretapping a political opponent. From 1977 to 1981 he was assistant secretary of the treasury during the Carter administration, where he worked on the Iran hostage crisis.

Julie Triedman is a Senior Writer for New York Law Journal, an ALM sibling of Entertainment Law & Strategy.