Why Did Caesars Choose Chicago?

As restructuring professionals counted down the hours until Caesars Entertainment Corp. put its largest unit into Chapter 11 protection in Chicago, they weren’t puzzling over the reasons for the bankruptcy filing. The casino operator had indicated for weeks it would take a Chapter 11 restructuring to resolve the unit’s $18.4 billion debt load.

The big question on their minds: Why Chicago? Why did the Las Vegas-based gambling company buck the corporate trend and file its bankruptcy in the Windy City, rather than New York or Delaware, the courts that catch the big cases?

Caesars says the Midwest “is an important hub of Debtors operations, including seven of the Debtors’ 27 owned or operated casinos, more than any other region.”

The buzz in bankruptcy circles, however, is that Caesars picked Chicago because of Airadigm Communications, a phone company that took a run through Chapter 11 and wound up before a federal appeals court in Chicago in 2008.

[RELATED: 5 Things Things to Know About the Caesars Restructuring]

Via the Airadigm case, the Chicago appeals court made it easier for ailing companies to force creditors to drop lawsuits against entities outside the bankruptcy–such as company leaders who were calling the shots–even though they themselves aren’t under bankruptcy protection.

A lawsuit injunction issued under the Airadigm standard means creditors may not be able to “go after management for all the stuff they’ve done,” said Anthony Casey, an assistant professor at the University of Chicago Law School. “If you’re really worried about that, this would mean a lot to you.”

A Caesars spokesman declined to comment.

Caesars is facing a number of lawsuits that accuse the parent company, its leaders and some affiliates of having transferred the best assets from the operating unit that is now in bankruptcy, Caesars Entertainment Operating Co., to other Caesars affiliates. Caesars has defended the transfers.

Under the Airadigm ruling, the parent company, affiliates that absorbed the transferred assets, and the company’s private-equity owners, Apollo Global Management LLC and TPG, could be off the hook if the Caesars unit gets its Chapter 11 plan through the court.

That likely wouldn’t happen in Delaware, where some junior bondholders filed an involuntary bankruptcy case against the Caesars unit Monday.

Outsiders that want to get out from under lawsuits by way of a Chapter 11 plan in Delaware can do so only if they pay a price, and only if creditors agree to go along.

The Airadigm standard that applies in Chicago simply requires a finding that the forced lawsuit releases are appropriate and not inconsistent with bankruptcy law.

Mr. Casey said that Caesars case could produce a “more nuanced” version of the Airadigm standard, after creditors make their arguments for better treatment. Going into the proceeding, however, creditors don’t have the assurance of the line of Delaware cases that set a high bar for broad grants of immunity.

Judge Kevin Gross of the Delaware bankruptcy court said Wednesday he would set an emergency preliminary hearing on the venue fight as soon as the voluntary Chapter 11 case is filed to avoid the confusion of having one company slogging through bankruptcy cases in two different courts.