Caesars Might Have $450 Million Riding on an “And”

Ah, what would life be without disputes over and and or!

Here’s a fresh one (thanks to cousin Joshua Stein for alerting me) that arose in connection with a series of transactions that freed Caesars Entertainment from having to guarantee a portion of the $18 billion of debt of its subsidiary Caesars Entertainment Operating Co. As a result, investors lost something like $450 million on CEOC’s bonds.

The language at issue is in section 12.02 (Limitation of Liability) of an indenture:

The Parent Guarantee shall terminate and be of no further force or effect and the Parent Guarantor shall be deemed to be released from all obligations under this Article XII upon:

(i) the Issuer ceasing to be a Wholly Owned Subsidiary of Caesars Entertainment;

(ii) the Issuer’s transfer of all or substantially all of its assets to, or merger with, an entity that is not a Wholly Owned Subsidiary of Caesars Entertainment in accordance with Section 5.01 and such transferee entity assumes the Issuer’s obligations under this Indenture; and

(iii) the Issuer’s exercise of its legal defeasance option or covenant defeasance option under Article VIII or if the Issuer’s obligations under this Indenture are discharged in accordance with the terms of this Indenture.

Caesars got out of its guarantee by selling 5 percent of the equity of CEOC to institutional investors in a private transaction. As described in this Bloomberg News article, here’s how the and at the end of clause (ii) comes into play:

Bondholders may argue that because two of the actions are linked by “and” in the document, extinguishing the guarantee requires Caesars to satisfy all three clauses, according to Fitch’s Bumazhny.

“We would view this as something that could be contested,” John Kempf, an analyst at RBC Capital Markets, wrote in a report last week. “The company could argue that this was simply a ‘drafting error,’ and the actual intention was not the literal interpretation.”

Bloomberg View columnist Matt Levine takes up the story in this column:

I don’t know what to tell you. As readers of words, those bondholders seem to be right. “The guarantee goes away upon X, Y and Z” does sound like you need X, Y and Z all to happen before the guarantee goes away. That’s just what “and” means.

On the other hand, the indenture obviously means to say “or.” It would make no sense to say that CEOC has to (i) stop being a wholly owned sub and (ii) merge into another company and (iii) pay off or defease all its debts for the guarantee to go away. Like, if CEOC paid off all its debts, but didn’t merge into another company, would Caesars still be obligated under the guarantee?

So this looks like a mistake, but the sort of mistake that a court probably wouldn’t read too literally. So I wouldn’t bet on the bondholders’ chances of challenging the de-guarantee-ification successfully.

I’m not going to hazard a guess at how a court would handle this—that would require too much work! As usual, my principal interest is, what should the drafter have done?

Using just or works when occurrence of only one of the specified alternatives is feasible or desirable. But if you want to avoid having someone argue that occurrence of more than one of the specified alternatives precludes operation of the provision in question, then put the phrase one or more of the following before the specified alternatives and put and at the end of the penultimate alternative.

(By the way, this kind of confusion falls under what I call “ambiguity of the part versus the whole.” MSCD chapter 11 contains the most complete discussion of the subject in any literature.)

Posted in Ambiguity | 7 Comments

  • Cam Mitchner

    I think you meant to write “one or more of the following” in the second to last paragraph. Otherwise, I like your suggestion, particularly because it signals to the reader how to interpret the alternatives prior to hitting the conjunction at the end of the second to last term.

    • http://www.adamsdrafting.com/ Ken Adams

      Oops, thanks for pointing that out. I’ve fixed it.

      • AWrightBurkeMPhil

        You say:

        “But if you want to avoid having someone argue that occurrence of *more than one* of the specified alternatives precludes operation of the provision in question, then put the phrase *one or more of the following* before the specified alternatives and put and at the end of the penultimate alternative.”

        But in the Caesars case, wouldn’t the point be:

        “But if you want to avoid having someone argue that occurrence of *fewer than all* of the specified alternatives precludes operation of the provision in question, then put the phrase *one or more of the following* before the specified alternatives and put and at the end of the penultimate alternative”?

        Also, has the word “antepenultimate” ever appeared on this blog?

        • http://www.adamsdrafting.com/ Ken Adams

          You’re right, but my suggestion followed discussion of using “or.”

  • http://rickcolosimo.com Rick Colosimo

    Ken, isn’t this whole situation described backwards in the press? The agreement says “and,” which has a straightforward meaning. But Caesar’s says that the deal was always “or,” and they conducted themselves that way.

    It seems to me that the argument that the provision is internally inconsistent is another ex post facto argument in case Caesar’s is unsuccessful in either (1) its scrivener’s error argument or (2) its parole evidence “and was never meant to actually mean ‘and’” argument.

    I find it even more interesting that the bondholders don’t seem to have had the same understanding as Caesar’s. Or at least the people currently holding the bag, so to speak.

    If nothing else, it supports the argument that you should write what you mean, and if you mean something different from what you write, expect extra trouble when it comes to enforcement time.

    • http://www.adamsdrafting.com/ Ken Adams

      People mess up “and” and “or” all the time, so sometimes it can be difficult to attribute significance to the choice of one or the other.

  • http://www.lawnotes.com D. C. Toedt

    Sounds like a job for “and/or,” no? (Cut to Ken repeatedly banging his forehead on his desk.)