Harrah’s wants class-action suit over debt swap dismissed

By Steve Green (contact)

Friday, Feb. 27, 2009 | 2 a.m.

Attorneys for Harrah’s Entertainment Inc. are seeking dismissal of a class-action lawsuit challenging the hotel and casino giant’s recent debt-swap deal.

The attorneys said in court papers filed this week in U.S. District Court in Delaware that the recent debt-reduction deal was good for Las Vegas-based Harrah’s and didn’t hurt any bondholders.

The lawyers for Harrah’s, with the firms Richards, Layton & Finger of Wilmington, Del.; and Latham and Watkins of New York; were responding to a suit filed in January by class-action securities lawyers on behalf of bondholders S. Blake Murchison and Willis Shaw.

That suit alleged the debt exchange benefited some big corporate bondholders while placing other classes of bondholders in jeopardy, should Harrah’s default on its debt or file for bankruptcy protection.

The January lawsuit alleged Harrah’s is “on the verge of bankruptcy, debt default and other events of insolvency.”

“Plaintiffs’ bond holdings have been subordinated to the newly-issued bonds and, as a result, have been likely rendered worthless as the specter of Harrah’s insolvency approaches,” the suit alleged.

But attorneys for Harrah’s and its board of directors, who were also sued, said the suit should be thrown out for several reasons including:

— The plaintiff bondholders have not been harmed by the debt swap and are scheduled to receive the same interest and principal payments they would have received regardless of whether Harrah’s swapped the debt in question.

— Harrah’s is not insolvent or bankrupt, meaning bondholders are receiving their interest payments on time. Courts could hear claims from bondholders of companies that are actually bankrupt, but cannot entertain bondholder claims about companies that are merely near insolvency or likely to file for bankruptcy, Harrah’s said.

— Harrah’s has no fiduciary duty to bondholders; it only has contractual relationships with debt holders. It did not violate its indentures, or contracts, with any of the old bondholders when it swapped the debt. For instance, the old bond indentures allowed Harrah’s to swap nonsecured debt for secured debt, something the plaintiffs claim is harmful to them. Harrah’s also asserts the plaintiffs are failing to comply with provisions in the bond contracts requiring them to take specific steps before filing a lawsuit over their bond contracts.

— The plaintiffs represent just two of 10 classes of old bonds. Harrah’s said this means they cannot represent a class action for all bondholders since their actions, if successful, would actually harm the other classes of noteholders. Harrah’s also asserts the federal court has no jurisdiction in the case since there are no true geographic diversity issues between the plaintiffs and Harrah’s.

—The plaintiffs said they were harmed by Harrah’s "unfair, arbitrary and discriminatory’’ tender offers — but Harrah’s said federal law addressing such discrimination applies only to equity securities, not debt.

Harrah’s response said that under the terms of the debt swap, completed on Dec. 24, it exchanged $2.25 billion in old debt for $1.05 billion in new bonds and $290 million in cash. Harrah’s had plenty of takers for its swap offer because its bonds have been trading at a discount to face value. Certain classes of investors were allowed to participate in the swap, while others were not. The deal substantially reduced the overall debt burden of the company, Harrah’s response said.

"Here, plaintiffs’ rights to principal and interest are exactly the same now as they were before the exchange offer,’’ Harrah’s said.

"The relationship between a bondholder and a company is one of a contract. Nothing in Harrah’s contracts with its bondholders warrants the present suit and plaintiffs’ claims should be dismissed,’’ the suit says.

"The (federal) Trust Indenture Act does not apply to plaintiffs’ claims unless: (a) a bondholder’s right to principal or interest has been impaired and (b) the issuer has failed to pay interest or principal as originally agreed,’’ Harrah’s said. "Here, neither is the case — the plaintiffs’ rights to principal and interest are exactly the same after the exchange offer as before, (and) Harrah’s has never failed to pay plaintiffs anything.’’

Steve Green can be reached at 990-7714 or steve.green@hbcpub.com.