Casino bill pits Reid against Warren

A move by Sen. Harry Reid (D-Nev.) to help Caesars Entertainment Corp. avoid bankruptcy has put the Senate Democratic leader at odds with one of his star colleagues, Sen. Elizabeth Warren (D-Mass.).

Reid is seeking to insert language in an end-of-year spending bill that would allow the gaming corporation to restructure the debt of a subsidiary out of court despite opposition from holdout bond holders.

{mosads}If Caesars doesn’t get the help and folds, it could cost Reid’s state thousands of union jobs.

The problem is that the language could also help Education Management Corp. — a top target of Warren’s.

She argues the private education company, which operates for-profit colleges such as the Art Institutes, Argosy and Brown Mackie, uses “scam recruiting practices” to bilk students.

Earlier this year, Warren called for tougher federal oversight of for-profit colleges, and last month she sent a letter to the Departments of Education and Justice criticizing a settlement with Education Management for being too lenient.

Decisions by two courts involving Caesars and Education Management make it more difficult for corporations to cut their debts without going into bankruptcy if their debt-cutting plans are opposed by minority shareholders.

Reid’s language is meant to override those decisions to allow Caesars to cut its debt without going through bankruptcy despite opposition from some stockholders.

He argues the language has been drafted so that it would not apply to Education Management, but allies of Warren say it does not pass muster.

Adam Levitin, a law professor at Georgetown University who is a friend and former student of Warren’s, said Reid’s legislative language is poorly drafted and will not exempt Education Management from protection.

“They didn’t manage to do that, first of all. It’s astonishing how badly drafted this is. They don’t seem to understand what the litigation posture is. If this were to pass, EDMC could take advantage of it the next day,” he said.

He and 17 other law professors wrote a letter to congressional leaders Tuesday panning the proposed rider.

“We urge you to postpone any amendment of the Trust Indenture Act until after legislative hearings that enable more deliberate and careful consideration,” they wrote. “The amendment of federal securities laws is not something that should be undertaken lightly. A hasty amendment of the Trust Indenture Act could have broad negative unintended consequences in the securities market.”

The letter was addressed to Reid, Senate Majority Leader Mitch McConnell (R-Ky.), Speaker Paul Ryan (R-Wis.) and House Minority Leader Nancy Pelosi (D-Calif.).

Warren, a former Harvard Law professor who specialized in bankruptcy, was thought to have backed off her opposition to Reid’s rider earlier in the week, but Tuesday’s letter indicated otherwise. Her office declined a request to comment for this story.

Senate and K Street sources say Warren isn’t satisfied.

“She still has some issues with the fundamental question,” said Senate Democratic whip Dick Durbin (Ill.), who helped strip similar language from the highway bill after complaints from liberals.

Critics argue Reid’s language would roll back a Depression-era law known as the Trust Indenture Act, which was intended to protect minority bondholders from getting cheated. Proponents say it merely reestablishes the original meaning of the 1939 law.

Levitin, who teaches and writes about the Trust Indenture Act, said he has been in touch with Warren on the subject. Warren was Levitin’s boss when they both served on the Congressional Oversight Panel for the Troubled Asset Relief Program.

“There’s disagreement within the legal academy about what if anything should be done to amend the Trust Indenture Act, but there’s clear consensus it shouldn’t be done this way procedurally,” he said.

“Elizabeth was my teacher in law school, she was my boss for a while when I worked for the Congressional Oversight Panel and she’s a friend. She’s someone I’ve been in touch with about this,” he added.

Levitin said he was first approached by a staffer for another senator who alerted him to the legislative language when it was under consideration for the highway bill. He said he flagged the issue for Warren and added she did not ask him to take action.

Reid defended his efforts during a Tuesday press conference.

He argued his language would merely reestablish a legal right that has existed “for more than 90 years to allow someone that is having financial difficulties [to] have pre-bankruptcy discussions with the bondholders, the debtors and in the process, try to work something out.

“It doesn’t apply to Caesars, it applies to everybody because that’s a bankruptcy law [that] has been in this country for more than 90 years,” he added.

Durbin frequently criticizes for-profit colleges on the Senate floor for misleading recruiting practices and sometimes leaving students deep in debt with slim job prospects after graduation.

But he said his concerns about Reid’s language were allayed when proponents of the rider changed its language to exempt Education Management.

“I’m satisfied,” he said.

Sen. Sherrod Brown (Ohio), the ranking Democrat on the Banking Committee, another liberal opponent of the policy rider, said he would have to review the changes.

“I didn’t like it in the [transportation] bill. I have to look at what they’ve done,” he said Wednesday. 

This story was updated at 9:50 a.m.