U.S. District Judge Shira Scheindlin threw a monkey wrench in Caesars Entertainment’s bankruptcy plan on Tuesday when she ruled that Caesars’s deal with bondholders to eliminate guarantees of the debts of its largest subsidiary was illegal. Scheindlin noted that it would amount to an “impermissible out-of-court debt restructuring” that stripped assets from the unit while leaving bondholders “with an empty right to assert a payment default from an insolvent issuer.”

Statement from Caesar’s on new ruling in bankruptcy case

“We respectfully disagree with the court’s ruling, which was based simply on the plaintiffs’ allegations and that we believe is inconsistent with the provisions” of federal law, noted Caesars spokesman Stephen Cohen. “And given the size of the claims at issue and our strong defenses, we do not expect the ruling to impact the planned reorganization.”

Judge Sides With Plaintiffs Against Caesars In Bankruptcy Proceeding

More on Caesars bankruptcy

Caesars Entertainment was taken over by hedge funds Apollo Global Management and TPG seven years ago. Last week, the firm’s largest unit, Caesars Entertainment Operating Co., declared bankruptcy. However, before the bankruptcy filing the company moved around a number of valuable assets, putting the assets out of reach of creditors of CEOC.

The legal wrangling over the asset switching is emerging as a key issue in the unit’s bankruptcy. Especially, as Judge Scheindlin noted, the bankruptcy filing protects the operating unit from ongoing litigation, but there is no protection for the parent.

Scheindlin rejected Caesars’s efforts to get the case thrown out at the pretrial stage, and allowed most of a lawsuit against parent company CEC over an August 2014 transaction that cut off debt guarantees to a subsidiary.

“CEC’s ultimate plan is to push CEOC into bankruptcy while protecting Apollo and TPG from CEOC’s creditors,”  Judge Scheindlin commented. She also noted that if the case proceeds, the investors that sued may be able to collect for being forced into an inappropriate restructuring.

Analysts note that today’s ruling, although preliminary, is the first official legal word coming down against Caesars questionable maneuvers, and and will strengthen the claim of investors who say Caesars asset switching has caused them harm.