The following information is used for educational purposes only.
Home Runs and Strike Outs: Analyzing Team Bankruptcies
Adam Rogoff
New York Law Journal
03-05-2012
As Yogi Berra said, "It ain't over till it's over." So, too, does the expression apply to Chapter 11 restructuring. In recent years, Chapter 11 and sports teams have played ball. Five teams filed for bankruptcy in just the last three years alone,1 and financial distress is affecting other teams.2 Reasons for sports team bankruptcies include systemic liquidity issues (e.g., low ticket sales, high player salaries and burdensome debt), and intellectual property and antitrust issues. Sports team bankruptcies also involve fundamental power struggles between team owners and other parties, raising legal issues not present in other types of bankruptcy cases.
Bankruptcy Sales Come With Hurdles
Section 363(b) of the U.S. Bankruptcy Code3 authorizes sales free and clear of liens, claims and encumbrances—an attractive feature for sports team buyers. Take the case of the Phoenix Coyotes, which suffered significant negative EBITDA (earnings before interest, taxes, depreciation, and amortization) from 2005-2008, prompting a search for a purchaser or strategic investor. The search resulted in a potential purchaser that conditioned the transaction on implementation through bankruptcy.4
Met with significant opposition by the National Hockey League (NHL) and the City of Glendale, where the Coyotes played, the bankruptcy court denied the sale to the initial purchaser. The NHL argued that professional sports leagues have the right to approve owners and locations of member teams, that contracts must be assumed, assigned or rejected in their entirety, and that the Code should not be used to supersede a league's approval rights over team owners.5 The NHL cautioned that the precedent set by permitting the debtor to circumvent the league contract restrictions would "wreak havoc" in professional sports, inviting teams to escape or revise contracts.6 The debtors raised antitrust issues contending that a "bona fide dispute" existed, thereby allowing the sale to be free of any such "disputed claims" under §363(f)(4) of the Code. The court disagreed that such a dispute allowed the sale over NHL objection and that it could not force a new owner into the league.
Glendale, which financed the Coyotes' arena, also asserted that it was entitled to specific performance and liquidated damages under its agreement, including the provision requiring the Coyotes to remain in Glendale through 2035. Glendale argued that Code §365 did not apply to its specific performance rights, relying on a bankruptcy tenet that debtors cannot "cherry-pick" the benefits of a contract while discarding the burdens.7 Because the bankruptcy court had several other reasons to deny the sale motion, it did not rule on Glendale's arguments. Meanwhile, the NHL put forward a competing bid to purchase the team, which was approved, resulting in a sale to the league while it pursued new owner options outside of the bankruptcy context. (As recent as January 2012, the NHL continues its efforts to locate a new owner—preferably with an interest in staying in Arizona).8
Another example lies with the Texas Rangers, which negotiated a private sale prior to filing for Chapter 11 in 2010, a condition of the transaction. The lenders did not support the plan or private transaction,9 and after negotiation, an auction process was undertaken resulting in a purchase price increase of $100 million that was implemented through an amended plan.10 Looking to §363 to rubber stamp a private transaction is not possible when the deal is faced with opposition. The goal of the Rangers' auction process was fair price or fair process, and ultimately, the Rangers believed they obtained both.11 Bankruptcy sales (particularly through an auction) level the playing field for debtors, potential purchasers, leagues and lenders by facilitating a transaction in an environment where dispute resolution and court oversight is readily available.
While §363 is a powerful tool for many types of debtors, sports teams do not always score, at least not when first at bat. Complex contractual rights relating to franchise agreements and stadium leases make this a high stakes game.
Relocation Provisions
An ailing sports team may view a move to another city (and fan-base) as a jumpstart to its financial recovery. While that may seem logical since certain markets are generally more lucrative, there are often relocation restrictions in agreements with the league and with the arenas in which the teams play.12 Section 365 of the Code allows the debtor to assume and assign executory contracts despite anti-assignment or anti-transfer provisions in the agreement.13 In the Coyotes case, the debtors and the potential purchaser struggled with the provisions that restricted the relocation of the team to Canada with both arguing that it was unenforceable under §365(f)14 and therefore could be eliminated from the agreement. The court disagreed and found that the relocation provision was not an anti-assignment clause and concluded that adequate assurance of future performance or compensation in the form of a "relocation fee" could not compensate the NHL's interests under the agreement.15
The parties and the court recognized that a sale was the only option for the team, therefore the NHL was invited to submit a revised bid, which they did. In this bid, they provided for the satisfaction of the secured prepetition and postpetition financing as well as purchase of the unsecured claims.16 By doing so, the NHL implemented a bifurcated auction process for the team to seek bids that will keep the team in Glendale, Arizona before considering relocation. As discussed above, the sale process is ongoing outside of the bankruptcy case.
As noted by the court, there is a challenge in sports bankruptcies between the league's desire to control membership and location of home games versus the rehabilitative goal of financially challenged teams.17 In many industries (e.g., automotive), economic changes come from rejecting manufacturing facility or headquarter leases and relocating to a lower-cost plant site. Relocation of a team through bankruptcy is not easily accomplished.
More Options Than Corporate Debtors
Meanwhile, years after they left their Brooklyn home, the Dodgers needed the financial power to knock one into the stands. Obtaining postpetition financing under §364 was the hoped-for sweet spot shot over the plate in the early stages of the Dodgers bankruptcy case. The Dodgers sought approval of a postpetition, super-priority, delayed draw term loan facility funded by a third-party family of funds. Importantly, the court reviewed the potential financing using an "entire fairness" standard rather than a typical business judgment standard, because of the lack of disinterestedness due to potentially significant personal liability of the debtors' principal, if the approval was not sought.18 Major League Baseball (MLB) objected, and offered unsecured financing on economically superior terms.19 Because the Dodgers could obtain unsecured credit and failed to demonstrate that the super-priority credit transaction was necessary and that the terms of the financing were fair, reasonable and adequate in light of the more favorable MLB financing option, the court denied the Dodgers' motion.20
As debtors, sports teams must exercise sound business judgment and act in the best financial interests of the estate, even if the debtors might be in conflict with their sports league and wish to deal with other parties when obtaining postpetition credit. Unlike other industries' bankruptcies, franchised sports teams have an additional outlet for financing other than traditional third parties. Leagues that want to protect their interests may choose to fund a Chapter 11 case for strategic purposes, while debtors, like the Dodgers, will be hard-pressed to justify choosing alternative lenders when unsecured (or even secured) financing is available on favorable terms.21 This represented another example of a league's ability to protect rights by offering alternatives through the bankruptcy process, much like the NHL's acquisition of the Coyotes.
Not Always a Home-Run
Maximizing the value of the estate for the benefit of creditors is a fundamental goal of the bankruptcy process.22 However, contracts in existence at the time of bankruptcy commencement often create challenges for a debtor seeking to maximize value, as occurred in the Dodgers Chapter 11 case, including valuable media rights contracts.
In late 2001, the Dodgers and Fox Sports entered into an agreement establishing a media production and licensing relationship through the 2013 baseball season, which contained an exclusive negotiation provision and a right of first refusal for Fox. In bankruptcy, the Dodgers sought court approval to sell the team and renegotiate the media rights prior to the end of the contract term, which the Dodgers argued would maximize the value of the estate. Fox objected on the grounds that the "no shop" clause was enforceable while the court found it to be invalid, as it impedes the debtors' exercise of fiduciary duties to maximize value.23 The court granted the motion, finding that the amended media agreement was within the debtors' business judgment and that Fox would not suffer significant damage.
When ruling on a stay pending appeal motion, the district court found that the "no-shop" was not in fact such a provision, instead was an ordinary contractual limitation with a fixed time period, and moreover, there was evidence of solvency, so the debtor should be bound by contractual obligations.24 Additionally, due to possible solvency, the marketing of the telecast rights was not vital to creditor recoveries in early 2012 versus late 2012. Fox also demonstrated irreparable harm with the likelihood of losing the unique and valuable contract rights. The stay pending appeal would provide more flexible negotiating ability than the truncated schedule.
In January 2012, Fox and the Dodgers settled their disputes, with the Dodgers assuming the media agreement with the exclusive negotiating period under the agreement commencing on Oct. 15, 2012. At the same time, the debtors also settled with MLB whereby they would file a Chapter 11 plan that seeks to sell the team and stadium either as an asset sale or a sale of equity. Initial bids were due on Jan. 2325 and a proposed Chapter 11 plan and disclosure statement have been filed with the court, which will implement any transaction through the confirmation process. The Dodgers anticipate that any transaction will provide for full satisfaction of all allowed claims asserted—the ultimate victory in any Chapter 11 case. The Dodgers project the bidding process to be complete before opening day of the 2012 season.26
The Dodgers matter provides a bankruptcy case study of the tensions between parties struggling for ownership and control, the value and weight of media/intellectual property rights of the team, and the duty that all debtors have to maximize the value for creditors. As evidenced by the Dodgers, a settlement between the debtors and the various major constituencies may be the only avenue to facilitate a Chapter 11 process, rather than expend time and energy on costly litigation over these issues.
Is Bankruptcy a Lay-Up?
Economic downturn, coupled with high player salaries, significant unsecured debt, and low ticket sales and revenues can cause financial constraints for any team. While sports franchise bankruptcies are often complicated and require the balance between the debtors, creditors and league's interests, bankruptcy can offer the much-needed breathing room for your quarterback before throwing the Hail Mary pass, hopefully without fumble or turnover. Teams take timeouts to re-evaluate operations, salaries and key contracts for future success. While financial health and stability are the goals of all debtors for their emergence from Chapter 11, a hallmark of success in sports bankruptcies is a winning season capped off by a championships, such as the Stanley Cup winner, the Pittsburgh Penguins, and the Texas Rangers, who won American League pennants upon their emergence from bankruptcy.27 Filing for bankruptcy can assist in cleaning the financial slate, implementing an operational and management restructuring, and creating an opportunity for the team to succeed in their foremost goals of winning championships and entertaining their fans.
Adam Rogoff is a partner in the corporate restructuring and bankruptcy department of Kramer Levin Naftalis & Frankel. Anupama Yerramalli and Anastasia Kaup, associates in that department, assisted in the preparation of this article.
Endnotes:
1. Approximately 11 major teams have utilized the bankruptcy process, with five teams having done so in the past three years (Dallas Stars, Los Angeles Dodgers, Texas Rangers, Phoenix Coyotes, and Chicago Cubs). See Jared Diamond, "How Bankruptcy Can Lead to Victory," The Wall Street Journal (June 30, 2011), available at http://online.wsj.com/article/SB10001424052702304450604576415810160949134.html.
2. In the New York area, there has been media activity regarding the New York Mets' losses of approximately $70 million last year and the hiring of restructuring advisors. The New Jersey Devils have also recently experienced financial troubles related to their arena. See Mike Ozanian, "New Jersey Devils Appear Headed for Bankruptcy," Forbes.com (Nov. 4, 2011), http://www.forbes.com/sites/mikeozanian/2011/11/04/new-jersey-devils-appear-headed-for-bankruptcy/.
3. Title 11, United States Code, 101 et seq. (the Code).
4. Declaration of Michael Nealy in Support of Chapter 11 Petitions and First Day Motions at 17, In re Dewey Ranch Hockey, No. 09-09488 (Bankr. D. Ariz. May 5, 2009) (Docket No. 8).
5. In re Dewey Ranch Hockey, 406 B.R. 30, 35 (Bankr. D. Ariz. 2009).
6. Id.
7. Id. at 37.
8. Sports Illustrated, "NHL Commissioner: Plan B for Coyotes is premature" (Jan. 28, 2012), available at http://sportsillustrated.cnn.com/2012/hockey/nhl/01/28/phoenix.coyotes.ap/index.html.
9. The lenders also commenced involuntary bankruptcy proceedings against the equity owners resulting in the appointment of a chief restructuring officer for those entities, who determined that an auction process would prove the adequacy of the proposed purchase price for the team.
10. Transcript at 20, In re Texas Rangers Baseball Partners, No. 10-43400 (Bankr. N.D. Tex. Aug. 5, 2010).
11. Id. at 21.
12. 406 B.R. at 37.
13. 11 U.S.C. §365.
14. Section 365(f) is a powerful tool that invalidates provisions in contracts that seek to prevent or hinder assignment of the agreement to a new party. Courts have given this tool fairly wide effect. See Shoppers World Community Center v. Bradlees Stores Inc. (In re Bradlees Stores Inc.), No. 01-3934, 2001 U.S. Dist. LEXIS 14755, at *6 (S.D.N.Y. Sept. 20, 2001).
15. Disclosure Statement, at 9-11. After the denial of the sale motion, the debtor commenced an adversary proceeding against the NHL alleging that the relocation provision violated the antitrust laws. In re Dewey Ranch Hockey, 414 B.R. 577 (Bankr. D. Ariz. 2009).
16. Disclosure Statement, at 9-11.
17. 406 B.R. at 42.
18. See In re Los Angeles Dodgers LLC, 457 B.R. 308, 313 (Bankr. D. Del., 2011).
19. See id. at 312.
20. Id. at 314.
21. See, e.g., id. at 312.
22. See In re Los Angeles Dodgers LLC, No. 11-12010, 2011 Bankr. LEXIS 4957, at *23 (Bankr. D. Del. Dec. 15, 2011) (citing In re Mushroom Transp. Co., 382 F.3d 325, 339 (3d Cir. 2004)).
23. Id. at *22.
24. In re Los Angeles Dodgers LLC, No. 11-01235, 2011 U.S. Dist. LEXIS 149582, at *34-35 (Bankr. D. Del. Dec. 27, 2011).
25. ESPN LA, "Dodgers settle with Fox Sports" (Jan. 11, 2012), http://espn.go.com/los-angeles/mlb/story/_/id/7449372/judge-oks-settlement-los-angeles-dodgers-fox-sports.
26. Michael McCann, "Dodgers deal is a victory for Selig, and a warning for other teams," SI.COM (Nov. 2, 2011), http://sportsillustrated.cnn.com/2011/writers/michael_mccann/11/02/dodgers.sale/index.html.
27. See Joseph Checkler, "Sports Teams' Secret to Success After Bankruptcy: File Again!," The Wall Street Journal (June 27, 2011), available at http://blogs.wsj.com/bankruptcy/2011/06/27/sports-teams-secret-to-success-after-bankruptcy-file-again/.
Source: www.newyorklawjournal.com
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