League Impact on the Sports Team Bankruptcy Process

The teams themselves face economic challenges. For example, 14 of the 30 teams in the NHL showed negative earnings before interest, taxes, depreciation and amortization (EBITDA) for the 2008-2009 season, according to a November 2009 Forbes magazine report. As more beleaguered team owners seek refuge in bankruptcy proceedings, the resulting clash of league interests with fundamental principles of bankruptcy law will result in the development of novel legal and practical solutions for financially distressed sports franchises.

Cultural Clash

When teams become financially distressed or insolvent, there is an immediate cultural clash between the team and the league. The team clings to the bankruptcy imperative of maximizing asset value. The league desires dominance and control in what is, at its core (and despite the leagues' legal protests to the contrary), a very large business. Two aspects of the team/league relationship fuel the culture clash ' the leagues' predilection for calling teams “franchises,” and the leagues' legal battles to dodge antitrust claims.

What Is a 'Franchise'?

The leagues like to characterize the relationship with each constituent team as a “franchise” ' a term used so often that it's embedded in the sports lexicon. But terms such as “franchise player” or “the Yankees franchise” are legal misnomers. In the purely legal sense, a franchise involves the owner of the rights to special sauce, if you will, such as a proprietary recipe or a trademarked or patented process. Third-party franchisees obtain licenses to use the special sauce under the auspices of a franchise relationship that is specifically and tightly regulated under state and federal statutory law.

In this same legal sense, most leagues are more of a “cooperative,” in which individual teams work with each other to define rules of conduct, competition and business. Some leagues, such as the NHL, are unincorporated joint ventures. The special sauce in the NHL, for example ' intellectual property such as logos and broadcast rights ' is owned by each individual team and not the NHL. According to an unpublished paper titled “Sports Franchise Bankruptcy: The Inadequacy of Professional Sports Leagues' Trademark Ownership Structure,” the NHL does not and cannot own the intellectual property of the 30 teams in the league because unincorporated joint ventures cannot own assets under New York law. In the NHL, the intellectual property is owned by a special-purpose entity owned equally by the 30 league teams.

Antitrust Law

The leagues have long attempted to insulate themselves from legal restrictions in antitrust law. MLB alone has had a judicially created exemption from antitrust laws since 1922 (See Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200, reaffirmed in Flood v. Kuhn, 407 U.S. 258 (1972) and Radovich v. NFL, 352 U.S. 445 (1957), in which the Court reaffirmed that only MLB has this exemption.)

The U.S. Supreme Court recently and definitely held in its May 2010 decision in American Needle, Inc. v. NFL, 130 S. Ct 2201 that sports teams within a league constitute separate and competing businesses that can engage in anticompetitive activities in the legally prohibitive sense. The decision came despite the leagues' argument that the individual teams that are comprised by a league constitute one single happy (albeit athletically competitive) legal entity. The bankruptcy bar watched American Needle with interest and no little envy, given the general opinion that it is time the leagues faced similar restraints in bankruptcy proceedings.

Until and if that time comes, however, owners of teams that run into financial distress usually have a simple yet unpalatable choice. They can turn the team over to the league or a league-sponsored buyer (typically for little or no return on the owner's investment), or file bankruptcy and take their chances. Leagues face challenges as well. It's a contact sport. The game begins with the control that professional sports leagues exercise over teams. The value of the “asset” (the team itself) becomes secondary to the league's agenda (controlling team ownership). In the Coyotes case, the NHL made clear in court filings that its priority was ” ' to preserve the viability, good will and success of the NHL as a major professional sports league rather than to protect any creditor interest.”

The Valuation Process

Nowhere is the clash of cultures between bankruptcy and leagues more extreme than in the valuation process. The leagues' control over who owns a team and where the team plays has material consequences to the team's value in a bankruptcy case. Real-world examples of three team bankruptcies showing the impact, in varying degrees, of league interference with the “market” are set out below and in the forthcoming second part of this article. They can best be summarized, with apologies to Sergio Leone and Clint Eastwood, as “The Good, the Bad and the (Coyote) Ugly.” Depending on one's perspective, these recent examples provide an interesting contrast in the interaction of different leagues in the bankruptcy sale process.

The Chicago Cubs Chapter 11 may be perceived (certainly from the league's perspective) as the “good,” in that a bankruptcy court did little to interfere with a pre-anointed sale that needed to be “washed” through a Section 363 sale. The Texas Rangers case may be perceived as the “bad,” in that a bankruptcy court had the temerity to exercise control over a sale process in such a way that a league-preferred bidder was challenged and the league's control over the process was threatened. Finally, the Phoenix Coyotes Chapter 11 proceeding may be perceived as the “ugly,” in that the bankruptcy process was used to attempt to circumvent league control over both the ownership and location of an NHL hockey team, which was thwarted by the league after significant litigation.

The 'Good' ' the Chicago Cubs Chapter 11

The Chicago National League Ball Club, LLC (the LLC), which owned the Chicago Cubs, filed Chapter 11 in Delaware on Oct. 11, 2009. The LLC owned the vast majority of the ownership interests in the Cubs. The LLC itself was 95% owned by the Tribune Company, which owned the Chicago Tribune and had itself filed a Chapter 11 in August 2009.

The club and MLB, determined to avoid the disruption that follows a major league baseball team bankruptcy filing, spent more than two years in intense negotiations with more than 10 bidders. Tom Ricketts, billionaire founder of online brokerage house TD Ameritrade, offered $800 million for the team. The sale price, reportedly the most paid for any professional sports team, included storied Wrigley Field and a 25% interest in Comcast SportsNet Chicago. The sale needed to be run through a Section 363 process to clear the assets of debts and claims.

That process was notable for both its efficiency and emotive court filings. The pending sale details were agreed to before the LLC itself ever filed for Chapter 11. In August 2009, the Tribune, in its Chapter 11 case, filed a motion before the bankruptcy court stating that the sale of the Cubs was already negotiated, that it was a highly detailed and complex transaction, and that, when the LLC filed, it would be asking the court to set an extremely expedited process for court approval. Bankruptcy Judge Peter J. Walsh agreed. MLB supported the sale to Ricketts, and told the court as much. The process was punctuated by a barrage of breathless declarations and affidavits vividly predicting disastrous outcomes should the sale be mired in a bankruptcy process. Two days after the LLC filed bankruptcy, the court held a sale hearing and that very day entered a 24-page order approving the sale to the Ricketts family.

The speed with which the case and sale took place astounded many and was heralded in the press as the template for professional sports team bankruptcies. MLB was thrilled insofar as it maintained control over the process, and there was essentially no interference from those pesky bankruptcy judges. Everyone, it seemed, was happy.

The 'Bad' ' the Texas Rangers Chapter 11

If the Cubs case was a successful sprint through the bankruptcy court process, the May 2010 filing by the Texas Rangers was more of a cross-country steeplechase complicated by MLB hurdles. As in the Cubs case, there were extensive pre-filing negotiations to find a buyer. Before filing in May 2010, the team informed MLB that it had two viable offers ' one from a group headed by Hall-of-Fame pitcher Nolan Ryan, and one from Houston businessman Jim Crane. The team told MLB that the Crane offer was “clearly economically superior” to the Ryan offer.

MLB, however, instructed the team not to negotiate with the Crane group, as Nolan Ryan was MLB's “chosen bidder.” (One of the game's all-time greats, Ryan is baseball royalty.) In addition, to prevent other parties from interfering with MLB's plans or making competing offers for the team, MLB issued a news release in late April 2010 that, amazingly enough, stated: “Major League Baseball is currently in control of the sale process and will use all efforts to achieve a closing with the chosen bidder [i.e., Nolan Ryan] ' . Any deviation from or interference with the agreed upon sale process by Mr. Hicks [owner of the Texas Rangers] or any other party, or any actions in violation of MLB rules or directives will be dealt with appropriately by the Commissioner.”

Ironically, the Chapter 11 was precipitated by lenders who refused to abide by the deal structure negotiated between MLB's chosen bidder and the team owner, and the Chapter 11 filing was intended to get the Ryan bid approved over lenders' objections.

MLB and the Ryan group sought rubber-stamp approval similar to the process in the Cubs bankruptcy, but the lenders wanted an auction, believing that the team would bring higher value. In fact, Crane had initially indicated he was still interested. Despite a push by MLB and the Ryan group for sale approval within 30 days, the court decided to hold an auction. The Ryan group, which made an initial offer of about $530 million, structured to limit secured lenders' direct rights to sale proceeds, filed an adversary proceeding in the case to compel specific performance of the initial sale contract ' a lawsuit that, not surprisingly, went nowhere.

Crane, the team's first choice, eventually dropped out of the bidding. His place was taken by Dallas Mavericks owner Mark Cuban. Ryan and Cuban (through their attorneys) slugged it out in an auction that lasted into the early hours of the morning and ended with the court approving Ryan's bid of more than $590 million. The bid was restructured to eliminate features that had riled the lenders. The Ryan group had the benefit of a $15 million “break fee” to factor into its bid economics, and ultimately Cuban called it quits after taking the Ryan group to the brink.

The Rangers case demonstrates how the league can flex its organizational muscle to affect a bankruptcy proceeding, even using a form of pocket veto on owner approval to make it difficult for anyone other than its preferred candidate to bid on the team. Cuban told the court that MLB told him even if he prevailed at the auction, it could take as long as nine months for MLB to approve him as an owner. Judge Lynn made it abundantly clear that he reserved the right to revisit any MLB action related to delays in considering or turning down the winning bidder as an owner, based on the general principles of good faith, even in the face of arguments by MLB counsel that MLB had total discretion in choosing who could own a MLB team. Judge Lynn also made it clear that if MLB's agenda and the Bankruptcy Code came head to head, there was uncertainty as to which would prevail. That uncertainty was enough to keep MLB in line in that particular process, but the Rangers experience put a scare into leagues everywhere.

Conclusion

The Cubs and Rangers bankruptcies, which were emotional and high profile, set the stage for the next major sports team bankruptcy. The Chapter 11 sought by the Coyotes hockey team, which we will explore in the second part of this article, was quickly dubbed a pivotal case in professional sports litigation.

Thomas J. Salerno is co-chair of the international financial restructuring practice of the global law firm Squire, Sanders & Dempsey L.L.P. He has represented parties in insolvency proceedings in 30 states and five countries. Jordan A. Kroop is a corporate bankruptcy partner with Squire Sanders and has been involved in some of the largest Chapter 11 cases in the United States. Salerno is lead bankruptcy counsel and Kroop is one of the the principal lawyers representing the NHL's Phoenix Coyotes.

There's no playbook when it comes to professional sports teams facing bankruptcy, given that only six of them have sought bankruptcy protection since the Bankruptcy Code was enacted in 1978. For those keeping score, however, it's clear the professional sports leagues ' Major League Baseball (MLB), the National Football League (NFL), the National Basketball Association (NBA) and the National Hockey League (NHL) ' have played an unusual role in bankruptcy proceedings.

The recent bankruptcies of three teams ' the NHL's Phoenix Coyotes and MLB's Chicago Cubs and Texas Rangers ' provide valuable perspective on the leagues' roles. This perspective is important, because while team bankruptcies have been relatively rare, the ongoing global economic turmoil hasn't passed by team owners, who are often highly leveraged in numerous investments. In difficult economic times, then, it should not surprise anyone to see more owners resorting to bankruptcy courts in an effort to maximize the value of their teams in light of either a league's insistence on limiting the universe of potential buyers (as happened in both the Coyotes and Rangers cases) or intransigent lenders trying to hold up sales (as happened in the Rangers case).

Economic Challenges

The teams themselves face economic challenges. For example, 14 of the 30 teams in the NHL showed negative earnings before interest, taxes, depreciation and amortization (EBITDA) for the 2008-2009 season, according to a November 2009 Forbes magazine report. As more beleaguered team owners seek refuge in bankruptcy proceedings, the resulting clash of league interests with fundamental principles of bankruptcy law will result in the development of novel legal and practical solutions for financially distressed sports franchises.

Cultural Clash

When teams become financially distressed or insolvent, there is an immediate cultural clash between the team and the league. The team clings to the bankruptcy imperative of maximizing asset value. The league desires dominance and control in what is, at its core (and despite the leagues' legal protests to the contrary), a very large business. Two aspects of the team/league relationship fuel the culture clash ' the leagues' predilection for calling teams “franchises,” and the leagues' legal battles to dodge antitrust claims.

What Is a 'Franchise'?

The leagues like to characterize the relationship with each constituent team as a “franchise” ' a term used so often that it's embedded in the sports lexicon. But terms such as “franchise player” or “the Yankees franchise” are legal misnomers. In the purely legal sense, a franchise involves the owner of the rights to special sauce, if you will, such as a proprietary recipe or a trademarked or patented process. Third-party franchisees obtain licenses to use the special sauce under the auspices of a franchise relationship that is specifically and tightly regulated under state and federal statutory law.

In this same legal sense, most leagues are more of a “cooperative,” in which individual teams work with each other to define rules of conduct, competition and business. Some leagues, such as the NHL, are unincorporated joint ventures. The special sauce in the NHL, for example ' intellectual property such as logos and broadcast rights ' is owned by each individual team and not the NHL. According to an unpublished paper titled “Sports Franchise Bankruptcy: The Inadequacy of Professional Sports Leagues' Trademark Ownership Structure,” the NHL does not and cannot own the intellectual property of the 30 teams in the league because unincorporated joint ventures cannot own assets under New York law. In the NHL, the intellectual property is owned by a special-purpose entity owned equally by the 30 league teams.

Antitrust Law

The leagues have long attempted to insulate themselves from legal restrictions in antitrust law. MLB alone has had a judicially created exemption from antitrust laws since 1922 ( See Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs , 259 U.S. 200, reaffirmed in Flood v. Kuhn , 407 U.S. 258 (1972) and Radovich v. NFL , 352 U.S. 445 (1957), in which the Court reaffirmed that only MLB has this exemption.)

The U.S. Supreme Court recently and definitely held in its May 2010 decision in American Needle, Inc. v. NFL , 130 S. Ct 2201 that sports teams within a league constitute separate and competing businesses that can engage in anticompetitive activities in the legally prohibitive sense. The decision came despite the leagues' argument that the individual teams that are comprised by a league constitute one single happy (albeit athletically competitive) legal entity. The bankruptcy bar watched American Needle with interest and no little envy, given the general opinion that it is time the leagues faced similar restraints in bankruptcy proceedings.

Until and if that time comes, however, owners of teams that run into financial distress usually have a simple yet unpalatable choice. They can turn the team over to the league or a league-sponsored buyer (typically for little or no return on the owner's investment), or file bankruptcy and take their chances. Leagues face challenges as well. It's a contact sport. The game begins with the control that professional sports leagues exercise over teams. The value of the “asset” (the team itself) becomes secondary to the league's agenda (controlling team ownership). In the Coyotes case, the NHL made clear in court filings that its priority was ” ' to preserve the viability, good will and success of the NHL as a major professional sports league rather than to protect any creditor interest.”

The Valuation Process

Nowhere is the clash of cultures between bankruptcy and leagues more extreme than in the valuation process. The leagues' control over who owns a team and where the team plays has material consequences to the team's value in a bankruptcy case. Real-world examples of three team bankruptcies showing the impact, in varying degrees, of league interference with the “market” are set out below and in the forthcoming second part of this article. They can best be summarized, with apologies to Sergio Leone and Clint Eastwood, as “The Good, the Bad and the (Coyote) Ugly.” Depending on one's perspective, these recent examples provide an interesting contrast in the interaction of different leagues in the bankruptcy sale process.

The Chicago Cubs Chapter 11 may be perceived (certainly from the league's perspective) as the “good,” in that a bankruptcy court did little to interfere with a pre-anointed sale that needed to be “washed” through a Section 363 sale. The Texas Rangers case may be perceived as the “bad,” in that a bankruptcy court had the temerity to exercise control over a sale process in such a way that a league-preferred bidder was challenged and the league's control over the process was threatened. Finally, the Phoenix Coyotes Chapter 11 proceeding may be perceived as the “ugly,” in that the bankruptcy process was used to attempt to circumvent league control over both the ownership and location of an NHL hockey team, which was thwarted by the league after significant litigation.

The 'Good' ' the Chicago Cubs Chapter 11

The Chicago National League Ball Club, LLC (the LLC), which owned the Chicago Cubs, filed Chapter 11 in Delaware on Oct. 11, 2009. The LLC owned the vast majority of the ownership interests in the Cubs. The LLC itself was 95% owned by the Tribune Company, which owned the Chicago Tribune and had itself filed a Chapter 11 in August 2009.

The club and MLB, determined to avoid the disruption that follows a major league baseball team bankruptcy filing, spent more than two years in intense negotiations with more than 10 bidders. Tom Ricketts, billionaire founder of online brokerage house TD Ameritrade, offered $800 million for the team. The sale price, reportedly the most paid for any professional sports team, included storied Wrigley Field and a 25% interest in Comcast SportsNet Chicago. The sale needed to be run through a Section 363 process to clear the assets of debts and claims.

That process was notable for both its efficiency and emotive court filings. The pending sale details were agreed to before the LLC itself ever filed for Chapter 11. In August 2009, the Tribune, in its Chapter 11 case, filed a motion before the bankruptcy court stating that the sale of the Cubs was already negotiated, that it was a highly detailed and complex transaction, and that, when the LLC filed, it would be asking the court to set an extremely expedited process for court approval. Bankruptcy Judge Peter J. Walsh agreed. MLB supported the sale to Ricketts, and told the court as much. The process was punctuated by a barrage of breathless declarations and affidavits vividly predicting disastrous outcomes should the sale be mired in a bankruptcy process. Two days after the LLC filed bankruptcy, the court held a sale hearing and that very day entered a 24-page order approving the sale to the Ricketts family.

The speed with which the case and sale took place astounded many and was heralded in the press as the template for professional sports team bankruptcies. MLB was thrilled insofar as it maintained control over the process, and there was essentially no interference from those pesky bankruptcy judges. Everyone, it seemed, was happy.

The 'Bad' ' the Texas Rangers Chapter 11

If the Cubs case was a successful sprint through the bankruptcy court process, the May 2010 filing by the Texas Rangers was more of a cross-country steeplechase complicated by MLB hurdles. As in the Cubs case, there were extensive pre-filing negotiations to find a buyer. Before filing in May 2010, the team informed MLB that it had two viable offers ' one from a group headed by Hall-of-Fame pitcher Nolan Ryan, and one from Houston businessman Jim Crane. The team told MLB that the Crane offer was “clearly economically superior” to the Ryan offer.

MLB, however, instructed the team not to negotiate with the Crane group, as Nolan Ryan was MLB's “chosen bidder.” (One of the game's all-time greats, Ryan is baseball royalty.) In addition, to prevent other parties from interfering with MLB's plans or making competing offers for the team, MLB issued a news release in late April 2010 that, amazingly enough, stated: “Major League Baseball is currently in control of the sale process and will use all efforts to achieve a closing with the chosen bidder [i.e., Nolan Ryan] ' . Any deviation from or interference with the agreed upon sale process by Mr. Hicks [owner of the Texas Rangers] or any other party, or any actions in violation of MLB rules or directives will be dealt with appropriately by the Commissioner.”

Ironically, the Chapter 11 was precipitated by lenders who refused to abide by the deal structure negotiated between MLB's chosen bidder and the team owner, and the Chapter 11 filing was intended to get the Ryan bid approved over lenders' objections.

MLB and the Ryan group sought rubber-stamp approval similar to the process in the Cubs bankruptcy, but the lenders wanted an auction, believing that the team would bring higher value. In fact, Crane had initially indicated he was still interested. Despite a push by MLB and the Ryan group for sale approval within 30 days, the court decided to hold an auction. The Ryan group, which made an initial offer of about $530 million, structured to limit secured lenders' direct rights to sale proceeds, filed an adversary proceeding in the case to compel specific performance of the initial sale contract ' a lawsuit that, not surprisingly, went nowhere.

Crane, the team's first choice, eventually dropped out of the bidding. His place was taken by Dallas Mavericks owner Mark Cuban. Ryan and Cuban (through their attorneys) slugged it out in an auction that lasted into the early hours of the morning and ended with the court approving Ryan's bid of more than $590 million. The bid was restructured to eliminate features that had riled the lenders. The Ryan group had the benefit of a $15 million “break fee” to factor into its bid economics, and ultimately Cuban called it quits after taking the Ryan group to the brink.

The Rangers case demonstrates how the league can flex its organizational muscle to affect a bankruptcy proceeding, even using a form of pocket veto on owner approval to make it difficult for anyone other than its preferred candidate to bid on the team. Cuban told the court that MLB told him even if he prevailed at the auction, it could take as long as nine months for MLB to approve him as an owner. Judge Lynn made it abundantly clear that he reserved the right to revisit any MLB action related to delays in considering or turning down the winning bidder as an owner, based on the general principles of good faith, even in the face of arguments by MLB counsel that MLB had total discretion in choosing who could own a MLB team. Judge Lynn also made it clear that if MLB's agenda and the Bankruptcy Code came head to head, there was uncertainty as to which would prevail. That uncertainty was enough to keep MLB in line in that particular process, but the Rangers experience put a scare into leagues everywhere.

Conclusion

The Cubs and Rangers bankruptcies, which were emotional and high profile, set the stage for the next major sports team bankruptcy. The Chapter 11 sought by the Coyotes hockey team, which we will explore in the second part of this article, was quickly dubbed a pivotal case in professional sports litigation.

Thomas J. Salerno is co-chair of the international financial restructuring practice of the global law firm Squire, Sanders & Dempsey L.L.P. He has represented parties in insolvency proceedings in 30 states and five countries. Jordan A. Kroop is a corporate bankruptcy partner with Squire Sanders and has been involved in some of the largest Chapter 11 cases in the United States. Salerno is lead bankruptcy counsel and Kroop is one of the the principal lawyers representing the NHL's Phoenix Coyotes.