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League Impact on the Sports Team Bankruptcy Process

By Thomas J. Salerno and Jordan A. Kroop
October 26, 2010

Professional sports team bankruptcies are, happily, more rare than a pitcher's perfect game. Only six teams from the “big four” American sports leagues ' Major League Baseball (MLB), the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL) ' have filed bankruptcy cases since Congress adopted the U.S. Bankruptcy Code in 1978.

In Part One of this article, we explored two recent Chapter 11 bankruptcy cases for two MLB franchises ' the Chicago Cubs and the Texas Rangers. The Cubs' Chapter 11 bankruptcy case ' The “Good” in our Clint Eastwood-inspired formula ' was intended to effect the sale of the team before the start of the 2010 baseball season. That bankruptcy sale process went smoother and fared far better than most of what the Cubs managed on the field in 2010. The sale of the Cubs was completed in a manner that avoided much of the drama that would befall the Texas Rangers' bankruptcy case only months later. The Rangers' case ' The “Bad” ' demonstrated what can happen when two would-be ownership groups (only one with the MLB imprimatur) compete. That case is perhaps a distant memory for fans as the Rangers head into this year's playoffs. (The Rangers were, until press time, the only MLB franchise never to have won a post-season series.) But the team's new ownership group, headed by baseball legend Nolan Ryan, will be sitting nearest the field-side bunting this fall owing, in part, to MLB's participation in the bidding.

The 'Ugly' ' The Coyotes' Chapter 11

The Chapter 11 experience of the NHL's Phoenix Coyotes was far more prolonged, far more contentious, and far less satisfying than the Rangers' case, which at least featured a competitive bidding process that ultimately resulted in a sale that paid creditors in full. The Coyotes did not fare nearly so well. Nor did their creditors. And depending on what happens to the Coyotes during and immediately after this coming NHL season, the Coyotes' bankruptcy case may have been the beginning of the Coyotes' farewell to Phoenix.

Background

The Phoenix Coyotes moved to Arizona in 1996 from Winnipeg, Canada, where they played as the Winnipeg Jets. Since making the move to the desert, the team never made a profit, losing more than $300 million between 1996 and 2009. See In re Dewey Ranch Hockey, LLC, 414 B.R. 577 (Bankr. D. Az. 2009). After acquiring the team in 2006, Jerry Moyes sunk over $100 million of his own money into keeping the team afloat ' with no luck. By November 2008, the NHL was effectively financing the team's operating losses through secured loans while Moyes searched for a buyer.

Moyes informed the NHL that no offers had been received from any buyer wishing to keep the team in Arizona, but that Jim Balsillie (CEO of Research In Motion, maker of the ubiquitous Blackberry) had expressed an interest in acquiring the team and moving it to Hamilton, Ontario. The NHL told Moyes that he was expressly prohibited from negotiating with anyone who would want to relocate the team. Moyes nonetheless continued to negotiate with Balsillie, and filed a Chapter 11 case in May 2009 to implement a sale of the Coyotes to Balsillie, who offered over $212 million for the team, conditioned on his ability to move the team in time for the start of the NHL season in October. To accommodate Balsillie's timelines, the team requested that a sale hearing be held by the end of June. See In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bankr. D. Az. 2009).

Incensed with the Chapter 11 filing and the Balsillie offer, the NHL did everything it could to stop the court from even considering Balsillie's offer. The NHL asserted that there was insufficient time to find other buyers for the team, assuring the court there were at least four other parties interested in buying the team and leaving it in Arizona. Further, the NHL agreed to continue financing the team's operations during the bankruptcy process to avoid giving Balsillie, who had offered DIP financing, any creditor standing in the case. Ultimately, the bankruptcy court was persuaded that the timelines requested by the team and Balsillie were too ambitious, setting bid deadlines further into the summer. Balsillie waived his original deadlines and remained a viable bidder.

The Coyotes play at Jobing.com Arena in Glendale, AZ, west of Phoenix. The City of Glendale built the arena through bond financing, and the Coyotes signed a 30-year lease. Because Glendale faced the possibility of being left with an arena but no tenant, the city came out strongly against Balsillie's offer and the debtors' proposed sale process. Aligning itself with the NHL, Glendale argued that the lease could not be rejected because it would cause irreparable harm to the city, creating alleged damages that could exceed $500 million not subject, the city argued, to the Bankruptcy Code cap on lease rejection damages. The city also applied for a TRO in the case (similar to the TRO obtained in the Pittsburgh Penguins' Chapter 11 in the 1990s), that would have prevented the debtors from negotiating with any potential buyer that would move the team. Unlike in the Penguins case, Glendale's TRO application went nowhere, largely because of Glendale's full-throated support of the NHL's offer to buy the Coyotes, which explicitly gave the NHL the right to move the team after the 2009-2010 season.

A 'Bifurcated' Sale Process

The NHL, attempting to control and slow the sale process, ensuring an auction could not be held before the start of the season, urged a “bifurcated” sale process. Specifically, the NHL preferred an auction first just for buyers who wished to keep the team in Arizona. Only if that auction did not produce a court-approved buyer could a second auction be held, open to bidders who would move the team. In all events, however, no team relocation could occur without express NHL consent, something the NHL assured the court would not be possible in time for the upcoming season. The debtors, Balsillie, and even the unsecured creditors committee opposed the NHL's approach, but the NHL reassured the court, in declarations by Commissioner Gary Bettman and others, that there were at least four potential buyers who were serious about buying the team and leaving it in Arizona. The NHL, of course, wanted the bifurcation because it knew the team was not worth nearly as much in Arizona as it would be elsewhere ' the NHL didn't want lower, non-relocation bids compared on an equal footing with the Balsillie bid. The NHL further assured the court that these mystery bidders would bid enough to take care of all “legitimate” creditors ' which, in NHL lingo, meant all creditors other than Moyes.

The court rejected a bifurcated auction, a choice made easier when the initial bid deadline passed without any qualified bids (on any basis); only Balsillie's original bid remained. Balsillie even sweetened his bid during the process, offering Glendale $25 million in cash simply to support his bid, and another $25 million to offset the city's rejection damages if his bid prevailed. Balsillie also offered to pay, in addition to the purchase price, a court-determined “relocation fee” to the NHL. In all, the Balsillie bid exceeded $250 million by the auction date in late August.

The NHL Makes Its Own Bid

Faced with no bidders to compete with Balsillie's enhanced bid, the NHL made its own bid to buy the Coyotes (for about $140 million), keep the team in Arizona for the upcoming season, pay operational losses for that season, and seek a buyer who would keep the team in Arizona. The NHL reserved the right to move the team if no such buyer emerged by the end of the 2009-10 season. (In fact, no buyer was found by June 2010, but Glendale convinced the NHL to keep the team in Arizona through the 2010-11 season by making up to $25 million of Glendale's own funds available to pay the team's oerating losses for that season.)

The NHL bid allocated sales proceeds to pay off secured creditors (including the NHL itself), but also allocated sales proceeds to pay off, in full, certain unsecured creditors while excluding other, disfavored creditors ' Moyes and NHL legend and former Coyotes head coach Wayne Gretzky. The debtors objected, arguing that the NHL's offer as structured was an unconfirmable sub rosa plan. Glendale rejected Balsillie's $50 million and supported the NHL bid despite that, by its express terms, the NHL's bid could have resulted in the team leaving Glendale after the 2009-10 season.

To decisively end Balsillie's pursuit of the Coyotes, the NHL held a meeting of its board of governors in July 2009, at which the other 29 team owners voted on Balsillie's ownership application. Unsurprisingly, the NHL informed the bankruptcy court that Balsillie was unanimously rejected by the other owners on “character” grounds ' apparently a first in NHL history.

The Court Decides

The court ultimately rejected both Balsillie's bid and the NHL bid. See In re Dewey Ranch Hockey, 414 B.R. at 593. The court found the attempted allocation of sales proceeds to some unsecured creditors and not others to be impermissible. Furthermore, the court found that it did not have the ability to approve an offer that would move the team over the NHL's opposition, and that there had been insufficient showing of a mature-enough dispute to allow the court to override the NHL's veto. In essence, the NHL's private club veto power trumped the Bankruptcy Code.

The court's ruling left the Coyotes and its Chapter 11 case in limbo. Balsillie immediately ended his pursuit of the Coyotes. The team was hemorrhaging cash ' operational losses, on average, were about $1 million per week. Faced with no buyer, the debtors, the NHL, Glendale, and the creditors committee negotiated a revised NHL offer that effectively addressed the court's concerns about allocating proceeds to some but not all creditors. Rather than pay the claims of creditors directly, the NHL agreed to purchase the claims it desired to have paid, assert those claims against the bankruptcy estate, but voluntarily subordinate them to all unpurchased unsecured claims (like Glendale's claims) other than Moyes' and Gretzky's claims. This understandably won the creditors committee's support and, given the mounting economic losses, the debtors and Glendale agreed to the sale of the Coyotes to the NHL, which closed on Nov. 2, 2009. That night, the Coyotes lost to the Los Angeles Kings 5-3.

Bloody and Contentious

The Coyotes bankruptcy process was bloody and contentious. The NHL won after a bruising fight that ultimately left about $100 million of value on the table for a team that may very well end up relocating from Arizona anyway. The bankruptcy imperative of maximizing value for creditors seemed to yield to the NHL's demands, while many creditors, including Glendale, are likely to receive only cents on the dollar irrespective of whether the Coyotes stay in Arizona. The Coyotes' remarkable on-ice success in 2009-10 ' they made the playoffs for the first time in seven years ' was not enough to attract a buyer and, as of this writing, no buyer has yet been found to keep the team in Arizona. If such a buyer is to emerge, it had better be soon ' the NHL's agreement with Glendale allows the NHL to complete a sale and relocation of the team at any time after Dec. 31, 2010.

Post-Game Comments

Professional sports in the United States is always viewed as operating under a different set of rules. The same seems to hold true in professional sports team bankruptcies. Imagine, in any other industry, participants finding fault with a process that generates more value for legitimate creditors owed real money! Only in the surreal world of professional sports can legal and economic doctrine be made to yield to the parochial needs of an entertainment performed with balls and pucks. In the end, we must rely on courts to discern what's good, what's bad, and what's ugly ' what's good for all of us and what's good for the game.


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.

Professional sports team bankruptcies are, happily, more rare than a pitcher's perfect game. Only six teams from the “big four” American sports leagues ' Major League Baseball (MLB), the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL) ' have filed bankruptcy cases since Congress adopted the U.S. Bankruptcy Code in 1978.

In Part One of this article, we explored two recent Chapter 11 bankruptcy cases for two MLB franchises ' the Chicago Cubs and the Texas Rangers. The Cubs' Chapter 11 bankruptcy case ' The “Good” in our Clint Eastwood-inspired formula ' was intended to effect the sale of the team before the start of the 2010 baseball season. That bankruptcy sale process went smoother and fared far better than most of what the Cubs managed on the field in 2010. The sale of the Cubs was completed in a manner that avoided much of the drama that would befall the Texas Rangers' bankruptcy case only months later. The Rangers' case ' The “Bad” ' demonstrated what can happen when two would-be ownership groups (only one with the MLB imprimatur) compete. That case is perhaps a distant memory for fans as the Rangers head into this year's playoffs. (The Rangers were, until press time, the only MLB franchise never to have won a post-season series.) But the team's new ownership group, headed by baseball legend Nolan Ryan, will be sitting nearest the field-side bunting this fall owing, in part, to MLB's participation in the bidding.

The 'Ugly' ' The Coyotes' Chapter 11

The Chapter 11 experience of the NHL's Phoenix Coyotes was far more prolonged, far more contentious, and far less satisfying than the Rangers' case, which at least featured a competitive bidding process that ultimately resulted in a sale that paid creditors in full. The Coyotes did not fare nearly so well. Nor did their creditors. And depending on what happens to the Coyotes during and immediately after this coming NHL season, the Coyotes' bankruptcy case may have been the beginning of the Coyotes' farewell to Phoenix.

Background

The Phoenix Coyotes moved to Arizona in 1996 from Winnipeg, Canada, where they played as the Winnipeg Jets. Since making the move to the desert, the team never made a profit, losing more than $300 million between 1996 and 2009. See In re Dewey Ranch Hockey, LLC, 414 B.R. 577 (Bankr. D. Az. 2009). After acquiring the team in 2006, Jerry Moyes sunk over $100 million of his own money into keeping the team afloat ' with no luck. By November 2008, the NHL was effectively financing the team's operating losses through secured loans while Moyes searched for a buyer.

Moyes informed the NHL that no offers had been received from any buyer wishing to keep the team in Arizona, but that Jim Balsillie (CEO of Research In Motion, maker of the ubiquitous Blackberry) had expressed an interest in acquiring the team and moving it to Hamilton, Ontario. The NHL told Moyes that he was expressly prohibited from negotiating with anyone who would want to relocate the team. Moyes nonetheless continued to negotiate with Balsillie, and filed a Chapter 11 case in May 2009 to implement a sale of the Coyotes to Balsillie, who offered over $212 million for the team, conditioned on his ability to move the team in time for the start of the NHL season in October. To accommodate Balsillie's timelines, the team requested that a sale hearing be held by the end of June. See In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bankr. D. Az. 2009).

Incensed with the Chapter 11 filing and the Balsillie offer, the NHL did everything it could to stop the court from even considering Balsillie's offer. The NHL asserted that there was insufficient time to find other buyers for the team, assuring the court there were at least four other parties interested in buying the team and leaving it in Arizona. Further, the NHL agreed to continue financing the team's operations during the bankruptcy process to avoid giving Balsillie, who had offered DIP financing, any creditor standing in the case. Ultimately, the bankruptcy court was persuaded that the timelines requested by the team and Balsillie were too ambitious, setting bid deadlines further into the summer. Balsillie waived his original deadlines and remained a viable bidder.

The Coyotes play at Jobing.com Arena in Glendale, AZ, west of Phoenix. The City of Glendale built the arena through bond financing, and the Coyotes signed a 30-year lease. Because Glendale faced the possibility of being left with an arena but no tenant, the city came out strongly against Balsillie's offer and the debtors' proposed sale process. Aligning itself with the NHL, Glendale argued that the lease could not be rejected because it would cause irreparable harm to the city, creating alleged damages that could exceed $500 million not subject, the city argued, to the Bankruptcy Code cap on lease rejection damages. The city also applied for a TRO in the case (similar to the TRO obtained in the Pittsburgh Penguins' Chapter 11 in the 1990s), that would have prevented the debtors from negotiating with any potential buyer that would move the team. Unlike in the Penguins case, Glendale's TRO application went nowhere, largely because of Glendale's full-throated support of the NHL's offer to buy the Coyotes, which explicitly gave the NHL the right to move the team after the 2009-2010 season.

A 'Bifurcated' Sale Process

The NHL, attempting to control and slow the sale process, ensuring an auction could not be held before the start of the season, urged a “bifurcated” sale process. Specifically, the NHL preferred an auction first just for buyers who wished to keep the team in Arizona. Only if that auction did not produce a court-approved buyer could a second auction be held, open to bidders who would move the team. In all events, however, no team relocation could occur without express NHL consent, something the NHL assured the court would not be possible in time for the upcoming season. The debtors, Balsillie, and even the unsecured creditors committee opposed the NHL's approach, but the NHL reassured the court, in declarations by Commissioner Gary Bettman and others, that there were at least four potential buyers who were serious about buying the team and leaving it in Arizona. The NHL, of course, wanted the bifurcation because it knew the team was not worth nearly as much in Arizona as it would be elsewhere ' the NHL didn't want lower, non-relocation bids compared on an equal footing with the Balsillie bid. The NHL further assured the court that these mystery bidders would bid enough to take care of all “legitimate” creditors ' which, in NHL lingo, meant all creditors other than Moyes.

The court rejected a bifurcated auction, a choice made easier when the initial bid deadline passed without any qualified bids (on any basis); only Balsillie's original bid remained. Balsillie even sweetened his bid during the process, offering Glendale $25 million in cash simply to support his bid, and another $25 million to offset the city's rejection damages if his bid prevailed. Balsillie also offered to pay, in addition to the purchase price, a court-determined “relocation fee” to the NHL. In all, the Balsillie bid exceeded $250 million by the auction date in late August.

The NHL Makes Its Own Bid

Faced with no bidders to compete with Balsillie's enhanced bid, the NHL made its own bid to buy the Coyotes (for about $140 million), keep the team in Arizona for the upcoming season, pay operational losses for that season, and seek a buyer who would keep the team in Arizona. The NHL reserved the right to move the team if no such buyer emerged by the end of the 2009-10 season. (In fact, no buyer was found by June 2010, but Glendale convinced the NHL to keep the team in Arizona through the 2010-11 season by making up to $25 million of Glendale's own funds available to pay the team's oerating losses for that season.)

The NHL bid allocated sales proceeds to pay off secured creditors (including the NHL itself), but also allocated sales proceeds to pay off, in full, certain unsecured creditors while excluding other, disfavored creditors ' Moyes and NHL legend and former Coyotes head coach Wayne Gretzky. The debtors objected, arguing that the NHL's offer as structured was an unconfirmable sub rosa plan. Glendale rejected Balsillie's $50 million and supported the NHL bid despite that, by its express terms, the NHL's bid could have resulted in the team leaving Glendale after the 2009-10 season.

To decisively end Balsillie's pursuit of the Coyotes, the NHL held a meeting of its board of governors in July 2009, at which the other 29 team owners voted on Balsillie's ownership application. Unsurprisingly, the NHL informed the bankruptcy court that Balsillie was unanimously rejected by the other owners on “character” grounds ' apparently a first in NHL history.

The Court Decides

The court ultimately rejected both Balsillie's bid and the NHL bid. See In re Dewey Ranch Hockey, 414 B.R. at 593. The court found the attempted allocation of sales proceeds to some unsecured creditors and not others to be impermissible. Furthermore, the court found that it did not have the ability to approve an offer that would move the team over the NHL's opposition, and that there had been insufficient showing of a mature-enough dispute to allow the court to override the NHL's veto. In essence, the NHL's private club veto power trumped the Bankruptcy Code.

The court's ruling left the Coyotes and its Chapter 11 case in limbo. Balsillie immediately ended his pursuit of the Coyotes. The team was hemorrhaging cash ' operational losses, on average, were about $1 million per week. Faced with no buyer, the debtors, the NHL, Glendale, and the creditors committee negotiated a revised NHL offer that effectively addressed the court's concerns about allocating proceeds to some but not all creditors. Rather than pay the claims of creditors directly, the NHL agreed to purchase the claims it desired to have paid, assert those claims against the bankruptcy estate, but voluntarily subordinate them to all unpurchased unsecured claims (like Glendale's claims) other than Moyes' and Gretzky's claims. This understandably won the creditors committee's support and, given the mounting economic losses, the debtors and Glendale agreed to the sale of the Coyotes to the NHL, which closed on Nov. 2, 2009. That night, the Coyotes lost to the Los Angeles Kings 5-3.

Bloody and Contentious

The Coyotes bankruptcy process was bloody and contentious. The NHL won after a bruising fight that ultimately left about $100 million of value on the table for a team that may very well end up relocating from Arizona anyway. The bankruptcy imperative of maximizing value for creditors seemed to yield to the NHL's demands, while many creditors, including Glendale, are likely to receive only cents on the dollar irrespective of whether the Coyotes stay in Arizona. The Coyotes' remarkable on-ice success in 2009-10 ' they made the playoffs for the first time in seven years ' was not enough to attract a buyer and, as of this writing, no buyer has yet been found to keep the team in Arizona. If such a buyer is to emerge, it had better be soon ' the NHL's agreement with Glendale allows the NHL to complete a sale and relocation of the team at any time after Dec. 31, 2010.

Post-Game Comments

Professional sports in the United States is always viewed as operating under a different set of rules. The same seems to hold true in professional sports team bankruptcies. Imagine, in any other industry, participants finding fault with a process that generates more value for legitimate creditors owed real money! Only in the surreal world of professional sports can legal and economic doctrine be made to yield to the parochial needs of an entertainment performed with balls and pucks. In the end, we must rely on courts to discern what's good, what's bad, and what's ugly ' what's good for all of us and what's good for the game.


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.

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