Dollars and Sense: Coyote Roundup

My last post discussed, in broad terms, what would happen if the Phoenix Coyotes went bankrupt. Since that post, more details (here and here) about the Coyotes' financial situation have come to light, particularly in regards to their lease with the City of Glendale. The two pieces of particular interest are that (1) the lease has a "poison pill" clause that would impose a $750 million fee on the Coyotes for breaking the lease and (2) the Coyotes just brought their lease payments up to date after seven months of delinquency.

Regarding the $750 million fee, it appears to me to be a liquidated damages clause enforceable to the extent the Coyotes breach their lease obligations. Liquidated damages are damages whose amount the parties designate within the contract for the injured party to collect as compensation upon breach of contract. Whether such a liquidated damages clause is enforceable outside bankruptcy is somewhat debatable, one can be certain that if the Coyotes filed for Chapter 11 protection, the city of Glendale would certainly file a claim for $750 million. (See my previous post about the city potentially having a pre-petition claim for breach of contract under 11 U.S.C. section 365.) The parties would then negotiate the amount of this claim. I would suspect the amount of the claim to be reduced, after taking into account the following numbers:

1. $42,708: amount Coyotes owe Glendale each month under the lease
2. $15,734,880: total amount of monthly payments for 30 year lease

Even if the Coyotes had to pay Glendale $500,000 per game as a percentage of parking fees, sales tax, security costs, and repairs (as required by the lease), that would still only get the total damages to somewhere in the neighborhood of $615 million ($500K times 41 home games times 30 seasons), plus that $15 million above. (And that's a very generous estimate.) Taking into account Glendale's common law duty to mitigate damages, I doubt they could maintain a claim for $750 million. Furthermore, some studies have found that creditors typically only recover 50% of their unsecured claims in Chapter 11 cases. If that were the case here, and the $750 million claim were not reduced, Glendale would still only receive $375 million as payment of their unsecured claim. So, if the Coyotes filed for Chapter 11, broke the lease under Section 365, and moved to another city, the city of Glendale would probably never see anything close to the $750 million.

As for the Coyotes recent payment of their delinquent lease obligations, the team would be wise not to file for bankruptcy until June (if it does at all). Why June? Under 11 U.S.C. section 547, certain transactions between the debtor and creditors can be dismantled if they took place within the 90 days immediately before filing the bankruptcy petition. Seven requirements must be met to void a transaction as a voidable preference: there must be (1) a transfer (2) of the debtor's property (3) to a creditor (4) on account of an antecedent debt owed by the debtor (5) while the debtor was insolvent (6) within the 90 days before filing (7) that allows the creditor to get more than in Chapter 7 liquidation. There are exceptions to the voidable preference section (whereby the transaction, while a preference, is not voidable for policy and practical reasons), such as where the payment was made in the ordinary course of business. These requirements definitely raise a number of other issues (were the Coyotes insolvent, how much would Glendale get in Chapter 7, etc.). Also, there is a strong argument that the payment could fall within the ordinary course of business exception, especially if the Coyotes were consistently late on payments in the past. However, the fact of the matter is that the Coyotes can avoid all this if they just file after the 90 day period. But will they be able to wait that long?

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