[Editor's Note: In late December, SportsJudge brought to light the financial instability of the Phoenix Coyotes and the fact that "after losing over $60 million the past two seasons, the Coyotes are projected to be $30 million in-the-red this year when it's all said and done." (Article can be found here) As the NHL continues to search for a satisfactory solution, Tim Cedrone takes an interesting in-depth look at the Coyotes situation and what could unfortunately become a common situation in these challenging economic times.]In this uncertain economy, many sports teams are facing financial problems; consumers are spending less, and that includes spending a small fortune to attend a game. It's not surprising then to see rumors of bankruptcy floating around a sports franchise.
What would happen if the Coyotes actually filed for bankruptcy? First, the Coyotes would have to decide whether to file a pre-packaged plan. In a pre-pack, the Coyotes and their creditors would negotiate a refinancing structure for the Coyotes' debt before filing, and then to make the deal work, the Coyotes would file Chapter 11 to take advantage of Bankruptcy Code provisions needed to carry out the plan. A pre-pack would resolve the case rather quickly. In the sports context, a pre-pack would likely involve transferring ownership to a new group which would assume most, if not all, of the team's debt. The L.A. Kings used a pre-pack during their bankruptcy in 1995.
If the Coyotes filed a full-blown Chapter 11 petition instead, the team's management would continue to run the franchise during bankruptcy. (This may seem intuitive, but consider that in England, outsiders manage the company when it is in administration, the English Chapter 11.) Filing for bankruptcy would trigger an automatic stay, which would stop almost all lawsuits against the Coyotes, including any creditors' attempts to collect debts.
During the case, the Coyotes would have to find post-petition financing to meet their operating capital needs. The team would also have to decide what to do with any executory contracts and unexpired leases, as the Coyotes would be able to decide whether to perform or not perform such agreements. This would be especially important for the Coyotes; their arena lease is one of the worst in the NHL and is a primary reason why they are financially unstable. Bankruptcy would allow the team to break the lease, or at least renegotiate it like the Pittsburgh Penguins did in 1998. Next, the Coyotes would have to negotiate with the creditors committee, which, among other things, participates in the formulation of a reorganization plan. Finally, the Coyotes would have to get the bankruptcy court to approve a reorganization plan. Plan confirmation is the ultimate goal in Chapter 11. The plan would likely address the financial reorganization of the company, pare down debts, and, most importantly for creditors, include the terms by which creditors would be paid. Secured creditors would receive at least as much as their secured claim, but unsecured creditors may get far less. After plan approval, the Coyotes' debts would be discharged (subject to completing any payments required by the plan) and the Coyotes' creditors would be barred from further pursuing their claims.
So would it work? The Coyotes would have a few issues. First, securing post-petition financing may be problematic given the credit markets' continuing tightness. The repayment priority guaranteed by the Bankruptcy Code to post-petition lenders may not be enough to entice some to lend to a Chapter 11 debtor. Second, rejection of the arena lease would give rise to a pre-petition claim for breach of contract that would be treated as an unsecured claim that would be paid according to the reorganization plan terms. Finally, Chapter 11 would likely allow the team to bring in the new investors it desperately needs. The L.A. Kings, Pittsburgh Penguins, and Buffalo Sabres (the three previous American professional sport franchise bankruptcies since 1978) all emerged from bankruptcy with new owners. The Coyotes have been seeking new investors; perhaps Chapter 11 could facilitate the process. In the end, bankruptcy may work for the Coyotes. However, they should be aware (and I'm sure they are) that not all Chapter 11 reorganizations are successful, and sometimes they become Chapter 11 liquidations.
*Interested in more on this subject? Check out Tim Cedrone's update on the Coyotes situation here
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5 comments:
Tim,
Great post. As you know, I'm not a bankruptcy guy (short of one, painful case that I was given during my junior associate years). So, this lies far from my area of expertise.
If the Coyotes filed for Chapter 11, would it facilitate their ability to move out of Phoenix (given the possibility of breaking their lease).
Also, do you have any idea of whether a court could appoint a debtor-in-possession ("DIP") and, if so, how that would jive with the general NHL Constitution that requires the other teams in the league to approve new ownership. (I believe the MLB Constitution allows the teams to vote to terminate a franchise if that franchise declares for bankruptcy specifically to avoid the DIP issue)>
Marc,
Good questions. First, a Chapter 11 filing would, in theory, facilitate the Coyotes' ability to move out of Phoenix (or Glendale to be precise). Their arena lease would be treated as an unexpired lease, giving the Coyotes to assume (perform) or reject (not perform) the lease pursuant to 11 U.S.C. section 365. Under section 365(g), the Coyotes could reject the lease, thereby freeing itself of its contractual obligations. This would then enable them to find a more suitable lease in another city, if so desired. The only drawback is that rejection of the lease would give the arena landlord (the City of Glendale) a pre-bankruptcy unsecured claim against the Coyotes. Unsecured creditors typically receive small payouts in Chapter 11 cases, so Glendale would likely not receive much on their claim. Glendale would also be subject to a landlord's duty to mitigate their damages for breach of a lease. So, yes, Chapter 11 could potentially facilitate the Coyotes' ability to break their lease and move to another city.
Second, upon filing a Chapter 11 petition, the current managers of the company will retain control of the business as "debtor-in-possession" ("DIP") under 11 U.S.C. sections 1107-1108. The DIP is really just a change in form more than substance; no one is actually appointed. The difference is that now, the company, as DIP, has a responsibility to keep the business running so as to maximize creditors' recovery. In some circumstances, the court will appoint a trustee in bankruptcy ("TIB") or an examiner in a Chapter 11 case if there is serious concerns about how the DIP is running the business post-filing. (This is different than a Chapter 7 liquidation where a TIB is automatically appointed.)
Finally, the NHL Constitution would be treated as an executory contract in a Chapter 11 filing, thus giving the Coyotes the unilateral right to assume the contract under the aforementioned section 365. Section 365 also permits assumption and assignment of contracts. Thus, the Coyotes could assume the Constitution and then assign it to new ownership in the reorganization plan, without worrying about getting league approval. This is exactly what happened in the L.A. Kings' reorganization plan in 1995, where the new ownership group assumed all of the previous owners' hockey-related obligations, including the NHL Constitution.
Tim:
Well put, and all very interesting. Do we know if any NHL team tried to challenge the transfer of ownership of the Kings? I presume the answer is no, but I'm just throwing it out there. I hope you will keep monitoring the Coyote situation for us.
Marc,
To the best of my knowledge, no NHL team tried to challenge the transfer of ownership in the Kings' case. Nor did my research turn up anything. I would also venture to guess that NHL owners would be rather reluctant to oppose such a transfer of ownership. First, if the ownership group meets the requirements it must in order to get the bankruptcy court to approve the reorganization plan, the NHL owners would likely approve also. This is because such requirements include (among other things) that the plan have a reasonable likelihood of success and that the plan pay creditors at least as much as they would have received if the company liquidated. Second, and more practically, I find it unlikely that the NHL owners would disapprove the new ownership group and leave the team without owners. Moreover, the NHL owners would be flying in the face of the bankruptcy court if they rejected the new owners. After all, if the new owners are good enough for the bankruptcy court, why not for the NHL?
Interesting post and question..If it comes true God knows what will be the result exactly...
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