Q&A on the Phoenix Coyotes Bankruptcy

[Editor's Note: Today's post is the first in a two-part series addressing the Phoenix Coyotes recent bankruptcy filing. Part 1 discusses some of the legal issues surrounding the case. Part 2 will reflect on some of the hockey-related issues that have arisen. For previous posts regarding the Phoenix Coyotes and bankruptcy, click here and here. For a more detailed background on the legal history of bankruptcies in professional sports, you can also check out Tim Cedrone's full law review article here.]

On May 5, the Phoenix Coyotes filed for Chapter 11 bankruptcy protection. During the course of the past week, many issues have been raised regarding the filing. At times, it can be dizzying and downright confusing to piece together everything that has happened...and where everything is going. Lucky for you, we at SportsJudge Blog are here to help. We have come up with some basic questions and answers regarding the Coyotes filing. Please let us know your thoughts.

1. Why did the Coyotes file? The simple answer is that the Coyotes believed they needed to financially reorganize the business through a sale to a new ownership group headed by Jim Balsillie, the co-CEO of BlackBerry-maker Research In Motion Ltd. Some reorganizations are purely financial, where the business operations of the debtor remain the same and debts are written down or eliminated. Other reorganizations are designed to reshuffle business operations, i.e., sell unprofitable divisions, cut staff, etc. In the Coyotes case, they had debts significantly in excess of their assets, and Jerry Moyes, the owner, obviously believed the best way to reorganize was through a sale to Jim Balsillie.

2. Did Jerry Moyes have the right to file? The Bankruptcy Code permits companies to voluntarily file bankruptcy petitions. However, the Code does not specify which party to a limited liability company may file a petition on behalf of the LLC. As a result, state law and the LLC's operating agreement specify who may file on behalf of the LLC. In this case, that means the Arizona Limited Liability Company Act and the operating agreements of the various LLCs that make up the Coyotes franchise (Coyotes Holding LLC, Coyotes Hockey LLC, and Dewey Ranch Hockey LLC). Based on the operating agreements, Moyes appeared to have the authority to file as he was majority owner. The reason this has become an issue, however, is the NHL claims Moyes did not have the authority to file the petition. The NHL claims that when the League provided the Coyotes and Moyes with $38 million in financial support, Moyes agreed to the condition that he had no authority to cause the Coyotes to take any actions outside the normal course of business, including filing for bankruptcy. If Moyes agreed to such terms, he would apparently not have had the authority to file.

Another issue is whether the NHL could have the case dismissed. If a petition is filed in bad faith, a creditor can seek to have it dismissed. Proving bad faith usually requires showing that the debtor is in a strong and solvent financial position and does not have a valid reorganization purpose. Here, the Coyotes have had well documented financial problems and their debts outweigh assets. Thus, a motion for dismissal for bad faith would likely fail, even if the NHL could show Moyes filed to merely circumvent the League's efforts at brokering a deal to buy the team. Much of this will be resolved on May 19, when the court decides who controls the Coyotes - Moyes or the NHL. If Moyes agreed to not file for bankruptcy, the NHL will likely win. If Moyes only relinquished control on hockey matters, as is his contention, he could prevail.

3. Assuming the case is not dismissed, will Jim Balsillie's plan be approved? If the case goes forward, the court will have to decide whether to approve Jim Balsillie's reorganization plan. The non-financial part of the plan calls for Balsillie to assume control of the team (through PSE Sports & Entertainment LP) and relocate it (presumably to Hamilton, Ontario). The financial details of the $212.5 million plan call for $80 million to be paid to SOF Investments, $35 million to the NHL, and $97.5 million to other unsecured creditors. For the plan to be approved, it would have to satisfy a laundry list of Code requirements. The most important is whether it would be in the best interests of all the creditors. This requires each creditor to get at least as much under the plan as it would if the Coyotes liquidated. Moreover, if another plan is proposed that would allow creditors to recover more of their claims, Balsillie's plan may be rejected. Thus, if another party offers more than Balsillie's $212.5 million, his plan may indeed fail. If no one else comes forward with a plan, his may indeed go through as the court would likely want to avoid liquidating the Coyotes.

4. What happens if Balsillie's plan is not approved? If Balsillie's plan is not approved, the Coyotes have proposed an auction at which Balsillie's offer is the starting point. Under the Coyotes' auction scenario, if no other bids are submitted, then Balsillie's bid would automatically win. Either way, if the plan is not approved, any party in interest (such as creditors) may file a reorganization plan starting on September 2 (120 days after filing), thereby effectively taking some control of the case away from the Coyotes (or NHL if they win on May 19). While everyone would like to see the case resolved before the season starts, it is not unprecedented for teams to be in bankruptcy during the season, as was the case with the Penguins and Sabres in recent years.

5. Why did the Coyotes bring an antitrust claim against the NHL? I thought this was a bankruptcy case. The Coyotes brought an antitrust claim against the NHL seeking injunctive relief in connection with the proposed move to Ontario under Balsillie's plan. The Coyotes argued that the NHL is excluding competition and restraining trade through the application of unreasonable restrictions in the NHL Constitution and Bylaws, which prevent relocation of the team to Hamilton, Ontario. The reason the Bankruptcy Court can hear the antitrust claims is that bankruptcy courts have jurisdiction to hear all civil proceedings arising in or related to cases filed under the Bankruptcy Code. Although the antitrust claim could be removed to the District Court, the Bankruptcy Court has the power to hear the antitrust claim because the claim is related to the outcome of the case and has an effect on administration of the team.

6. What happens next? The next step in this case is the May 19 hearing to determine who has control of the team. If Moyes and the Coyotes win, they will push the Balsillie plan and auction process forward. If the NHL wins, they will either (1) seek to have the case dismissed and try to sell the team to Jerry Reinsdorf or another party or (2) let the case run its course and seek to find a buyer within the guidelines of a bankruptcy proceeding.

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