Thursday, October 8, 2009

Sports and the Law: Coyotes Roaming in the Desert

Last week, we here at SportsJudge Blog alerted you to Judge Redfield Baum's rejection of the two proposed reorganization plans for the Phoenix Coyotes under which a new entity would purchase the moribund franchise out of bankruptcy. (For previous posts on the Phoenix Coyotes bankruptcy, click here.) Those two competing entites, of course, are Jim Balsillie (co-CEO of BlackBerry-make RIM) and the National Hockey League. Given the consequences of Judge Baum's decision, two issues are worth examining: What exactly did Judge Baum's decision say and what happens next to the Coyotes?

The Decision: Judge Baum Rejects Both Bids, But Leaves the Door Open to the NHL

Two bids were presented to Judge Baum for consideration, both of which called for the proposing entity to buy the Coyotes and bring them out of bankruptcy. Jim Balsillie's bid was for $242.5 million, a $30 million increase from his previous bid as part of an attempt to get the city of Glendale to drop its objection to his bid. Balsillie's bid was contingent on being able to move the team to Hamilton, Ontario. The NHL's bid was worth $140 million, and called for payment of unsecured creditors as chosen by the NHL. After evaluating both bids, Judge Baum decided to accept neither. Balsillie's bid was rejected because Judge Baum determined that the NHL's interests in selecting its member owners could not be adequately protected from an economic perspective as required by the Bankruptcy Code.

The NHL's bid was rejected because the language of the bid had a practical effect of allowing the NHL to pay all creditors in full except for Jerry Moyes and Wayne Gretzky. Under the Bankruptcy Code, a reorganization plan cannot allow for the purchasing entity to pick and choose which creditors it will pay. The silver lining for the NHL, however, is that its bid was rejected without prejudice, meaning that it can fix its bid and re-propose it for the court's consideration. Balsillie's bid, on the other hand, was rejected with prejudice, meaning that he cannot propose another bid. With rejection of both bids, the Coyotes will remain in bankruptcy until a new reorganization plan is filed by the NHL or another party.

Where Do the Coyotes Go from Here?

Now that the Coyotes are remaining in Chapter 11 for a while longer, an important question to ask is how will they finally emerge? One possibility is that the NHL could re-propose its bid with provision for payment of Moyes and Gretzky at the same rate as other unsecured creditors. Another possibility is that a new entity could propose a reorganization plan. Such a scenario is not unprecedented in sport organization bankruptcies. For example, the Pittsburgh Penguins languished in bankruptcy for about ten months after filing for bankruptcy in November 1998. Three reorganization plans were proposed, including one by the NHL and one by Mario Lemieux. Lemieux proposed his plan late in the bankruptcy process, becoming the knight in shining armor that rescued the Penguins from bankruptcy. Could the same thing happen with the Coyotes? It's possible, but given the ease with which the NHL could amend its bid, you can bank on the NHL getting control of the franchise. At that point, expect the NHL to sell the team outside of bankruptcy, possibly even to Jerry Reinsdorf, a previous bidder for the franchise. And if the NHL is really lucky, maybe it can secure a price higher than what it paid for the club, considering the new buyer would be getting the team free and clear of all the bankruptcy problems.

Tim Cedrone is a judicial law clerk in the New Jersey Superior Court, Appellate Division. This blog post and all others written by Mr. Cedrone are his work and his alone and express only the author's views. Nothing in this blog post or any other blog post written by Mr. Cedrone represents the views of the New Jersey Superior Court or any related entity.

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Mike Colligan said...

Tim, why did Baum not simply tell the NHL was their new bid would have to exceed?

If Moyes and Gretzky were in the fact the only two left out, it shouldn't have been too difficult to arrive at a number.

Tim Cedrone said...

From a jurisprudential standpoint, it is not the Bankruptcy Court's place to instruct a party what to pay creditors. Such a determination is left to the party proposing a bid to purchase the debtor, and rightfully so in a capitalistic society such as ours. Indeed, a bankruptcy court's job is to evaluate the bids and reorganization plans presented to it for compliance with the Bankruptcy Code, not create the reorganization plan itself. While I agree that the court may have been able to derive a value to be paid to Moyes and Gretzky, the NHL shouldn't have a value forced on them. With the court's ruling, the NHL will be able to decide what Moyes and Gretzky are to be paid within the constraints of its own economic flexibility, provided they are paid at a level consistent with other unsecured creditors.

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