Saturday, October 17, 2009

Sports and the Law: Cubs First Non-NHL Team to File Chapter 11

Well that was fast. In a case that was the antithesis of the Phoenix Coyotes saga, the storied Chicago Cubs filed for and emerged from Chapter 11 bankruptcy this past week in the course of 48 hours. (For previous coverage of the Cubs filing, click here.) With its filing, the Chicago Cubs became the first non-NHL team to file Chapter 11 team among the four major professional leagues (NFL, NBA, MLB, and NHL) since the inception of the current Bankruptcy Code in 1978. The filing was part of the planned sale of the Cubs by the Tribune Co. to billionaire J. Joseph Ricketts, the founder of TD Ameritrade. With that said, let's look at some of the details of the case.

The Facts. The Tribune Co. bought the Cubs in 1981 for $20.5 million. Since then, Tribune faced some difficult times, culminating with the company's Chapter 11 bankruptcy in December 2008. Tribune's filing did not include the Cubs. In attempt to shed itself of some assets, Tribune decided to sell the Cubs, with the Ricketts family winning a bidding war that once included Mark Cuban. The final deal calls for payment of $845 million by the Ricketts family in exchange for 95% of the Cubs, Wrigley Field, and Tribune's stake in a sports TV network. Tribune will retain 5% of the Cubs and end up with $740 million from the deal. Major League Baseball owners previously approved the sale of the Cubs to the Ricketts family by a unanimous vote.

The Filing. The Cubs filed what is known as a "pre-packaged" bankruptcy plan. Under a "pre-pack," the debtor and creditors work out a refinancing structure for the debtor before filing, and then to make the deal work, the debtor files Chapter 11 to take advantage of Bankruptcy Code provisions needed to carry out the plan. Pre-packs allow for a quick resolution of the case, as seen here with the Cubs. In the Cubs case, the team filed for bankruptcy to eliminate any claims against the team stemming from Tribune's bankruptcy case. In other words, by filing itself, the Cubs can eliminate the possibility of Tribune creditors seeking payment of their claims via the Cubs.

The History. The Chicago Cubs are the first non-NHL team among the four major professional leagues to file for Chapter 11 bankruptcy protection since the inception of the current Bankruptcy Code in 1978. Since then, only 4 NHL teams have filed for bankruptcy: the L.A. Kings, Pittsburgh Penguins, Buffalo Sabres, and Phoenix Coyotes. (For a list of other teams that have had encounters with bankruptcy, check out my law review article here.) Some may remember that the Baltimore Orioles were sold in a bankruptcy auction to Peter Angelos as part of the bankruptcy case of the team's previous owner, Eli Jacobs; however, the Orioles themselves never filed. The Cubs bankruptcy is most similar to that of the L.A. Kings. In 1995, the Kings filed for and emerged from Chapter 11 bankruptcy protection in the same day. The bankruptcy flowed from the individual bankruptcy of one-time owner Bruce McNall, and was essentially designed to approve the sale of the franchise previously negotiated and approved by the NHL - much like that of the Cubs here. At the end of the day, the Cubs are the newest members of a club no one wants to be in.

The Lesson to be Learned. The divergent cases of the Coyotes and Cubs represent opposite ends of how to go about selling a sports organization via bankruptcy. On the one hand, you have the Coyotes. The owner, Jerry Moyes, filed bankruptcy in a blatant attempt to sell the team to an owner of his choosing (Jim Balsillie) without NHL approval. After contentious court battles, the bankruptcy court rejected Balsillie's bid to buy the team, and the franchise currently sits in bankruptcy limbo after filing 5 months ago. The Cubs, on the other hand, worked out the franchise's sale ahead of time, got MLB's approval, filed bankruptcy to effectuate the sale, and emerged one day later. What can we learn from this? Very simply, selling a professional sports franchise via the Bankruptcy Code will be most easily accomplished through staying in bankruptcy for a short period and getting league approval for sale of the franchise. Failure to get league approval first will certainly result in a case more like that of the Coyotes and less like that of the Cubs.

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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