Sports and the Law: Cubs Sale Complete

Two weeks ago, we discussed the news out of Chicago that the Cubs had filed for and emerged from Chapter 11 bankruptcy protection within a 48 hour period. (Click here for previous coverage on the Cubs bankruptcy.) The bankruptcy filing was part of the sale process of the team from the Tribune Co. to the Ricketts family. As expected, the sale of the Chicago Cubs has now been finalized, and the team is now in control of billionaire Joe Ricketts.

The total value of the sale is approximately $845 million. That amount is the most that has ever been paid for a franchise, topping the $660 million that was paid for the Boston Red Sox and its related properties in 2002. For its $845 million, Joe Ricketts will receive not only 95% of the Cubs franchise, but also Wrigley Field and and 25% of Comcast Sportsnet, the television station that broadcasts most of the Cubs' games. Tribune Co. will retain the remaining 5% of the team. At the end of the day, Tribune Co. will actually receive about $740 million after taxes and fees are taken out.

So was it a good deal for Tribune Co.? In April, Forbes valued the franchise at $700 million, a number that included a $149 million valuation of Wrigley Field. The Forbes valuation took into account the pending sale to the Ricketts family, although at the time, the price tag was $900 million - $60 million more than the final number and less than other bidders were then offering for the club. In fact, some reports after the first round of bidding for the Cubs in late-2008 stated that bids were made as high as $1.3 billion. On the other hand, the Red Sox, a team now valued at $833 million by Forbes, sold for $660 million only 6 years ago. So, in only 6 years, the price for a Major League Baseball franchise rose almost $200 million dollars, and that is for a team (the Cubs) arguably less valuable than the previously sold team (the Red Sox). So, to answer the initial question, this appears to be a good deal for Tribune Co., or at least a fair deal for both parties. What do you think?

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.

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.

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.

Dollars and Sense: Bankruptcy Briefs

Here at SportsJudge Blog, we usually focus on the legal side of the ongoing Phoenix Coyotes bankruptcy case. Today, our focus will shift a bit more towards the business side of the case, with an additional piece on the pending sale of the Chicago Cubs by the Tribune Co.

NHL In, Reinsdorf Out, Balsillie Still Kicking
In a somewhat surprising move, Jerry Reinsdorf has withdrawn his $148 million bid for the Phoenix Coyotes from the auction to be held by the Bankruptcy Court on September 10. At the same time, the NHL has submitted its own bid, reported to be about $140 million, for the franchise. The NHL is seeking to purchase the Coyotes and then immediately re-sell the team to a third party. This is not the first time the NHL has submitted a bid in a bankruptcy case; indeed, the NHL filed a bid in the Pittsburgh Penguins case in the late-1990s as a contingency if no buyer willing to keep the team in Pittsburgh could be found. It is also not unprecedented for a league to own a franchise; Major League Baseball owned the Montreal Expos for three years before the team moved to Washington, D.C. With Reinsdorf out of the bidding process, that leaves three bids for the auction on September 10: Jim Balsillie's $212.5 million bid, Ice Edge Holding's $150 million bid, and the NHL's $140 million bid. My money is still on Jim Balsillie winning the auction if (and that's a big if) he can resolve (1) the antitrust issues regarding relocating the franchise and (2) the ownership issues arising from the NHL's rejection of him as an owner. Resolution of those issues is ultimately in the hands of Bankruptcy Judge Redfield Baum.

Cubs To Be Sold to Ricketts Family, Bankruptcy Filing Possible
As part of its own bankruptcy case, the Tribune Co. is required to obtain court approval for the sale of any significant assets occurring outside the ordinary course of business. That means that the Tribune Co. must obtain court approval before its sale of the Chicago Cubs (an entity owned by the Tribune Co.) to the Ricketts family (Joe Ricketts is the founder of TD Ameritrade) can be finalized. Because of the precariousness of a debtor selling a large asset during the bankruptcy process, the Tribune Co. may be forced to place the Cubs into Chapter 11 to facilitate the process. Such a filing would almost assuredly be a pre-packaged case where the parties merely file a bankruptcy petition to take advantage of certain Bankruptcy Code provisions to effectuate the sale on which they have previously agreed. This would be very similar to the Los Angeles Kings bankruptcy case in 1995. In that case, the filing was essentially designed to approve the sale of the team previously negotiated and approved by the NHL. There are two other things to note about the Cubs sale. First, if the Cubs file, it will be the first bankruptcy filing by a professional sports franchise outside the NHL since the inception of the current Bankruptcy Code in 1978. Second, the $845 million price tag the Ricketts family will pay, most of which the Tribune Co. will use to pay creditors, is $155 million less than some of the previously reported $1 billion bids. While that shouldn't be anything giving the bankruptcy court cause to disallow the sale, it is still substantially less than what creditors may have been expecting.

Stay tuned to SportsJudge Blog for more ongoing coverage of these developments.

Sports and the Law: Update from the Desert

As any loyal reader of this blog knows, we have been following the Phoenix Coyotes Chapter 11 bankruptcy saga pretty closely in these parts. Now that Judge Redfield Baum has made some sense out of everything that is going on in the case, we thought it would be a good time for an update. (Click here for previous posts on the Coyotes.)

First, a quick update on where we are right now. On June 15, Judge Baum, in a 21 page opinion, rejected Jim Balsillie's proposed reorganization plan to buy the Coyotes for $212.5 million and move the team to Hamilton, Ontario. Judge Baum's basic reasoning was that Balsillie's proposed deadline for the deal - June 29 - did not provide the court with enough time to solve the complex legal issues in the case (including the controversial antitrust issue discussed by Marc Edelman here). After the judge rejected the plan, new bids for the team were solicited. That has resulted in Balsillie readying a new bid for the team (still contingent on moving the team) and a firmer bid emerging from Chicago Bulls and White Sox owner Jerry Reinsdorf that would keep the team in Arizona. Reinsdorf's bid is expected to be filed with the court Friday, June 26. Now, the next step for any other bids to keep the team in Phoenix is for such bids to be submitted to the court this week, with the potential for an auction of the team on August 5. For bids contingent on moving the team, the timeline shifts to a September 10th auction date.

So what does this all mean for the Coyotes? By all indications, if a bidder (i.e., Jerry Reinsdorf) can come forward with a bid that approximates Jim Balsillie's, but proposes to keep the team in Arizona, Judge Baum will likely approve the plan. Indeed, Judge Baum already indicated as much during a hearing on June 22. If, however, the court finds that Reinsdorf's bid does not adequately compensate creditors, look for Jim Balsillie to get back in the running with a more lucrative offer. After all, the judge in any bankruptcy case, including this one, has an obligation to ensure the reorganization plan is not only beneficial to the bankrupt debtor, but also that it enables creditors to recover at least as much as they would in a hypothetical Chapter 7 liquidation. If Reinsdorf's bid fails to meet that standard (unlikely, but possible), Balsillie will still have a shot. At the end of the day, expect to see Reinsdorf come up with the money, and for the team to remain in Arizona.

Stay tuned for more coverage on this case. If we have learned anything so far, it is that this is an unpredictable case where one should expect the unexpected.

Q&A Part 2: Revisiting the Phoenix Coyotes Bankruptcy

[Editor's Note: Today's post is the second in a two-part series addressing the Phoenix Coyotes recent bankruptcy filing. Part 1 discussed some of the legal issues surrounding the case. Part 2 reflects on some of the hockey-related issues that have arisen. For previous posts regarding the Phoenix Coyotes and bankruptcy, click here, 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.]

A lot has happened since we last discussed the Phoenix Coyotes bankruptcy here at Sports Judge Blog. To catch you up to speed a bit, here's a quick run down of the major developments. First, after being ordered to mediation to resolve the dispute over who controlled the franchise, Jerry Moyes and the NHL agreed that the existing ownership would continue to run the day-to-day aspects of the franchise. Second, Judge Redfield Baum sped up the pace of the proceedings, scheduling a hearing for June 9 to resolve the issue of whether the team can be relocated without the NHL's consent. Judge Baum also laid the groundwork so that new ownership could be in place by June 22. Third, prospective owner Jim Balsillie has secured funding to upgrade Copps Coliseum in Hamilton, Ontario - the city to which he hopes to move the Coyotes. Finally, two rival bids have emerged to compete with Balsillie's: one from a Coyotes minority owner and one from Jerry Reinsdorf, majority owner of the Chicago Bulls and Chicago White Sox. With that said, we now turn to some of the hockey-related issues stemming from this bankruptcy.

1. How does this case affect the Coyotes players? As a general matter, the Coyotes players will still be around next season (or at least those under contract anyway). Although player contracts are treated as executory contracts in bankruptcy proceedings, and can thus be rejected by the debtor, it is highly unlikely the team would reject any contracts. After all, if they rejected any contracts, they would still have to sign new players. Furthermore, it does not appear that they are saddled with any Stephon Marbury-like contracts. What should be of greater to concern to the players is if they are owed any deferred salary. Mario Lemieux serves as a good example. When the Penguins filed for bankruptcy in 1998, Lemieux was owed $32 million in deferred compensation. Lemieux ended up being paid only $21 million after he and investors brought the team out of bankruptcy. So, if any players are owed deferred salary, they may end up not getting all of it.

2. What happens if Judge Baum rules for the Coyotes and allows them to move without the NHL's consent? The short answer: the Coyotes move to Hamilton, Ontario. The long answer is much more involved. (Isn't it always?) Legally, such a ruling would effectively rewrite the NHL Constitution, something even Judge Baum recognized he may not legally able to do. If he does, however, teams will effectively be able to relocate without NHL consent, despite current rules requiring approval by the league and other owners. This would also impact relocations in leagues with similar rules, which is why the NFL, MLB, and NBA filed motions in support of the NHL's position. A ruling for the Coyotes would essentially mean teams could use bankruptcy to blackmail other owners: Let us move, or we'll file bankruptcy and move anyway. From a hockey standpoint, a move to Hamilton, Ontario, would mean that a team in the Pacific Division would be in lower Ontario. That makes for a lot of travelling for San Jose, Anaheim, Dallas, and Los Angeles whenever the teams play each other. All you fantasy hockey fans may want to keep that in mind when drafting Shane Doan next year.

3. Where does Wayne Gretzky come out in all this? As a minority owner of the Coyotes (Gretzky owns about 1.5%) and coach of the team, the Great One obviously has a lot at stake. One certainty right now is that if Jim Balsillie's plan goes through, Gretzky will no longer be a minority owner of the team, but he could receive as much as $22.5 million. The large uncertainty, however, is whether Gretzky will remain the team's coach. According to one report, Gretzky will not return as coach if Jerry Reinsdorf gets the team. Jim Balsillie has not discussed the issue publicly; however, one would not be surprised if he kept the Great One behind the bench if the team ends up in Ontario. Hamilton is only a half hour from Gretzky's boyhood home of Brantford, and having Gretzky front and center for every game may not be a bad idea. It is for that reason that you can expect to see Gretzky remain as coach next season if the Coyotes relocate to Hamilton.

4. What's in a name? If the Coyotes move to Hamilton (a BIG if right now), one can't honestly think they'll keep the Coyotes moniker. The Hamilton Coyotes just doesn't cut it. So what should the name be? How about the Hamilton Tigers? That was the name of the NHL franchise that resided in Hamilton from 1920-1925. While the trademark rights to the name would have to be obtained from their current owner (unless that owner is the NHL), it probably wouldn't be that difficult. If the case ever gets to this point, Balsillie surely wouldn't let that stand in his way. And besides, Hamilton Tigers sounds better than Hamilton Coyotes.

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.

Phoenix Coyotes Bankruptcy: Breaking News

Breaking News: The Phoenix Coyotes today filed for Chapter 11 bankruptcy protection. The filing plan appears to be a pre-packaged plan, under which the Coyotes (and specifically their holding company) filed to effectuate a sale of the franchise.

SportsJudge previously posted on a "hypothetical" Coyotes bankruptcy specifically involving a pre-packaged plan filing in the following articles:

"What Would Happen If The Coyotes Went Bankrupt? - March 2

"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."

"Coyote Roundup" - March 9

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.

For a more detailed background on the legal history of bankruptcies in professional sports, you can also check out my full law review article on the topic here.

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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?

Dollars and Sense: What Would Happen if the Phoenix Coyotes Went Bankrupt?

[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

Sports and the Law: Phallout Phrom Phelps Pholly

[Editor's Note: The following is a guest column by Tim Cedrone, a third-year law student at Seton Hall Law School in Newark, NJ. Tim is the symposium editor of the Seton Hall Sports & Entertainment Law Journal.]

From the Wall Street Journal, February 6, 2009:

Phelps Loses Endorsement Pact, Faces Suspension over Photos
by Suzanne Vranica & Matthew Futterman

Kellogg Co. is severing its relationship with Michael Phelps after the Olympian was photographed smoking marijuana. . . . The Battle Creek, Mich., packaged-food company, whose brands include Frosted Flakes, Rice Krispies and Pop-Tarts, said Thursday it wouldn't continue its endorsement contract with the gold medalist, which comes up for renewal at the end of the month. . . . "We originally built the relationship with Michael, as well as the other Olympic athletes, to support our association with the U.S. Olympic team," a Kellogg spokeswoman said in a statement. "Michael's most recent behavior is not consistent with the image of Kellogg." (Full article here.)

A myriad of reports have come out over the last few days regarding Michael Phelps and his pot-smoking picture. Many of the stories discuss the repercussions Phelps may face from sponsors. As seen above, one sponsor has already decided to discontinue its relationship with Phelps. Others (Visa, Speedo, Omega, Subway) have expressed support for Phelps. But the question is, if these sponsors wanted to terminate their relationship with Phelps because his behavior is "not consistent with the sponsor's image," how could they do it? The answer lies in the oft-mentioned and little-discussed morals clause.

In an article soon to be published in the Seton Hall Journal of Sports & Entertainment Law, I discuss morals clauses in talent agreements in great detail. (Click here for a copy of the article, co-authored by Fernando Pinguelo.) As stated in the article, a morals clause is a contractual provision that gives a company the unilateral right to terminate an agreement with an individual in the event the individual engages in reprehensible behavior or conduct that may negatively impact his/her public image and, by association, the public image of the company. Companies often use morals clauses to terminate sponsorship agreements, such as with Kate Moss/H&M and Michael Vick/Rawlings. These clauses can be very broad, whereby they allow termination for almost anything; or very narrow, whereby they permit termination for specified conduct like felony convictions. Athletes (and their agents) typically prefer narrow clauses so that they can limit their potential exposure, whereas sponsors prefer broad clauses to ensure flexibility. The ability of an individual to secure a narrow clause often depends on their leverage: the more marketable the athlete, the narrower the clause and vice versa (think Michael Jordan v. Milorad Cavic).

So what does this mean for Phelps? Assuming his contracts have morals clauses, the legal reality is that any of his sponsors may have the ability to terminate the sponsorship agreement. After all, smoking pot is certainly not something companies want associated with them. The more likely situation is that some sponsors may decide to not renew his contract (like Kellogg). This also happened to Kobe Bryant with McDonald's and Nutella in 2004. If the contract is set to expire soon, the sponsor may just not use Phelps in any ads, make their payments to him, and then not renew the contract when the term expires. For longer contracts, the sponsor could just ride out the publicity storm and hope that Phelps restores his image with dominant performances at the 2009 World Championships and 2012 London Olympics. So, while Phelps' sponsors may have the legal right to terminate his contract right now, the companies probably want to remain associated with the greatest Olympian ever despite his folly. Just another example of how economic realities can often take precedence over a party's legal rights.

[Tim Cedone is Symposium Editor of the Journal of Sports & Entertainment Law at Seton Hall Law School, as well as author of the Sports & Business Blawg.]