By Daniel A. Etna, Partner and Co-Chair of the Sports Business Group at Herrick, Feinstein LLP
Traditionally, prior to the start of a baseball game, the ball park ground rules are discussed by the managers. Unfortunately for the Houston Astros, there was no prior discussion of the “ground rules” of the federal bankruptcy court for the Southern District of Texas before the Astros took the “courthouse field.”
The Astros are a partner in a regional sports network (the “RSN”) which was formed as a Delaware limited partnership to televise Astros’ baseball, Houston Rockets’ basketball games and other sports programming in the Houston area. The other partners of the RSN are the Rockets and an affiliate of Comcast.
Pursuant to the RSN’s limited partnership agreement, the RSN is managed by its general partner, Houston Regional Sports Network, LLC. Houston Regional Sports Network, LLC is also owned by the Astros, the Rockets and Comcast. The board of Houston Regional Sports Network, LLC is comprised of four individual directors — one selected by the Astros, one selected by the Rockets and two selected by Comcast. These four directors manage the business of the RSN. As permitted by Delaware law, the RSN’s limited partnership agreement provides that the partners do not owe fiduciary duties to the RSN or each other and that each partner and its designated director(s) is entitled to act in its own self-interest in making decisions for the RSN.
The RSN’s primary assets consist of media rights agreements under which the RSN holds the exclusive right to broadcast Astros and Rockets games in exchange for rights fee payments from the RSN. Each of these agreements is terminable in the event of an uncured payment default.
On July 31, 2013, the RSN failed to make a required media rights payment to the Astros. On the same day, the Astros sent the RSN a notice of default. The RSN also failed to make the August 30, 2013 media rights payment and the Astros sent a second notice of default on September 3, 2013. The second notice of default stated that the RSN had until September 29, 2013 to cure the payment defaults. If such payment defaults remained uncured, the Astros would have the right to terminate the Astros’ media rights agreement.
Based on the conduct of the parties, the Astros seemed desirous of terminating the media rights agreement in the hope of securing a more lucrative media rights agreement in the open market. In contrast, Comcast sought to maintain the Astros media rights agreement as an asset of the RSN. In an effort to thwart the Astros from terminating the media rights agreement, Comcast arranged for the filing of an involuntary chapter 11 bankruptcy petition against the RSN. This petition was filed on September 29, 2013 — just two days before the Astros were set to terminate the media rights agreement.
The Astros sought to dismiss the petition on two grounds — one of which was that the RSN’s chapter 11 bankruptcy reorganization would be futile. Under the RSN’s limited partnership agreement, the approval of all four directors was required to adopt a chapter 11 bankruptcy plan of reorganization. In support of its position, the Astros relied upon the right of its designated director to veto any proposed plan of reorganization — a right which could be exercised under the RSN’s limited partnership agreement without any state law fiduciary duty obligations.
The bankruptcy court, after finding that the RSN could be profitable if properly managed, denied the Astros’ motion to dismiss the petition. The bankruptcy court was unwilling to permit a state-law fiduciary duty waiver to render the bankrupt RSN incapable of taking advantage of its own profitability potential. The bankruptcy court ruled that the Astros’ designated director owed fiduciary duties to the bankruptcy estate that could not be waived. Thus, the Astros’ designated director was not at liberty to indiscriminately veto proposals concerning the RSN’s reorganization plan (including any modification to the Astros’ media rights agreement).
The Astros have appealed the bankruptcy court’s decision on the ground that neither the U.S. Bankruptcy Code nor case law supports the bankruptcy court’s decision that bankruptcy law does not recognize valid waivers of fiduciary duties under state law.
If upheld on appeal, the ramifications of the bankruptcy court’s ruling would affect the entire joint venture landscape. Waivers of directors’ fiduciary duties would no longer be absolute once a bankruptcy proceeding has been initiated. Absent such waivers, directors would bear the onus of observing fiduciary duties similar to those of a trustee to a bankrupt estate. Further, the recognition of the unenforceability of fiduciary duty waivers in a bankruptcy proceeding may alter the structure and overall negotiation of joint ventures.
In re Houston Reg. Sports Network, L.P., No. 13-35998 (Bankr. S. D. Tex, Feb. 12, 2014)
