The November 2nd Phoenix Coyotes Bankruptcy Decision And The Interplay Of Bankruptcy And Sports Law
David C. Blum and Elizabeth B. Vandesteeg1
The Phoenix Coyotes, a team in the National Hockey League (“NHL”), spent a highly contentious and rocky six months in bankruptcy proceedings before reaching a resolution on November 2, 2009, when it was acquired by the NHL in a 363 Sale. The NHL’s bid was significantly lower than that of the other bidder. However, the NHL took theposition, wearing its hat as the NHL (as opposed to its hat as a competing bidder), that it would not let the competing bidder in the NHL.
Team History & The Stadium Lease
The Phoenix Coyotes were originally the Winnipeg Jets. The team started to have financial difficulties and was sold to two Phoenix businessmen who relocated the team to Phoenix in 1995. From that time until December, 2003, the Coyotes shared a stadium with the NBA’s Phoenix Suns. Although the stadium was considered to be a state-of-the-art venue for basketball, it was seen as inadequate for hockey, due in part to the poor sight lines.
In 2001, several entities owned and/or controlled by the then principal owner of the Coyotes, Steve Ellman, entered into an “Arena, Management, Use and Lease Agreement” (“AMULA”) with the City of Glendale, Arizona, to build a new stadium for the Coyotes.2 Glendale advanced $183 million to pay for construction of the stadium, and issued $155 million in bonds in order to finance the project.3 Glendale’s plan was that the arena would be a multi-use sports and entertainment facility serving as the main feature of a planned 223 acre $1 billion development.4 The principal developer for the project was Steve Ellman.5
Pursuant to the AMULA with Glendale, the Coyotes agreed they would play all of their home games at the Glendale stadium through the 2035 season; Glendale had the right to seek specific performance, and the damages to Glendale would be a liquidated damages amount calculated by a complex formula starting at nearly $795 million with specified annual reductions if the agreement was terminated early and no specific performance was available.6 The Coyotes played their first home game in the Glendale stadium in December, 2003 and have played every home game there since.
Jerry Moyes purchased a minority interest in the Coyotes in 2001. By 2006, Moyes had become the Coyotes’ primary source for funding and, pursuant to a Consent Agreement approved by the NHL, Ellman relinquished all ownership rights to Moyes.7 Moyes advanced over $300 million to operate the Coyotes.8 However, the team failed to record a profit. The operations sustained annual losses in excess of $36 million in 2006, 2007 and 2008.9
In August, 2008, Moyes asked for financial assistance from the NHL. The NHL began advancing money to the Coyotes that was supposed to be repaid with the team’s future shared league revenue.10 In addition, the City of Glendale was requested to make economic concessions but it did not offer any meaningful concessions.11
In early 2009, both Moyes and the NHL began actively seeking a new owner for the Coyotes. In April, 2009, Moyes informed the NHL of interest by Jim Balsillie (co-founder and co-CEO of Research in Motion, developer of Blackberry), to buy the Coyotes and relocate the team to Hamilton, Ontario, Canada.12 NHL Commissioner, Gary Bettman, told the Moyes group that the NHL would not approve of relocating the team.13 Throughout this time, the NHL continued to fund the operational shortfall of the Phoenix Coyotes.14
The Chapter 11 Filing
On May 5, 2009, the Coyotes’ holding company, Dewey Ranch Hockey, LLC, filed Chapter 11 bankruptcy in the Arizona Bankruptcy Court, Case No. 09-09488. Judge Redfield T. Baum was assigned the case.15 That same day, Moyes announced the sale of the Coyotes to PSE Sports and Entertainment (“PSE”), which is headed by Balsillie, for $212.5 million.
The developments of May 5th took many by surprise, including the NHL. The NHL was believed to be in the midst of negotiating the sale of the Coyotes to Jerry Reinsdorf, who is the principal owner of the Chicago White Sox and the Chicago Bulls. Reinsdorf’s offer was much less than PSE’s $212.5 million, but Reinsdorf had no intention of relocating the team out of Glendale, which was very important to the NHL.
The Debtor filed a motion asking the Bankruptcy Court to approve the sale of the Coyotes to PSE, and to allow PSE to relocate the team to Hamilton. The NHL and the City of Glendale (among others) opposed the motion.
The NHL vehemently argued that Moyes had no ownership authority regarding the Coyotes since the NHL had been funding the team since August 2008.16 The NHL also argued that Moyes failed to file the necessary applications with the NHL for it to approve either the change in ownership or the relocation of the team.17
The National Basketball Association, the National Football League and the Office of the Commissioner of Baseball collectively filed an amici curiae brief, supporting the position of the NHL, taking the stance that approving the sale would ultimately disrupt the business of professional sports.18
Judge Baum ruled against the Debtor’s motion, holding that the Court needed more time to decide on the issues.19 The decision didn’t rule out PSE’s purchase of the Coyotes nor the relocation to Hamilton, but it did rule out any chance of the Coyotes’ relocation in time for the 2009-2010 season, as Balsillie had hoped.
The Auction
On July 9, the Court set two separate auction dates for the Coyotes. The first auction was to be only for bidders who would keep the team in Glendale for at least 5 years. The second auction would be for bidders who could try to relocate at any time (with the approval of the NHL).20 The first auction was initially set for August 20, 2009, and the second auction was set for September 10, 2009.21
Ultimately, a single auction took place on September 10, 2009, open to all bidders, regardless of intent to relocate.22 Just prior to the auction, Reinsdorf and Ice Edge, another potential bidder, both publically stated that they would not be submitting bids for the court auction, leaving only PSE and the NHL.23
The NHL’s final bid was for $140 million, which was to be reduced by the payment of the secured debt due to SOF Investments and the NHL, and specific cure costs and trade debt (totaling $11.6 million).24 The Court noted that the bid appeared to be intended to pay the unsecured creditors in full, in cash, but excluding in whole any claims by Moyes or Moyes affiliates and any claims of Wayne Gretsky (its coach and minority owner).25 The NHL’s bid committed to perform all obligations under the Glendale lease through the 2009-2010 season, while working during that time to find a buyer who would keep the team in Glendale.26 If at the end of that season there was no new owner, the NHL planned to sell the team “pursuant to a professionally conducted relocation sales process.”27
PSE’s final bid, on the other hand, was for $212.5 million and was expressly conditioned on the Court approving the relocation of the Coyotes to Hamilton.28 PSE also agreed to pay the same group of unsecured creditors as the NHL, whose claims totaled approximately $11.6 million.29 In addition, PSE offered to pay Glendale $50 million if it would withdraw its objection of the sale to PSE.30
The Failure of Both Bids to Provide Adequate Protection Under Section 363(e)
Both bidders submitted voluminous documentation in support of their respective bids and opposing the other.31 PSE argued that the Court had the power and authority to approve the sale to PSE and to authorize and mandate the relocation to Hamilton.32 PSE asserted that Section 365 of the Code allowed the Debtor to assume and assign the executory contract rights of the Coyotes, and that Section 363 then allowed the sale of those rights free and clear of the contractual restrictions of the NHL and Glendale that required the Coyotes to play all home games in Glendale.33
PSE further argued that the NHL’s actions regarding the PSE bid was a breach of the duty of good faith and fair dealing.34 In support of those claims, PSE made many arguments, including the assertion that once the NHL became a bidder for the Coyotes, it forfeited its right to decide the membership or relocation requests by the Coyotes and PSE and/or to determine the relocation fee due it.35
The NHL, among other things, argued that Section 365 did not provide a basis for a forced relocation of the team, but rather allowed only for the assumption and assignment of a contract that required the Coyotes to play their home games in Glendale.36 The NHL claimed that the Debtors and Moyes had breached their duty of good faith and fair dealing. The NHL also asserted that the PSE bid could not adequately protect the interests of the NHL, as required by Section 363(e).
Glendale argued that its claimed contractual right to specific performance under the lease was an interest under Section 363, and that the Code did not allow a sale free and clear of that interest. Glendale also asserted that its interest could not be adequately protected by Section 363(e), and that the proposed relocation to Hamilton did not meet the good faith requirements of Section 363. Glendale further argued that the bankruptcy case and the proposed sale to PSE were used solely to benefit Moyes, and that Moyes’ control of the auction process had improperly chilled bidding.
On September 30, 2009, Judge Baum rejected both parties’ auction bids, denying the PSE bid with prejudice and the NHL bid without prejudice. Judge Baum determined that PSE could not adequately protect the NHL’s non-economic interests, and therefore found that he was required by Section 363(e) of the Code to prohibit any sale to PSE that would result in a forced relocation from Glendale.37
Judge Baum noted that, in most cases, a party’s interest in property sold under Section 363 is purely an economic interest, capable of being adequately protected by impounding funds to protect such interest. In the case at hand, however, the Court found that the NHL had three important non-economic interests: (1) the right to admit only new members who met the NHL’s written requirements; (2) the right to control where its members play their home hockey games; and (3) the right to a relocation fee, where appropriate.38 The Court found that the NHL’s non-economic interests could simply not be adequately protected by PSE’s proposed payment of a relocation fee.
Prior to this ruling, the NHL Board of Governors on July 29, 2009, voted unanimously (26-0) to not approve PSE’s/Balsillie’s application because Balsillie, in their view, did not have the “character and integrity” required under NHL By-law 35 to be an owner of a NHL team.39 In addition, although Basillie had “sufficient financial means to ensure the financial stability of the Coyotes” there was a belief among the Governors that Balsillie “was not willing to comply with League rules and procedures and would not be a good business partner.”40 Throughout its various briefings, the NHL stressed that it had the right to choose its owners and that “NHL ownership involves relationships of trust and confidence” and set forth numerous reasons for the apparent dislike of Balsillie.41
At the end of the day, the Court appeared to rely most heavily on the body of case law championed by the NHL that provides that unincorporated associations (like the NHL) have the “sole power to say who shall belong and who shall not.”43 As the NHL argued, “courts have repeatedly recognized that the governing bodies of sports leagues have the right to choose their fellow owners.”43 The NHL repeatedly emphasized “how important … character and trustworthiness considerations are in the context of professional sports leagues. The NHL Board of Governors, like the governing bodies of every professional sports league, is made up of joint decision makers in an economically interdependent venture.”44
Therefore, the Court found itself bound by the mandatory restrictions under Section 363(e) and prohibited the sale to PSE. To put the nail in PSE’s coffin, the Court expressly stated that “[t]his conclusion effectively is the end for the efforts of PSE, Balsillie, Moyers and the Coyotes to force a sale and relocation of the hockey team[.]”45
While the NHL bid was also rejected, it was done so with a far softer hand, with the Court opening its analysis by stating that “[t]here are multiple factors that support the NHL bid.”46 The Court looked favorably on the fact that the NHL’s bid would pay the secured creditors in full and would make a substantial payment to the unsecured creditors.
Judge Baum rejected that bid, however, because it permitted the NHL to unilaterally select the creditors that would be paid, and it appeared that the NHL intended to pay all creditors with the sole exception of Moyes, Moyes affiliates and Wayne Gretsky. Recognizing that a 363 sale could deprive parties of rights inherent in the plan confirmation process, Judge Baum determined that the NHL’s bid should not be allowed to discriminate unfairly among the unsecured creditors.47 The Court held that it would be “inherently unjust for this court to deprive [Moyes and Gretsky] of their possible rightful share of any proceeds without first providing all involved a fair trial on their claims” and allowed the NHL the opportunity to cure this defect and present a revised bid.48 The NHL revised its bid and resubmitted it to the Court.
The NHL Becomes the Proud (Interim) Owner of the Coyotes
On October 26, 2009, Moyes agreed to sell the Coyotes to the NHL for $140 million. $128 million is the official figure, but the NHL will spend another $11.6 million to purchase the claims of certain unsecured creditors. Judge Baum approved the sale on November 2, 2009. Moyes had stood to make approximately $100 million from the sale to PSE. The sale to the NHL, on the other hand, left less than $11 million to be divided amongst Moyes, Gretzky, and Glendale.
The NHL will work to find a buyer for the Coyotes who will keep the team in the Phoenix area and try to stabilize the team’s operations as quickly as possible. If the NHL can’t find a buyer who will keep the team in the Phoenix area, then the NHL will consider relocating the team.
Other Aspects of the Case
Throughout this arduous process, a number of interesting side issues were raised by the various parties, which colored the arguments but did not appear to have a direct impact on the Court’s final ruling. For example:
* The NHL raised the argument that the bid with the highest numerical dollar amount in a Section 363 sale is not always the highest and best bid.49 This argument, while correct, does not appear to have required extensive consideration by the Court. In effect, under the Court’s holding, the PSE bid was never a viable bid that the Court could have considered and approved, regardless of the dollar amount.
* PSE raised allegations of bad faith with respect to the NHL’s bid.50 The NHL countered that it submitted a bid to preserve the possibility of the auction, because all other bidders had dropped out.51 Again, this was not a driver.
* The Debtors tried to discredit the NHL’s bid on the grounds that “[t]he NHL Bid contemplates a possible relocation sale of the Phoenix Coyotes after the NHL purchases it, despite demonizing the Debtors for attempting the sale thing pre- and post-petition.”52 This argument side-stepped the NHL’s clear intent to find a buyer who would keep the team in Phoenix, allowing relocation only if those efforts failed, and also what ended up being the most significant driver in the case: the NHL’s right to decide who could join its association.
Conclusion
In the end, a far lower bid prevailed because the Court could not find that the interests of the NHL were adequately protected by the higher bid. This is an interesting case for a number of reasons:
* It certainly has some good discussion about good and bad faith in the context of a sale process.
* It is a good place to look for cites to cases to support the argument that a highest bid is not always entitled to win an auction since the requirement of the Code is that the highest and best bid prevail.
* It is a great case to see world class lawyering. From our seats in the proverbial stands, we applaud counsel for what we believe must have been a tactical decision not to try to take the “you can’t join my club” line of cases head on and, instead, for choosing to get to the result its client wanted by making the legal arguments it did make.
The Court’s decision is a welcome one from the perspective of all professional sports leagues and serves as a warning to potential buyers of franchised teams that bankruptcy will not likely to be an effective way of circumventing league rules and regulations regarding team ownership and relocation.
1 David and Elizabeth (Lisa) are with Levenfeld Pearlstein, LLC in Chicago, IL. David chairs LP’s Sports Law Group. Lisa is a member of LP’s Restructuring & Insolvency Group. A special thanks to Melissa Mistretta, Director of LP’s Knowledge Management Group, for her assistance in performing research for this article.
2 Order dated September 30, 2009 at p. 4., In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488) (the “Sept. 30th Order”).
3 Id.
4 Id.
5 Id at p. 5.
6 Opinion dated June 15, 2009, In re Dewey Ranch Hockey, LLC 406 B.R. 30, 33 (Bkrtcy.D.Ariz.,2009) (No. 09-09488), (the “June 15th Opinion”).
7 Id.
8 Id.
9 Id. at p. 34.
10 Id.
11 Id.
12 Balsillie previously had made similar attempts to purchase the Nashville Predators and the Pittsburgh Penguins, but those deals didn’t work out. Balsillie has been committed to relocating an NHL team to Hamilton, Ontario. In the early 1990’s, Hamilton attempted to get an NHL team but lost out to Ottawa. Hamilton was readied with an NHL size arena, and Balsillie began negotiating to secure a lease of that stadium.
13 June 15th Opinion at p. 34.
14 Id.
15 In its bankruptcy petition, the Debtor named approximately 30 creditors. The main creditors were Moyes, the NHL, the City of Glendale, Aramark, and SOF Investments. Aramark was the exclusive manager of concessions at the Glendale stadium, and SOF Investments was the largest secured creditor, with a debt of $80 million. See Debtor’s Chapter 11 Petition, In re Dewey Ranch Hockey, LLC 406 B.R. 30 (Bkrtcy.D.Ariz.,2009) (No. 09-09488).
16 Opinion dated June 15, 2009, In re Dewey Ranch Hockey, LLC 406 B.R. 30 (Bkrtcy.D.Ariz.,2009) (No. 09-09488).
17 Id.
18 Id.
19 Id. at p. 35.
20 Order dated September 30, 2009 at p. 8., In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488) (the “Sept. 30th Order”).
21 Id.
22 The NHL requested and received a continuance of the first, non-relocation bidders only, auction to the September 10, 2009 date (Id. at pp. 12-13), but the Court denied the NHL’s request to continue the relocation auction until after the end of the 2009-2010 season. Id. at p. 13.
23 Id.
24 Id. at pp. 13-14, 17.
25 Id. at p. 14.
26 Id.
27 Id.
28 Id. at p. 17.
29 Id.
30 However, PSE would lower its overall bid by $20 million if the offer to Glendale was accepted. In other words, if Glendale accepted the $50 million offer, a net total of $30 million would be effectively added to the PSE bid, raising it to $242.5 million. Both bids were cash bids. Id.
31 Id at pp. 18-22.
32 Id.
33 Id.
34 Id.
35 Id.
36 Id.
37 Id. at p. 22-23.
38 Id. at p. 24.
39 Id. at p. 8. The Board of Governors did however approve an ownership transfer to the Reinsdorf group. Id.
40 Id. at p. 11.
41 “As Mr. Balsillie told the press on May 15, 2009, ‘I spent five years looking for a front door. . . . We couldn’t find a front door. I found a side door.’ Similarly, Mr. Rodier [Balsillie’s attorney] told the press on May 19, 2009, that his and Mr. Balsillie’s ‘strategy is to buy an NHL team out of bankruptcy and then move it over the league’s objections, by winning and antitrust lawsuit if necessary.'” NHL’s Reply in Support of Determination that Debtors’ NHL Membership Rights May Not Be Transferred to PSE or an Affiliate Thereof (public version), dated August 31, 2009 (“NHL’s Membership Rights Reply”), at p. 15, In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488).
42 Id. at p. 19 (citing Arnstein v. Am. Soc’y of Composers, Authors & Publishers, 29 F. Supp. 388, 393 (S.D.N.Y. 1939).
43 Id. at p. 20 (citing Levin v. NBA, 385 F. Supp. 149, 151-153 (S.D.N.Y. 1974); Fishman v. Estate of Wirtz, 807 F.2d 520, 562 (7th Cir. 1986); Mid-S. Grizzlies v. NFL, 550 F. Supp. 558 (E.D.Pa. 1982)).
44 Motion of National Hockey League for a Determination that Debtors’ NHL Membership Rights May Not be Transferred to PSE or an Affiliate Thereof, dated August 31, 2009, at p. 10, In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488).
45 Sept. 30th Order at p. 25.
46 Id.
47 Id. at p. 26. This argument was raised by the Debtors in their Objection to the National Hockey League’s Offer to Purchase the Assets of Coyote Hockey and Arena Management, dated September 1, 2009 (“Debtors’ Objection to NHL’s Offer”), p. 3, In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488).
48 Id. at p. 27.
49 NHL’s Brief in Support of the Sale of Assets to and Assumption of Liabilities by Coyotes Newco, LLC and Arena Newco, LLC (public version), dated September 10, 2009, at pp. 14-15, In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488).
50 See, e.g., PSE’s Motion for Determination That the Coyotes May Be Relocated to Hamilton Notwithstanding the NHL’s Refusal to Consent, dated August 28, 2009, at pp. 2, 8-9, In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488).
51 The National Hockey League’s Omnibus Reply in Support of the Sale of Assets to and Assumption of Liabilities by Coyotes Newco, LLC and Arena Newco, LLC, dated September 4, 2009, at pp. 2, 4-5, In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009) (No. 09-09488).
52 Debtors’ Objection to NHL’s Offer, p. 3.
