Hockey, Chapter 11, and the BlackBerry

For an interesting example of how the business of professional sports and insolvency law intersect, consider the latest developments in the Phoenix Coyotes case. For those that do not know, in 1996, the National Hockey League approved the relocation of the Winnipeg Jets franchise to Phoenix, Arizona. Along with the move came a new name more fitting for the southwest: the Coyotes.

The move, however, did not turn out so well from a financial standpoint. After the relocation, the team never made a profit, and from 2004 to 2008, lost anywhere from $50 million to $117 million per year. Jerry Moyes, the majority owner of the team, had been funding the losses for some time until about August 2008, after which the NHL funded the continued losses for the 2008-2009 season. In early 2009, Moyes started looking for a buyer for the team, and had discussions with a number of potential buyers, including the NHL and an entity controlled by Jim Balsillie. Balsillie is one of the billionaire co-founders of Research in Motion, the Canadian maker of the ubiquitous BlackBerry devices. At some point, the NHL discussions went cold, leaving Balsillie as the only viable suitor.

Balsillie had been trying to buy an NHL team for some time to move to Hamilton, Ontario (about 40 miles from Toronto). So, shortly after the team (and some affiliated entities) filed for Chapter 11 protection in May 2009 (in the U.S. Bankruptcy Court for the District of Arizona), a Motion was filed seeking the approval of the sale of the team to Balsillie. The offer (which was for $212.5 million) was specifically conditioned upon the relocation of the team to a location of Balsillie’s choosing in Southern Ontario, Canada. The NHL objected, arguing that the NHL bylaws required league approval of any team relocation (and the NHL would not approve a new team in essentially the backyard of the Toronto Maple Leafs). Balsillie and the Coyotes argued that Sections 363 and 365 of the Bankruptcy Code effectively permitted the sale of the team free and clear of encumbrances and burdensome contracts, including the restriction that otherwise permitted the NHL to have veto power on team relocations. In addition to objecting to Balsillie’s purchase, the NHL submitted an offer to purchase the team. The NHL offer had an interesting twist of its own: although the amount being offered by the NHL would pay a significant dividend to creditors, its offer was conditioned on the sale proceeds being used to pay all except for 2 creditors it viewed as adversaries: Moyes (for, among other things, the funds he lent to his team to keep it afloat) and the legendary Wayne Gretzky (on a breach of contract claim for his contract, which runs through 2011, as head coach of the Coyotes).

The Court rejected both offers, but one rejection was more permanent than the other. The Court did not agree with Balsillie that the NHL bylaws were akin to a contract that could be rejected by the team, and therefore, given Balsillie’s often stated goal of moving the team to Ontario, denied that sale motion, with prejudice. With respect to the NHL offer, the Court was troubled with the condition that the proceeds be essentially earmarked to creditors other than Moyes and Gretzky, especially without the benefit of an evidentiary hearing to consider the validity of their claims. The NHL bid was denied without prejudice and the Court invited the league to modify its proposal to cure that defect.

A few days ago, Balsillie stated that he would not pursue an appeal of the decision. As of this post, the NHL has not submitted a revised offer. Given its investment in funding the team for over a year (into what is now the new 2009-2010 season), and the Court’s essentially “open invitation” to modify its bid, it would be hard to believe that the NHL will not ultimately be the successful purchaser of the franchise.

In terms of marketability of professional sports teams in bankruptcy cases, the upshot of the Court’s decision in this case is that the leagues (which typically reserve the right to approve relocations) hold essentially all the cards in controlling who the purchaser will be. This result is not necessarily consistent with what is in the best interests of creditors since the universe of buyers of sports franchises becomes limited to those parties whose interests are aligned with those of the league.

To see a pdf of the Court’s September 30, 2009 decision, please go to http://www.nhl.com/league/ext/pdf/phx_decision.pdf.