Professional Sports Leagues as DIP Lenders in Sports Team Chapter 11 Cases

by Thomas J. Salerno, Jordan A. Kroop and Hon. Redfield T. Baum

Excerpt:

Like any operating business in chapter 11, sports teams need working capital to maintain business as usual during the course of a chapter 11 case. Outside of a sports context, a debtor in possession typically obtains working capital in one of three ways: (1) it uses its existing secured lender's cash collateral to meet ordinary course operating expenses, either with the lender's consent or under the bankruptcy court's authority over the lender's objection; (2) it obtains additional funding from its existing secured lender, usually by granting the lender a blanket first-priority lien on all the debtor's assets (if the lender does not already have it); or (3) it obtains new funding from a third party source, often with a grant of a blanket first-priority lien on all assets that sits atop (or "primes") existing liens in favor of pre-bankruptcy secured creditors.

In any of these three alternatives, the lender with the senior-most lien on all a debtor's assets will usually exert substantial control over the course of the chapter 11 case and place meaningful restrictions on and exercise serious oversight over the debtor's day-to-day business operations. If an existing lender provides debtor-in-possession financing (or "DIP financing"), the relationship between that lender and the debtor may closely resemble what it was before the chapter 11 filing. If, however, a new DIP financing source enters the scene, the relationship between the debtor and its various lenders, old and new, may change dramatically, often with the effect that the new DIP lender will exert significant influence over the debtor's operations and overall exit strategy for the chapter 11 case.

For this reason, a League-already engaged in a struggle for control of a financially distressed team in chapter 11 with the team's owners-will often attempt to insinuate itself intimately into the team's operations by forcing the team to accept DIP financing from the League rather than from a third party lender. And because of the high likelihood that the League will offer comparable and even better terms for DIP financing than third parties, a sports team in chapter 11 proceedings will have a difficult choice to make in seeking DIP financing: the team must weigh the benefits of obtaining cheaper DIP financing from the League against the team's keen interest in avoiding, to the greatest extent possible, the unwelcomed involvement of the league in operational and financial decisions during the bankruptcy case.

The Phoenix Coyotes faced precisely this dilemma. The NHL had attempted, literally on the eve of the Coyotes' chapter 11 filing, to wrest control of the Coyotes from their owner, Jerry Moyes, an effort that was at least temporarily thwarted by the bankruptcy filing. Because the Coyotes had not generated positive cash flow for years and because the team was already in default on its existing secured debt, the team had no ability either to use existing cash collateral or borrow DIP financing from an existing lender. In profound need of operating capital through DIP financing for the upcoming 2009-10 season, the Coyotes sought bankruptcy court approval for up to $17 million in secured DIP financing from an entity created by Jim Balsillie, the CEO of Research in Motion, the Coyotes' proposed purchaser of the team, and the NHL's clear adversary. Knowing that if Balsillie were to provide DIP financing to the Coyotes Balsillie would gain significant influence over the team and its chapter 11 case, the NHL had a strong interest in opposing the proposed financing, something it had more than some ability to do, since the Balsillie financing would have primed the liens the NHL already had on the Coyotes' assets owing to a pre-bankruptcy secured line of credit the NHL had provided to the Coyotes and that was still outstanding in the principal amount of about $13 million.

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Read the authors' blog post on the LA Dodgers chapter 11 bankruptcy case.

Read the chapter overview for Chapter 28 of the Collier Guide to Chapter 11, "Chapter 11 Cases Involving Professional Sports Franchises"

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