J. Salerno & Jordan A. Kroop, Squire Sanders &
Dempsey LLP, Phoenix
Hon. Redfield T. Baum,
U.S.B.C.-District of Arizona
Only eight professional sports teams have sought
bankruptcy protection since the U.S. Bankruptcy Code was enacted in 1978. Unlike sport team insolvencies in Europe and
elsewhere (which are relatively common),
and perhaps because of the relative rarity of these cases, the legal
intricacies of major sports team bankruptcies have not been the subject of many
reported judicial decisions or much academic analysis.
To anyone involved in such a case, it is clear that the
normal rules of the game in bankruptcy cases-chief among them being the
over-arching goal of maximizing value for all creditors-does not always apply
in professional sports team cases.
Professional sport team bankruptcies, with the amount of national and international
press they garner, have become a form of popular entertainment-a modern legal
soap opera/reality show where the lifestyles of the rich, famous and infamous
(including sports stars who often wind up being the largest creditors in the
cases) are publicly aired for all to see. Professional sports leagues exercise
control over their teams in such a way that the value of the "asset" (that is,
the team itself) becomes secondary to the League's desires to control ownership
of its teams and often to exert influence over team operations. In the Phoenix
Coyotes case, for example, the NHL was unabashed in its stated goal: "More
importantly, the NHL's fundamental interest in taking control of the Coyotes is
to preserve the viability, good will and success of the NHL as a major
professional sports league rather than to protect any creditor interest."
Americans tend to view the world of professional sports
as something almost sacred, an institution to be revered and almost
mystified. Rituals surrounding sports
are often observed with a near-religious fervor. Indeed, Super Bowl Sunday, for
football fans both devoted and casual, may be the most hallowed day on the
American calendar. Is it any surprise, therefore, that the Leagues, empowered
by their charters and constitutions, will reserve no effort and spare no
expense to protect their control over the ownership and geographic location of
their teams? Likewise, is it any surprise that team owners in financial
distress will employ extraordinary means-bankruptcy filings-to maximize the
value of their teams in the face of either a league's attempt to limit the
number of potential buyers (as happened in both the Coyotes and Rangers cases)
or an intransigent lender's attempt to hold up a proposed sale that even the
league supports (as happened in the Rangers case), or to circumvent a Leagues'
veto over a lucrative broadcasting deal (as happened in the Dodgers case)? What
was unthinkable even five years ago-an owner publicly disparaging the
commissioner of any League-is now becoming more commonplace, at least in
When a sports team encounters financial distress, an
immediate cultural clash between ownership and the League inevitably results.
The owner wants to maximize the value of the team. The League wants to exert
its dominance and control over the larger industry composed of competing teams.
The clash forces a simple choice on the owner: either turn the team over to the
League (or a League-sponsored buyer), usually for little or no return on the
owner's investment, or file bankruptcy and see what happens. Neither choice is
attractive for the owner.
This culture clash, coupled with a persistent economic
downturn affecting sports as it does all industries, will likely encourage more beleaguered team
owners to seek refuge in bankruptcy proceedings
in the near future. This will result in further development of the law
pertaining to sports team bankruptcies. This chapter does not restate the
general bankruptcy law attending many of the issues discussed here (such as the
general standards for sales free and clear of liens, need for adequate
assurance of future performance with respect to assumption and assignment of
executory contracts, and other such areas) unless that case law stems directly
from a sports team case. Those legal discussions are covered in depth in other
areas of this treatise. Moreover, some of the sources for discussion, unlike
the more traditional restructuring cases, tend to come from numerous and
detailed press reports, generated by a media that seems to have a bottomless fascination
to the issue of sports bankruptcies.
The culture clash lies at the heart of the peculiar
issues that arise in professional sports team bankruptcies-the Leagues'
predilection for calling its teams "franchises"; the team's desire to alter
operations post-bankruptcy filing; the somewhat unique nature of the "assets"
in a sports bankruptcy and League control over such assets and their
disposition, and the Leagues' attempts to dodge antitrust claims. Chapter 28
explores those issues.
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author Thomas Salerno and Jordan Kroop's blog post on the LA Dodgers chapter 11
Read the authors' Emerging Issues Analysis: Professional Sports Leagues as DIP Lenders in Sports Team Chapter 11 Cases