Chapter 28: Chapter 11 Cases Involving Professional Sports Franchises

Chapter 28: Chapter 11 Cases Involving Professional Sports Franchises

Thomas 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 bankruptcy cases.

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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Read author Thomas Salerno and Jordan Kroop's blog post on the LA Dodgers chapter 11 bankruptcy case.

Read the authors' Emerging Issues Analysis: Professional Sports Leagues as DIP Lenders in Sports Team Chapter 11 Cases