AMERICAN BANKRUPTCY INSTITUTE ournal JOctober 2010 * The Essentail Resource for Today's Busy Insolvency Professional * Vol. XXIX, No. 8 Texas Rangers Play Ball in Bankruptcy Arena Part II: Possible Conflicts Between Sports Leagues’ Goals and the Code Written by: franchises, requires Jonathan S. Covin About the Authors a three-fourths vote Wick Phillips Gould & Martin LLP; Dallas Jonathan Covin and David Gamble are of the major league [email protected] attorneys at the Texas-based firm of clubs to sell or trans- fer a controlling David G. Gamble Wick Phillips Gould & Martin LLP in 3 Wick Phillips Gould & Martin LLP the bankruptcy and creditors’ rights, interest in a team. Fort Worth, Texas bankruptcy litigation and commercial The commissioner’s [email protected] litigation practice areas. position in the bank- ruptcy proceeding— Editor’s Note: Part I appeared in the owners are indirect subsidiaries of HSG David G. Gamble which was agreed July/August 2010 Journal. Sports Group LLC, a Tom Hicks-led to by the debtor and art I discussed the early innings company. Certain lenders are creditors the Greenberg-Ryan Group—was that of the Rangers bankruptcy case.1 of HSG in excess of $525 million. The the MLC and the pre-petition financing PAnother article appeared in the debtor guaranteed and pledged its assets agreements entered into between the September 2010 issue of the Journal on to secure $75 million of this amount. debtor and the affiliate of the commis- the potential conflicts between the goals The debtor had not been profitable sioner, barred any sale of the Rangers not of professional sports leagues and the since its acquisition by Hicks in 1998. approved by the commissioner and the Bankruptcy Code with regard to the sale requisite percentage of owners of other Hicks covered cash shortfalls through 4 of a professional sports franchise, and advances that totaled more than $100 mil- major league baseball franchises. reviewed these potential conflicts in the context of the Rangers’ and the Phoenix Coyotes’ bankruptcy cases.2 In this arti- cle, the authors will focus on the novel Feature corporate governance issues addressed in the Rangers bankruptcy case. Let’s first lion by 2008. By that time, Hicks deter- examine the line-up. mined that he would no longer advance The lenders, on the other hand, took a funds to the debtor, and he began a process decidedly different position. They argued Who’s on First? that ultimately led to an agreement to sell that, under the terms of a pledge and The debtor, Texas the Rangers to a group led by Pittsburgh security agreement (the “pledge agree- Rangers Baseball attorney Chuck Greenberg and base- ment”), once their loan was in default, Partners (Rangers ball hall of famer/former Ranger, Nolan they had the power to control the equity Partners), a Texas Ryan—the “Greenberg-Ryan Group.” interests of the Rangers’ equity owners, general partnership, and could exercise approval rights as In March 2009, the lenders’ loans to 5 owned and operated HSG fell into default due to the failure to any sale of the Rangers. The lend- the Texas Rangers of HSG to make an interest payment. To ers exercised the approval rights under (Rangers). Rangers fund its operations, the debtor entered into the pledge agreement and declined to Equity Holdings LP certain agreements with an affiliate of the approve the sale of the Rangers to the Jonathan S. Covin (REHLP) is a 99 per- Greenberg-Ryan Group before the bank- Office of the Commissioner of Baseball. 6 cent general partner, The debtor borrowed in excess of $20 ruptcy filing. The commissioner, by and Rangers Equity Holdings GP LLC million pursuant to those agreements, contrast, asserted that the Greenberg- (REHGP) is a 1 percent general partner which contained provisions barring any Ryan Group was the prevailing bidder in the debtor (collectively, the “Rangers’ sale of the Rangers not approved by the in a properly-conducted auction process, equity owners”). The Rangers’ equity commissioner and the requisite percent- 3 MLC, Article V, § (2)(b) (“The vote of three-fourths of the Major League 1 See Jonathan S. Covin and David G. Gamble, “Texas Rangers Play Ball Clubs shall be required for the approval of…the sale or transfer of a age of owners of other major league base- control interest in any Club.”). in Bankruptcy Arena: Part I: The Early Innings of the Case,” XXIX ABI 4 Journal 6, 36-37, 75, July/August 2010. ball franchises. In addition, the Major Memorandum opinion dated June 22, 2010, at 4 [Rangers Docket No. 2 See Lawrence J. Kotler and Matthew E. Hoffman, “Rangers’, Coyotes’, 257] (the “memorandum opinion”). League Constitution (MLC), which 5 Memorandum opinion at 4-5. Asset-Purchase Agreements: Trumping Bankruptcy’s Fundamental 6 Goals?” XXX ABI Journal 6, 26, 70-71, September 2010. governs Major League Baseball (MLB) Id. at 5. 44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org and that the sale, which it approved, of all claims against the debtor and The court concluded that “an under- should be consummated.7 a substantial return to 100 percent lying premise” of the Bankruptcy Code The lenders were at loggerheads consenting equity? was that parties should be able to resolve with the commissioner. The lenders, (2) Who is entitled to speak on behalf how a debtor’s estate satisfies claims and seeking a purchaser that would pay more of the Rangers’ equity-owners: the interests. For example, the court noted for the Rangers than the Greenberg- management of the Rangers’ equity that one of the factors that a court must Ryan Group, would not consent to a owners, or the lenders? and consider under § 305(a)(1) when deter- sale to that group.8 Yet the commission- (3) What duties do the Rangers’ mining whether to abstain from hearing er would not agree to seek and consider equity-owners owe to the lenders?11 a case, is whether the debtor and credi- other offers for the Rangers.9 Unable to tors are able to agree to a less expensive resolve the impasse, the debtor filed its Running Up the Score out-of-court workout that better serves chapter 11 case. The Debtor’s Duty to Maximize Value all interests in the case. In addition, The debtor filed a chapter 11 plan Seeking to maximize the value of the the best interest of creditors (or equity in which it proposed to sell the Rangers equity interests of the debtor, the lenders owners) test under § 1129(a) (7) (A)(i) to the Greenberg-Ryan Group under the argued that the debtor had an obligation does not apply to a class member if the terms of an asset-purchase agreement to maximize the value of the estate for member has accepted the plan. Similarly, negotiated before the bankruptcy filing. the benefit of all stakeholders, including §§ 1123(a)(4) and 1129(a)(9) permit The plan provided that the lenders were the debtor’s shareholders. According to a claimholder to agree to less favor- to be paid $75 million in full satisfaction the lenders, the plan was premised on the able treatment than it would otherwise of their claims against the debtor. The debtor’s purportedly incorrect assertion be entitled.16 Further, allowing a class lenders, however, contended that because that it had no obligation to maximize the such as the Rangers’ equity owners to of their rights that were triggered under value of the estate. To support their argu- accept “less than optimal treatment is the pledge agreement by HSG’s loan ment, the lenders relied on Judge Lynn’s sensible.”17 A class, especially a class of default, their agent must authorize the previous decision in the Pilgrim’s Pride equity interests, “may have motives other sale of the Rangers, and the execution of bankruptcy case, in which they quoted than maximizing return.”18 the asset-purchase agreement was ultra the court as finding it to be “unquestion- In the Rangers case, the court con- vires and void.10 ably true that Debtors’ officers and direc- cluded that if the debtor’s original plan On May 27, 2010, shortly after the tors have a duty to maximize Debtors’ in fact provided for payment in full to all debtor’s bankruptcy filing, certain of estates to the benefit of shareholders as creditors of the debtor, and if 100 percent 12 the lenders filed involuntary bankruptcy well as creditors.” The lenders con- of the debtor’s equity interests accepted petitions against REHLP and REGHP. tended that this decision, as well as other the plan, then the plan was confirmable Prior to these filings, the Rangers’ equi- cases, imposed a duty on the debtor to even if another bidder would pay more ty owners were not parties to the bank- test the market place to obtain an offer for the Rangers than the Greenberg-Ryan ruptcy proceedings. The lenders held a that maximized the value of its estate. Group.19 The court held that the debtor lien on the equity interests of the debtor, The court disagreed, concluding that did not have a duty to maximize the and the involuntary petitioners stated the cases relied on by the lenders were value obtained for its estate.20 This did 13 that the petition was filed to ensure inapposite. Judge Lynn reasoned that in not mean, however, that the Rangers’ that the equity interests received maxi- none of those cases did the courts direct- equity-owners were necessarily free to mum value. In other words, the lenders’ ly address the value maximization issue accept a plan that did not maximize value guaranty claim against the debtor was “where the facts were that (1) the debtor for their creditors.21 capped at $75 million.