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On the Rangers' Bankruptcy

posted by Adam Levitin

The New York Times has an interesting piece on the Texas Rangers' bankruptcy. It seems that Major League Baseball is supporting one bidder group (including Nolan Ryan), but that group hasn't made the top dollar offer. So do the Rangers have to be sold to the top bidder or do MLB's preferences (and threat to terminate the Rangers' franchise if it doesn't get its way) have to be taken into account? 

The story doesn't explain why MLB prefers the lower bid. Maybe there's a good reason. On the other hand, "we just like them better," or "we think it'd be cool for Nolan Ryan to own the Rangers," (i.e., "in the best interests of baseball") can't be sufficient grounds for going with the lower bid. 

What about the threat of that if their preferred bidder wins, MLB will pack up its toys and leave the sandbox? I would anticipate that a sale order would include some sort of injunction against this (e.g., no termination of franchise except for reasonable cause). To be sure, for some creditors, the loss of the Rangers' franchise would be far worse than a lower sale price, but I don't think a spite termination can be included in a valuation maximization comparison. (Fwiw, I don't think MLB's unique antitrust exemption has any bearing on whether a bankruptcy court order can enjoin it from terminating a franchise.)

On a side note, yes, I'm aggrieved that MLB loaned the Rangers $40M, which was used to land Cliff Lee. Go go White Sox!

[Bob: note the spacing!]

Comments

Full disclosure: Red Sox fan

First, how likely is it that a bk court will order a permanent injunction -- or even one lasting significantly longer than the court's Ch 11 jurisdiction over the estate? I think not very.

This is an interesting oddity in that the Rangers filed Ch 11 supposedly to facilitate the sale. But didn't that subject all executory agreements to the Trustee's broad powers?

WRT not taking the highest bid, the group led by John Henry that eventually bought the Red Sox in 2002 was approved over a higher competing bid from the Dolan group. The then-Mass. AG was less than happy, declaring the sale "a bag job." Interesting parallel is that the Red Sox were owned by the Yawkey Trust and sold by the Trustee John Harrington. Harrington claimed the sale to the Henry group was justified b/c they had a greater chance of being accepted by other owners. The Henry group eventually threw the AG a bone and kicked in some more money into the Trust but not the difference between their bid and the Dolan bid. But try to unwind the sale of the Red Sox now... eight years, two World Championships and greatly increased franchise value later.

The other MLB franchise owners are real parties in interest in that they have voting rights in the sale of a team. If the Trustee in bk tried to force a sale to a high bidder rather than the [collusively] selected heir apparent, you'd see the owners close ranks faster than a bunch of bank CEOs or tobacco company execs at a congressional hearing. Good luck with that.

P.S. The number one reason for seeing the Rangers liquidated is that A-Rod is their #1 unsecured creditor.

Interesting parallel to the Bosox. Just imagine if the Dolan group had won--maybe the Bosox would have performed better.

I wonder about calling MLB's bluff, though. If the sale is ordered by the bankruptcy court to the highest bidder and then MLB responds by revoking the franchise, the winning bidder is going to litigate with MLB. Unless MLB has a really good reason to revoke the franchise, I think that's an uncomfortable litigation position for MLB. That antitrust law exemption doesn't shield MLB from other causes of action.

Also, isn't there arguably a 363(n) issue? With the threat to terminate the franchise, aren't the MLB owners "potential bidders" at the sale who are controlling the sale price? In that case, if the Ryan/MLB group wins, the trustee (or here, DIP, I assume) could come after them for the difference between their bid and the high bid, which is, I think prima facie evidence of "the value of such property."

How about a case of competing reorg plans to determine DIP? Funny thing is, supposedly there's already enough to pay all creditors at 100 cents so a, say, 10% bid difference goes to maximizing value of the company but, oddly, has no impact for the benefit of creditors! And does it really make sense to give creditors a say in the direction of a MLB franchise where their interests are not adversely impacted in either case?

I think it's a stretch (but fun) to consider the other owners as potential bidders colluding to fix price under 363(n). Not a good fit IMO because you have at least two "actual" bidders with clearly adverse interests with no indication of price fixing at less than FMV. The owners have a kind of equitable interest (off the top of my head here) in disposition of franchise, I think.

These are both 100 cent plans? That really does change things.

There was a similar situation with the Phoenix Coyotes National Hockey League franchise bankruptcy recently. My recollection is that the bankruptcy judge held that the league had the right to veto a sale to a group that wanted to move the franchise to Hamilton, Ontario, near Toronto. Thus the team stayed in Phoenix, at least for the time being.

The original report (5/24/10) was that the Hicks group claimed the plan, including sale to Ryan, would pay creditors in full:

"The plan would guarantee the lenders all of the $75 million owed by the club itself. The intention is to remove the club from the dispute and pave the way for the sale to be completed through the courts. Any additional proceeds, which should total a little more than $280 million, would go to HSG to pay the lenders. That's still well short of the entire $525 million amount that was defaulted on last March. It's likely that won't satisfy the creditors, who would then be dealing with HSG to recoup more money. Some of that could be accomplished through the sale of the Stars and any other HSG assets."

http://sports.espn.go.com/dallas/mlb/news/story?id=5214583

The issue of 100 cents turns on how you define HSG's (via Rangers org) obligation to the creditors. The dispute seems to be that the creditors want to squeeze everything they can out of the Rangers sale to cover HSG's larger obligation of $525 mil, but HSG's position is that only $75 mil in debt is attributable to the Rangers organization itself, which will be more than covered by the sale price to either bidder.

http://sports.espn.go.com/dallas/mlb/news/story?id=5356874

So, arguably, the HSG creditors are trying to impose parent entity obligations on the sale of a stand-alone subsidiary during bk. Would HSG's sale of the Rangers to a non-insider on these terms have been subject to 548(a)? Does sale to a lower (but MLB-approved) bidder constitute fraudulent conveyance where MLB has an equitable interest that effectively modifies "actual" FMV? I don't think so but I can't fault the creditors for being aggressive.

Interesting stuff.

MLB prefers Greenberg/Ryan over the other leading bidder, Jim Crane, because Crane backed out of a deal to purchase the Houston Astros in 2008, and that hasn't sat well with him or the other owners. In addition, Selig believes the team would be increased in stature by having one of the living greats of baseball at the helm. Of course, all this is offset by the fact that the other owners, through MLB, are upset that they are bankrolling a team that is competing against them (in both sports and business ways), including the mentioned Cliff Lee trade*.

It's interesting that the Rangers have the best lead in baseball, yet are primarily in the media over their bankruptcy. At least it's some attention. :) GO [first place] RANGERS!

* I should point out that the Mariners are picking up the majority of Lee's remaining salary. The Rangers paid for the Lee trade with their outstanding farm system (which, in many ways, is better than cash in baseball) and with Justin Smoak, who will probably be a prime first baseman well after Lee retires from the Yankees.

I hear much relatively casual reference to terminating the franchise. Has this ever been done in major league baseball? Is it assumed that the spot in the league would be left vacant, the first major league baseball contraction in over a century? Or be replaced immediately with a newly issued expansion franchise, without compensation to the Rangers' owner or creditors? I foresee further litigation.

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