Bankruptcy Law Insights : Kelley Drye & Warren LLP Bankruptcy and Restructuring Practice Group

The 2010 Major League Baseball season may not yet even be at the halfway point, but events in the Chapter 11 case of Texas Rangers Baseball Partners are beginning to resemble the taut back and forth of the final weeks of a pennant race. 

It appeared last week that Judge Michael Lynn of the U.S. Bankruptcy Court for the Northern District of Texas was guiding the parties to a consensual resolution of the dispute that was threatening to derail the proposed sale of the Rangers to a group headed by Nolan Ryan.  In addition to providing a ruling that offered a pathway towards overcoming the objections of secured lenders opposed to the sale, the judge also pushed back a scheduled July 9 hearing to July 22 in order to give the parties a chance to seek to resolve their remaining disputes through mediation.  

Now, however, parties appear intent on playing hardball.  The proposed purchasers, evidently concerned about having to wait for sale approval until a date that is close to the Major League Baseball trading deadline of July 31, filed an emergency motion to restore the July 9 hearing date.  The office of Commissioner Bud Selig is threatening to invoke its powers under the Major League Baseball Constitution to take over the Rangers' franchise.  Judge Lynn agreed to the purchasers' request, but warned that in the absence of a consensual deal he may not confirm the plan, which would throw the entire case into disarray. 

With the July 9 hearing date looming quickly, the legal maneuverings over the next twelve days will rival whatever may be taking place on the field.     

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The Texas Rangers’ lenders thought they had thrown a perfect strikeout pitch to prevent the confirmation of the Rangers’ proposed plan of reorganization. Instead, they now know how Hugh Casey felt. 

The Texas Rangers recently filed for bankruptcy under chapter 11 in order to consummate a sale of the team that is opposed by its lenders. Judge Michael Lynn’s ruling this week regarding the proposed sale of the Rangers to a group led by baseball legend Nolan Ryan must have felt to the lenders like a dropped third strike with the batter reaching safely. Judge Lynn agreed with the lenders’ key contention – but nevertheless issued an opinion that will effectively allow the sale to proceed. 

The lenders are owed $525 million by entities (the “HSG Group Entities”) controlled by Tom Hicks, the Rangers’ indirect owner.  Texas Rangers Baseball Partners (“TRB Partners”), the partnership entity that holds the Rangers’ franchise rights from Major League Baseball and all team assets, has guaranteed $75 million of that debt. Hicks is seeking to sell the Rangers to Ryan’s group for $575 million.

 Under a proposed plan of reorganization, the sale proceeds would pay off the partial guaranty to the lenders, then pay all other creditors of TRB Partners (including Alex Rodriguez, owed $25 million) in full. The remainder would then flow up to the HSG Group Entities and be available to pay down the loans due to the lenders (but insufficient to pay them in full). 

 The lenders believe that a higher sale price can be obtained for the Rangers and have exercised their rights under the loan documents to refuse to consent to the sale. The standoff led to the TRB Partners’ bankruptcy filing to effect the sale without the lenders’ consent. TRB Partners sought to blunt the lenders’ objections by having them designated under the plan of reorganization as “unimpaired”, thus creating the legal presumption of approval. Although the plan provided for the immediate payment of the full amount of the lenders’ $75 million claim against TRB Partners, the lenders argued that they in fact were impaired – and thus entitled to vote to reject the plan - because the plan did not “leave[] unaltered their legal, equitable and contractual rights” under the loan documents, including the right to approve the sale of the team. 

 Judge Lynn of the U.S. Bankruptcy Court for the Northern District of Texas agreed that the lenders were impaired. However, he then went on to state that the plan need not provide the lenders with a veto over the sale in order for them not to be impaired. The plan must only be amended, in Judge Lynn’s view, to provide for the recognition of the lenders’ rights – i.e., by giving them the right to seek a damages claim for the abrogation of such rights.

 This cannot be of great comfort to the lenders. Establishing a claim for damages – say, by establishing that a higher price of $25 million could be been realized from a different buyer – would only mean that such claim would get paid through the bankruptcy process, thus leaving less to get upstreamed (and thus less to get repaid by the HSG Group Entities). The total amount available from the sale of the team would not change.

 Professional sports franchise chapter 11 cases can be very difficult to resolve without full consensus of all major parties, as the disastrous proposed sale through bankruptcy of the Phoenix Coyotes amply demonstrated. There could well be other buyers for the team willing to pay a higher sale price, but there’s no guarantee that such a buyer could get the necessary approval of Major League Baseball (including approval by a 75% majority of owners). Judge Lynn may have had the Coyotes’ case in mind. (In fact, he has now directed TRB Partners and the lenders to seek to resolve their remaining disputes through mediation prior to a scheduled July 22 hearing.)  Unquestionably, giving the lenders an effective veto over the sale could lead to a prolonged and expensive standoff. Rendering the lenders unimpaired will substantially eliminate their ability to oppose the plan, and allow the sale of the Rangers to proceed expeditiously.

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The Third Circuit Court of Appeals issued an en banc opinion (pdf) today in which it overruled the Frenville standard for determining the existence of a "claim" for purposes of Section 101(5) of the Bankruptcy Code. 

The decision, In re Grossman's, Inc., involved a claimant (Van Brunt) whose symptoms did not manifest until years following a Chapter 11 case in which the debtor's plan of reorganization had been confirmed.  It will affect all bankruptcy proceedings in Delaware, and thus will have a very significant impact on how unknown potential tort and environmental claims are resolved in large Chapter 11 cases. 

Under the Frenville "accrual" standard, a "claim" under Section 101(5) was not deemed to exist until a "right to payment" arose under applicable state law.  Because such a right requires a manifestation of symptoms with respect to asbestos exposure, the lower courts had held that Van Brunt's claim did not exist at the time that the Grossman's plan was confirmed and therefore could not have been discharged by the plan.  However, because Frenville has been rejected by nearly every court outside of the Third Circuit, the successor to Grossman's asked the Third Circuit to overrule that standard.  The court, sitting en banc, agreed.  

The Third Circuit noted that some courts have adopted a "conduct" test, in which the prepetition conduct of the claimant, such as the use of a product that gives rise to a later injury, is determinative as to whether a "claim" exists.  Other courts have criticized this approach as too harsh and violative of due process rights, particularly in tort cases, and have required the existence of some level of prepetition relationship, contact, or privity between the debtor and the claimant before a "claim" can arise. 

The Third Circuit appears to be trying to come down in the middle of these two tests, recognizing on the one hand the need to define "claims" in as broad a manner as possible, so as to facilitate the Bankruptcy Code's fresh start policy, and on the other hand the imperatives of fairness and due process.  The court, though determining that Van Brunt had a "claim" that existed at the time of the chapter 11 case, did not opine on whether such "claim" was discharged by Grossman's plan.  It instead remanded the case so that the lower courts could make appropriate findings as to the manner of the bar date notice given during the chapter 11 case and whether, under the circumstances, a discharge of the claim would comport with Van Brunt's due process rights. 

Congress has dealt with this problem in mass tort asbestos cases through Section 524(g), pursuant to which a special trust can be created to deal precisely with the type of unmanifested future claims that arose in Grossman's.  The plan of reorganization in Grossman's, however, did not contain such a trust, so the sufficiency of the due process afforded Van Brunt must be addressed directly.  Whichever way the lower courts rule on this issue, it will in high likelihood come before the Third Circuit again.

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