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

The U.S. Court of Appeals for the Third Circuit has ruled in Visteon that retiree medical benefits cannot be terminated by a debtor during the pendency of a Chapter 11 case – even if the benefit plan reserved the debtor’s right to terminate such benefits at any time -- unless the debtor complies with the requirements of Section 1114 of the Bankruptcy Code.  In so determining, the Third Circuit, as it did in the recent Philadelphia Newspapers case, has utilized the so-called “plain meaning” mode of statutory interpretation to reach a result that runs contrary to long standing commercial practice and expectations.  The Third Circuit’s obtuse devotion to the “plain meaning” rule is particularly ill-suited to the Bankruptcy Code, a comprehensive statutory scheme deeply rooted in centuries of commercial law.    

Visteon sought, and obtained, approval to terminate its obligations to pay retiree benefits in its Chapter 11 case from the U.S. Bankruptcy Court for the District of Delaware.  Section 1114 limits a debtor’s ability to modify or terminate such benefits, which are defined under Section 1114 of the Bankruptcy Code as payments for medical or related benefits “under any plan, fund or program . . . maintained . . . by the debtor.”  The retirement plans specifically provided Visteon with the right to modify or terminate the plans at any time.  Visteon accordingly argued that it did not need to comply with the procedural steps mandated under Section 1114 which, among other things, require a debtor, before seeking court approval to terminate benefits, to make a modification proposal to “the authorized representative of the retirees”, and “to confer in good faith” with the representative in order to try and reach a settlement.  Visteon asserted that Section 1114 could not provide the retirees with greater substantive rights in the Chapter 11 case than they would have had outside of bankruptcy, a position supported by most courts that have considered the issue.  After the decision was affirmed by the District Court, the retirees’ union appealed to the Third Circuit, which reversed. 

In the Third Circuit’s view, “Section 1114 could hardly be clearer.  It restricts a debtor’s ability to modify any payments to any entity or person under any plan, fund, or program in existence when the debtor files for Chapter 11 . . . .” (emphasis in original).  Congress, it stated, “did not limit § 1114’s otherwise broad scope based on whether or not the debtor reserved a right to terminate in its plan.” 

The problem with the Third Circuit’s approach is that the meaning of Section 1114, as with numerous other provisions of the Bankruptcy Code, is “plain” only if one chooses to read the words in a particular fashion.  An equally natural reading (and thus “plain meaning”) of the statute is to read the words “any payment” as modified by the words “under any plan, fund or program”, thus suggesting that the right to receive such payments is limited by and subject to the express language of such plan, fund or program. 

Logic would suggest that when more than one natural reading of statutory words is evident, a court should look to underlying statutory principles and long standing practice in order to best understand legislative intent.  Indeed, the Supreme Court has long held that contractual and property rights in bankruptcy are defined by reference to applicable state or other non-bankruptcy law.  However, as it did in Philadelphia Newspapers, the Third Circuit refused to recognize any ambiguity whatsoever, notwithstanding the contrary conclusions reached by other courts. (“[T]he reasoning in In re Delphi Corp. is unpersuasive because the court’s analysis is not faithful to the plain language rule that it purports to, and must, apply.”) 

Going forward, in cases in Delaware and other Third Circuit districts, any plausible interpretation of a section of the Bankruptcy Code, regardless of how divorced from established practice and precedent such interpretation may be, can and will be claimed to be “unambiguous”.  The parties asserting such positions will have every incentive not to settle until taking their arguments up on appeal and seeing if they can get a majority of a Third Circuit panel to agree.  Ironically, by furthering the notion that there exists only one true interpretation of broad statutory language, the Third Circuit is achieving precisely the opposite of what it is purporting to do – it is creating uncertainty in the law where none should exist.

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The Texas Rangers Baseball Partners (“TRB Partners”) Chapter 11 case descended into the realm of the bizarre several weeks ago. Even by the standards of this case, however, the latest line of attack by the lenders seeking to delay the sale of the team is an eyebrow raiser.    

Bankruptcy cases regularly feature litigation over transfers of assets by a debtor prior to the start of the case. Creditors are often concerned that an insolvent debtor may have sought to place valuable assets beyond their reach by conveying it for less than “reasonably equivalent value”, and can take steps to have the transfer voided by the bankruptcy court so that such assets can be recovered for the benefit of the debtor’s bankruptcy estate. 

Naturally, therefore, in the Through the Looking Glass world of TRB Partners, the lawsuit commenced by the lenders alleges that a valuable asset was improperly transferred into the bankruptcy estate. 

The complaint states that Rangers Ballpark LLC (“Rangers Ballpark”), an affiliate of TRB Partners, held the tenant’s interest under the lease agreement for Rangers Ballpark in Arlington, the team’s stadium, and pledged that interest in support of its guaranty of the debt owed by the entities controlled by the Rangers’ indirect owner, Tom Hicks. According to the complaint, shortly prior to the bankruptcy filing, Rangers Ballpark assigned the leasehold interest to TRB Partners. The lenders allege:

As a result of the Leasehold Assignment, the rights of Rangers Ballpark – a guarantor whose obligations under the First Lien Credit Agreement are uncapped – under the Ballpark Lease were transferred to the Debtor – a guarantor whose obligations under the First Lien Credit Agreement were capped at $75,000,000. 

The Leasehold Assignment impaired plaintiffs’ ability to practically realize the full value of its security interest under the Leasehold Mortgage by transferring this valuable asset – the lease to the stadium in which the Texas Rangers play their home games – from a party who had guaranteed the payment of all obligations owing under the First Lien Credit Agreement to a party whose guaranteed obligations was limited to $75,000,000.

This lawsuit, of course, is an ancillary salvo to the main dispute as to how and when the team is going to be sold. Judge Michael Lynn scheduled the auction for August 4, but the lenders’ motion for reconsideration will be heard tomorrow. An appeal by whichever side loses looms likely.

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The Chapter 11 case of Texas Rangers Baseball Partners (“TRB Partners”) has devolved into a slow motion train wreck. 

It appeared that order might finally emerge from chaos earlier this week when Judge Michael Lynn of the U.S. Bankruptcy Court for the Northern District of Texas scheduled an auction for August 4, approved the bid of Rangers Baseball Express LLC (“RBE”), the group headed by Hall of Famer Nolan Ryan, as the “stalking horse” bid, and authorized procedures for the consideration of competing bids.  However, last evening the lenders owed $525 million by entities (the “HSG Group Entities”) controlled by Rangers’ indirect owner Tom Hicks, who have opposed the sale to RBE because it would not fully pay off the debt owed by the HSG Group Entities, filed an emergency motion asking Judge Lynn to reconsider his approval of the bidding procedures.  The hearing on the lender’s motion will be held on July 20.       

To recap:

First there was to be a sale to RBE, whose bid has the strong support of Major League Baseball, pursuant to a plan of reorganization for cash and certain specified assumed liabilities totaling $575 million. It was structured both to avoid a competitive bid process and to obviate any objection from the lenders by paying them the full amount of the portion of the HSG Group Entities’ debt ($75 million) guaranteed by the team. The lenders sought to derail the proposed plan, and also took steps to try and force certain of the HSG Group Entities which directly own TRB Partners (“Rangers Equity”) into bankruptcy as well.      

Judge Lynn effectively turned aside the lenders’ efforts regarding the plan, but appointed a chief restructuring officer, William Snyder, for Rangers Equity. After Snyder expressed concern regarding the lack of a competitive bid process, TRB Partners agreed to hold an auction, and filed a motion for the auction to be held on July 22 and for approval of bid procedures with RBE as the stalking horse bidder. 

Snyder initially supported the bid procedures but subsequently withdrew his support (evidently believing that they were too favorable to RBE’s bid), and TRB Partners withdrew the motion. 

At the beginning of this week, RBE sued TRB Partners, alleging a breach of the purchase agreement and seeking an injunction against the Rangers.  TRB Partners then filed a new motion for an auction and bidding procedures.   

Finally, on Tuesday, Judge Lynn ordered an auction for the team to held on August 4.  Although still opposed by Snyder and the lenders, Judge Lynn appeared satisfied that there will be sufficient opportunity for alternative bids to be presented by such date.  At least two other prospective bidders have already obtained clearance from Major League Baseball to participate.  The judge also sought to address concerns previously expressed by the lenders and Snyder by making clear that he, and not Major League Baseball, would have the final say as to who could participate in the auction and who would be the ultimate winner. 

The lenders, in their motion for reconsideration, contend that they had no meaningful opportunity to consider the proposed bidding procedures prior to Tuesday’s hearing and no notice until immediately prior to the hearing that the procedures were going to be adjudicated.

The day prior . . . Rangers Baseball Express LLC (the “Proposed Purchaser”) filed an emergency motion for a preliminary injunction and temporary restraining order (the “TRO Request”) . . . The Proposed Purchaser was seeking an emergency hearing on the TRO Request on 24 hours’ notice, which was granted.  There was nothing in the TRO Request to indicate that the hearing with respect thereto would deal with the substance of the bidding procedures for the sale of the [TRB Partners] Assets. . . Nevertheless, to the Lender Parties’ surprise, at the hearing on the TRO Request . . . the Court, sua sponte, proposed its own bidding procedures[.]”

They further argue that there are no exigent circumstances at this point requiring an expedited auction (and point to the Rangers’ recent trade for star pitcher Cliff Lee). 

This extraordinary schedule is not justified by the facts of this case. While this case continues to receive outsized publicity given the Debtor’s industry, it is not Lehman Brothers, Chrysler, GM, or any of the other cases where the debtor’s very existence, or the United States’ economy, hung in the balance. . . The Court has not received any evidence that the fact that the Texas Rangers have operated while in bankruptcy for the past several months has had any negative effect on the team’s value.  Quite to the contrary, since filing for bankruptcy, the Debtor (i) has obtained guaranteed financing for the remainder of the season, (ii) has obtained significantly cheaper credit than pre-petition (thanks to the benefits of a Court-sanctioned DIP financing auction), (iii) has demonstrated the operational and financial flexibility to engage in some of the most significant trades to occur in baseball this year, and (iv) continues to win at an almost historical pace.  The Debtor is fundamentally sound and there is absolutely no need for unreasonable speed to ensure its continued existence – there is no proverbial melting ice cube here.

It is possible that the end of the TRB Partners’ bankruptcy saga may indeed finally be in sight.  However, it will not come absent a consensual resolution that has so far eluded the parties in this case (RBE has already filed a response to the lenders’ motion in which they decry the lenders’ arguments as “myopic, one-sided and wreckless [sic]”), without there first being at least one more contested hearing before Judge Lynn, and then likely an expedited appeal.

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The Chapter 11 case of Texas Rangers Baseball Partners (“TRB Partners”) continues to take fascinating turns, and is fast becoming a cautionary tale about the risks of using the bankruptcy process to achieve a quick result without the consent of all major parties.   

As previously described, the team’s indirect owner Tom Hicks and Major League Baseball both wanted the team to be sold to a group headed by legendary pitcher Nolan Ryan for $575 million. Lenders owed $525 million by entities (the “HSG Group Entities”) controlled by Hicks opposed the sale because it would not fully pay off the debt owed by those entities, and they believed that there were other prospective buyers willing to pay more. 

The impasse between the lenders, Hicks and Major League Baseball led to the Chapter 11 filing by TRB Partners, the partnership entity that owns all team assets (including the Rangers’ franchise rights from Major League Baseball). TRB Partners has guaranteed $75 million of the HSG Group Entities’ debt. TRB Partners hoped to avoid the need to have a competitive bidding process for the team assets by submitting a “prepackaged” plan of reorganization that proposed to pay the lenders the $75 million guaranteed by TRB Partners, pay all other unsecured creditors (including deferred salary owed to Alex Rodriguez) in full, and upstream the remaining sale proceeds to the HSG Group Entities to pay over to the lenders. The lenders immediately objected to the proposed plan, and also took steps to try and force certain of the HSG Group Entities which directly owned TRB Partners (“Rangers Equity”) into bankruptcy as well. 

It looked a couple of weeks ago as though the lenders’ opposition had failed, and that they were going to be forced to accept the sale to Ryan’s group. U.S. Bankruptcy Court Judge Michael Lynn ruled that, upon the making of a few modifications, the lenders would have no right to vote to approve the plan, since it would pay the full amount of that TRB Partners had guaranteed.    

However, Judge Lynn also ruled that the Rangers Equity entities would be impaired by the plan, and appointed William K. Snyder, a well known turnaround professional, to make the determination on behalf of those entities as to whether such entities could vote to approve the plan consistent with whatever fiduciary obligations they might owe to the lenders. This effectively placed Snyder in a controlling position. A motion filed earlier this week to approve an auction process succinctly stated: 

“Subsequent to the appointment of the CRO in the [Rangers Equity] involuntary cases,it became clear to the Debtor following discussions with the CRO, that the CRO would be more likely to support and vote to approve the Prepackaged Plan following an auction process.” 

The motion proposed an auction to be conducted on July 16, and initially had Snyder’s support. However the motion has been withdrawn. The notice filed yesterday withdrawing the motion states only that

“Rangers Equity, by and through William Snyder, their CRO, have withdrawn their support for the sale procedures described in the Motion. The CRO has advised the Debtor that he intends to recommend a modified sales process with the intention of seeking approval fromthe Court on an expedited basis.”

A status conference is taking place this morning before Judge Lynn. Probably the only safe prediction that can be made at this point is that there will be no swift conclusion to the case unless a consensus among all major parties can finally be reached.

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