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

The U.S. Supreme Court will rule this term in RadLAX Gateway Hotel Inc. v. Amalgamated Bank on whether the Bankruptcy Code permits a debtor in a chapter 11 case to sell encumbered assets without providing the secured lender an opportunity to credit bid its debt. Determination of this question will require the Court essentially to choose between two opposing approaches to statutory interpretation, and decide whether the so-called “plain meaning” of a highly formalistic reading of the Bankruptcy Code should trump decades of established commercial practice.   

A circuit split arose earlier this year, when the Seventh Circuit in River Road Hotel Partners, a companion case to RadLAX Gateway Hotel, declined to follow the Third Circuit’s 2010 decision in Philadelphia Newspapers, and instead expressly adopted the position set forth in the dissenting opinion from that case of Judge Tom Ambro. As previously described on this site, the debtor in River Road sought to rely on Philadelphia Newspapers in putting forward a plan of reorganization that proposed an auction of the secured lenders’ collateral, but would have expressly denied the lenders the right to credit bid their debt.  Section 1129(b)(2)(A) of the Bankruptcy Code describes three different means by which a plan of reorganization can be found to be “fair and equitable” and thus capable of being confirmed without the consent of a secured lender class (i.e., “crammed down”):

(i) lender retention of liens securing the obligations and receipt of the present value of its secured claim,

(ii) sale of collateral free and clear of liens but subject to credit bidding, or

(iii) the realization by the creditor of the “indubitable equivalent” of its secured claim.

Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Third Circuit in Philadelphia Newspapers held that a sale “free and clear” could also take place without allowing the lenders to credit bid under subsection (iii), the “indubitable equivalent” prong.  The Third Circuit concluded that the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold “free and clear” under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, the opportunity to credit bid need not be provided. 

Judge Ambro, a longtime bankruptcy practitioner before being named to the bench, castigated the majority’s refusal to look beyond what it viewed as the sole plausible reading of Section 1129(b)(2)(A).  In Judge Ambro’s view, the result flew in the face of both the established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and the expectation that the Bankruptcy Code expressly protects such non-bankruptcy rights -- particularly the right of a secured creditor to look to its collateral in the event of non-payment. As he wrote, “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code . . . [and] upset[s] three decades of secured creditors’ expectations[.]”

The bankruptcy judge in River Road expressly rejected the reasoning of the Philadelphia Newspapers majority. The Seventh Circuit unanimously agreed, stating that “like the bankruptcy court, we find the statutory analysis articulated by Judge Ambro in his Philadelphia Newspapers dissent to be compelling.” 

The RadLAX Gateway Hotel debtor sought a writ of certiorari from the Supreme Court. They were joined by the Loan Syndication and Trading Association (“LSTA”), a loan market participants’ industry group that has been strongly supportive of lenders’ credit bidding rights. The LSTA announced that it “decided to support the appeal to the Supreme Court because, although [RadLAX Gateway Hotel] is a favorable ruling, the benefit to the market of certainty on credit bidding is an opportunity that cannot be missed.” 

The Supreme Court has not been consistent in its approach to Bankruptcy Code interpretation. While it has strictly applied the “plain meaning” approach in several recent bankruptcy cases, at other times it has been willing to look to underlying Congressional purpose. The latter approach here will unquestionably result in an affirmation of the Seventh Circuit. The former will leave the LSTA regretting that it got what it asked for.

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A World Series as exciting as any in memory ended two weeks ago. Notwithstanding the end of the season, the Los Angeles Dodgers’ chapter 11 case offered the promise of more baseball-related thrills. Dodger’s owner Frank McCourt and Major League Baseball (“MLB”) Commissioner Bud Selig appeared headed towards an epic courtroom showdown that promised to rival the high drama of the cliffhanger auction in last year’s Texas Rangers’ bankruptcy. However, the settlement last week between McCourt and MLB peremptorily ended the battle. 

The Dodgers’ bankruptcy reflected a desperate effort by McCourt to remain in control of the team despite his personal financial woes and the embarrassing allegations that emerged in the wake of his divorce from his wife (and co-owner). The apparent strategy was to use the protections of bankruptcy as a shield to prevent Major League Baseball from exercising its right to remove him from control of the Dodgers for long enough to effect a sale of the team’s media rights. Such a sale almost certainly would have enabled McCourt to propose a plan that would have paid all of the Dodgers’ creditors in full, and attempt (over MLB’s certain objection) to assume the agreements pursuant to which the Dodgers’ are permitted under the Major League Baseball Constitution to operate as a MLB franchise (the “MLB Agreements”). 

It was, however, a long-shot from the outset.  As previously stated in this space:

[The team’s bankruptcy lawyers] will probably be able to stave off a quick takeover of the Dodgers by Major League Baseball, and to turn aside the demands that the case be dismissed or that a trustee be appointed to run the team.  They should also succeed in buying McCourt enough time to negotiate a sale of the team on favorable terms.  But McCourt’s true goal here – to use the Chapter 11 process to keep permanent control of the team – appears to be beyond the reach of any lawyer. The Major League Baseball Constitution, pursuant to which McCourt acquired and holds the Dodgers’ franchise rights, in the end vests too much power in Commissioner Bud Selig and the other owners.  Even assuming that McCourt can come up with a plan to pay off the Dodgers’ creditors, the Dodgers’ bankruptcy will almost certainly only delay the inevitable exercise of power by Major League Baseball to terminate McCourt’s right to operate the franchise. 

The Dodgers did proceed with a motion to establish auction procedures for the sale of media rights, and MLB responded by seeking to compel a sale of the team. MLB’s papers emphasized the futility of allowing McCourt to proceed with a sale, arguing that he would never be able to cure the breaches of the MLB Agreements.   

A hearing on both matters was initially scheduled to be heard on October 31, and was then postponed until late November. One can only speculate as to why McCourt abandoned the fight when he did. It is possible that a damaging new piece of evidence came out in the discovery leading up to the hearing. It is also possible that McCourt finally realized the scope of the odds against him, and that following a sale, as MLB described in its pleadings, “Mr. McCourt will likely receive hundreds of millions of dollars, placing him in a position to pay all of his personal debts, and be left a very wealthy man.”

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Critics of last year’s decision on credit bidding by the Third Circuit Court of Appeals in the Philadelphia Newspapers chapter 11 case welcomed the Seventh Circuit’s recent unanimous opinion in River Road Hotel Partners LLC. The Seventh Circuit expressly adopted the Judge Tom Ambro’s cogent analysis in his Philadelphia Newspapers dissent.   

In River Road, the debtors sought to rely on Philadelphia Newspapers in putting forward a plan of reorganization that proposed an auction of the secured lenders’ collateral, but would have expressly denied the lenders the right to credit bid their debt. The rationale in both cases rested on a formalistic reading of Section 1129(b)(2)(A) of the Bankruptcy Code. That section describes three different means by which a plan of reorganization can be found to be “fair and equitable” and thus capable of being confirmed without the consent of a secured lender class (i.e., “crammed down”):

   (i) lender retention of liens securing the obligations and receipt of the present value of its secured claim,

   (ii) sale of collateral free and clear of liens but subject to credit bidding, or

   (iii) the realization by the creditor of the “indubitable equivalent” of its secured claim.

Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Third Circuit in Philadelphia Newspapers held that a sale “free and clear” could also take place without allowing the lenders to credit bid under subsection (iii), the “indubitable equivalent” prong. The River Road debtors asked the bankruptcy court to follow the Third Circuit’s conclusion that the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold “free and clear” under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, the opportunity to credit bid need not be provided.

The bankruptcy judge, Judge Bruce Black of the Northern District of Illinois, declined the invitation. Judge Black expressly rejected the reasoning of the Philadelphia Newspapers majority, stating that he found the dissent from Judge Ambro, “well-reasoned [and] more persuasive.” At the River Road debtors’ request, Judge Black certified an appeal directly to the Seventh Circuit. The court affirmed Judge Black’s decision, stating that “like the bankruptcy court, we find the statutory analysis articulated by Judge Ambro in his Philadelphia Newspapers dissent to be compelling.”

The Seventh Circuit decision first takes aim at the contention that there exists a single “plain meaning” interpretation of Section 1129(b)(2)(A) that directs the result. 

Nothing in the text of Section 1129(b)(2)(A) directly indicates whether Subsection (iii) can be used to confirm any type of plan or if it can only be used to confirm plans that propose disposing of assets in ways that can be distinguished from those covered by Subsections (i) and (ii). Hence, there are two plausible interpretations of the statute: one that reads Subsection (iii) as having global applicability and one that reads it as having a more limited scope.

The Seventh Circuit then considered whether Congress, having specified in Section 1129(b)(2)(A)(ii) the means by which a debtor could confirm a plan when proposing to sell a secured lender’s assets free and clear, i.e., by expressly protecting the lender’s right to credit bid, would then negate such protection in the immediately following subsection by permitting the debtor to conduct a “free and clear” sale without allowing for credit bidding. “The infinitely more plausible interpretation,” the court held, would only permit “free and clear” collateral sales as specified in subsection (ii). “Under such a reading, plans could only qualify as ‘fair and equitable’ under Subsection (iii) if they proposed disposing of assets in [a] way that [is] not described in [Subsection (ii)].”  

The Seventh Circuit’s vigorous seconding of Judge Ambro’s approach shows plainly why judges take the time to publish dissenting opinions. Judge Ambro, writing from a practitioner’s pragmatic viewpoint, clearly found it hard to accept the Philadelphia Newspapers majority’s refusal to look beyond what it viewed as the sole plausible reading of Section 1129(b)(2)(A) and consider any sense of Congressional purpose or the underlying principles of the Bankruptcy Code as evidenced by complementary Code sections. As he wrote, “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code . . . [and] upset[s] three decades of secured creditors’ expectations[.]” The Seventh Circuit’s decision in River Road vindicates Judge Ambro’s arguments.

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The U.S. Court of Appeals for the Seventh Circuit has taken under advisement the latest case involving the now contentious issue of credit bidding. 

Judge Bruce Black of the United States Bankruptcy Court for the Northern District of Illinois last year refused to permit the debtors in In re River Road Hotel Partners LLC, et al. (“River Road”) to circumvent a secured lender’s right to credit bid in connection with a sale of assets subject to the lender’s lien. The debtors in River Road were relying on the Third Circuit Court of Appeals’ controversial decision in Philadelphia Newspapers, which upheld a debtor's efforts to prevent its secured lenders from credit bidding in connection with an auction held under a plan of reorganization. 

The majority opinion in Philadelphia Newspapers determined that, notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens pursuant to a plan of reorganization, a sale “free and clear” could also take place pursuant to a plan, without allowing the lenders to credit bid, under Section 1129(b)(2)(A)(iii), the “indubitable equivalent” provision. Third Circuit Judge Thomas Ambro, a bankruptcy practitioner of many years, penned a lengthy dissent, noting that the result flew in the face of the established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and the long standing expectation that the Bankruptcy Code expressly protects such non-bankruptcy rights – particularly the right of a secured creditor to look to its collateral in the event of non-payment.   

Judge Black expressly rejected the reasoning of the Philadelphia Newspapers majority, stating that he found the dissent from Judge Ambro, “well-reasoned [and] more persuasive.”      

At the River Road debtors’ request, Judge Black certified an appeal directly to the Seventh Circuit, and the court heard arguments earlier this month. The Seventh Circuit panel, consisting of Judges David Hamilton, Richard Cudahy, and Daniel Manion, presented a “hot bench”, directing numerous questions at counsel for both sides.   

Interestingly, at no point during oral argument was it noted that the Third Circuit in Philadelphia Newspapers never actually decided whether the non-credit bid plan at issue in that case could be confirmed. It only upheld the debtor’s right in that case to seek to do so. Since the lenders in Philadelphia Newspapers subsequently chose to participate in the sale auction and won with a cash bid, the ultimate question of whether such a plan would provide the secured lenders with the “indubitable equivalent” of their secured claims was never answered. 

The Seventh Circuit should affirm Judge Black’s ruling and follow Judge Ambro’s reasoning in Philadelphia Newspapers, and in doing so plainly address the unanswered open question from that case. Even if an argument could plausibly be made, through a hyper-literal reading of Section 1129(b)(2)(A), that a secured lender can be denied the right to credit bid in connection with a sale under a plan of reorganization, beyond such hyper-literalism there really is no valid basis to contend that any such plan could provide the “indubitable equivalent” of the lender’s secured claim, and such a plan should never be confirmed over the secured lender’s objection. The Bankruptcy Code contains strong protections, including the right to credit bid under Section 363(k) and the anti-lien stripping provisions of Section 1111(b), that unambiguously work to prevent a debtor from “cashing out” a secured creditor by paying such creditor a depressed value for the collateral. The cramdown provisions of Section 1129(b)(2)(A) clearly are intended to complement those protections, not abrogate them through a resort to the “indubitable equivalent” standard.

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Bankruptcy lawyers who are regularly involved in distressed m&a deals have been wondering for the past few months about the potential fallout from Philadelphia Newspapers. In that case, as previously described on this site, the Third Circuit Court of Appeals upheld the debtor's efforts to deny its secured lenders the right to credit bid in connection with an auction held under a non-consensual plan of reorganization pursuant to Section 1129(b)(2)(A) of the Bankruptcy Code. The majority opinion in Philadelphia Newspapers was met by a lengthy dissent from the leading bankruptcy expert on the Third Circuit panel, Judge Thomas Ambro. 

In what appears to be the first decision since then on an attempt to use Section 1129(b)(2)(A) to circumvent a secured lender’s right under Section 363(k) to credit bid, Judge Bruce Black of the United States Bankruptcy Court for the Northern District of Illinois denied a debtor’s proposed bidding procedures motion. Judge Black, in In re River Road Hotel Partners LLC, expressly rejected the reasoning of the Philadelphia majority, stating that he found “Judge Ambro’s well-reasoned dissent more persuasive.”  

The debtors in River Road have asked Judge Black to certify an appeal directly to the Seventh Circuit, so there may well be an opportunity shortly for another Court of Appeals to weigh in on this highly contentious issue.

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Tom Hicks spent months trying to push through a sale of the Texas Rangers over the strong objections of his bank lenders, who believed that the proposed deal substantially undervalued the team. The result was a nasty, brutish (though relatively short) slog through chapter 11 for Texas Rangers Baseball Partners. 

Now, Liverpool Football Club, also substantially owned by Hicks, and also saddled with huge debt, is being sold. This time, the outcry regarding undervaluation is coming from Hicks himself. An interim board chairman recently installed at the behest of the Club’s lenders has reached a tentative deal to sell the Club to John Henry and New England Sports Ventures, the owners of the Boston Red Sox. The sale to NESV would leave Hicks on the hook for hundreds of millions of indebtedness incurred when he acquired the Club, and so he has gone to court in England to try and block the transaction. 

The Rangers’ bank lenders should be enjoying a good laugh at about this time.

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The Texas Rangers Chapter 11 case is finally winding down, following several weeks of nearly non-stop legal wrangling and high stakes drama. Rangers Baseball Express, LLC (“RBE”), a group fronted by legendary pitcher Nolan Ryan, emerged as the winner following a lengthy and raucous auction. 

There are numerous lessons which can be drawn from this fascinating case (particularly regarding professional major league sports franchise bankruptcies). However, one truism especially stands out: 

·                    Chapter 11 provides a highly effective mechanism for expeditiously resolving complex legal and financial logjams when consensus exists among the major parties. 

·                    Chapter 11 also offers an effective forum and provisions that can be used to “cram down” dissenting parties in the absence of such consensus. 

·                    Chapter 11 does NOT, however, readily lead to case resolutions that are both fast AND non-consensual.       

To recap quickly: Texas Rangers Baseball Partners (“TRB Partners”), the partnership entity that held the Rangers’ franchise rights from Major League Baseball and all team assets, and Major League Baseball (“MLB”), favored a sale of the team to RBE. The bank lenders owed $525 million by entities (the “HSG Group Entities”) controlled by Tom Hicks, the Rangers’ indirect owner, refused to consent to the sale to RBE because they believed that a higher sale price for the team could be obtained. Because TRB Partners had guaranteed only $75 million of such debt, TRB Partners, MLB and RBE (the “Plan Proponents”) took an aggressive gamble and sought to use a Chapter 11 filing to effect a quick sale of the team without the consent of the lenders. The case was filed together with a plan of reorganization in an effort to avoid a competitive bidding process, on the theory that because all creditors, including the lenders, would be paid in full the amounts directly owed by TRB Partners, the lenders would be deemed to be “unimpaired” under the Plan and thus presumed to accept it.  

At first, the aggressive strategy appeared to succeed when Judge Michael Lynn ruled that the plan, with some modifications, could proceed towards confirmation. However, the lenders took steps to force certain of the HSG Group Entities which directly owned TRB Partners (“Rangers Equity”) into bankruptcy as well. Judge Lynn ruled that the Rangers Equity entities would be impaired by the plan, and appointed William Snyder as an independent chief restructuring officer. Snyder was authorized to make the determination as to whether such entities could vote to approve the plan consistent with whatever fiduciary obligations they might owe to the lenders.  When he indicated a strong preference for a competitive bid process, the Plan Proponents’ aggressive strategy began to unravel. 

The Plan Proponents’ legal strategy was certainly solid, and it is possible that in a non-fast tracked case the plan could have been confirmed over the lenders’ objections. However, the Plan Proponents were looking for as short a journey through Chapter 11 as possible, as they were facing both the intense public scrutiny under which all major league sports teams operate, and the imperatives of the Major League Baseball schedule, including trading deadlines. Accordingly, there was no margin for error in the Plan Proponents’ strategy. Unfortunately, they were opposed by deep pocketed, well-advised and motivated adversaries who had sufficient legal arguments at their disposal to be able to block a quick confirmation. The Plan Proponents wound up with no choice but to accede to an auction as the only viable means for an expeditious exit. 

Bankruptcy courts are forums that exist fundamentally to maximize the value of assets. In the absence of truly exigent circumstances, it would essentially fly in the face of one of the primary underlying principles of the Bankruptcy Code to allow a sale to take place over creditor objections where strong evidence existed to show that a competitive bidding process would result in higher and better value. The lenders stated it succinctly in one of their many pleadings:  

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 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.

Ironically, it appears that in the end nearly every party got what it wanted. RBE succeeded in purchasing the team. MLB got its preferred buyer. The lenders that forcefully challenged the process wound up realizing the benefits from a competitive bidding process that maximized the value of the team assets. 

Perhaps even more ironically, the amount realized by the lenders in the end appears close to an amount that, by one account, was on the table in the months of negotiations that preceded the case, but that was pulled when the Chapter 11 case was filed and the parties went to war.

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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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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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In the end, all of the maneuvering in the Philadelphia Newspapers chapter 11 case appears to have done nothing but leave behind some very bad case law and a great deal of future uncertainty. 

As previously described on this site, the Third Circuit Court of Appeals upheld the debtor's efforts to deny the secured lenders the right to credit bid in connection with an auction held under a non-consensual plan of reorganization pursuant to Section 1129(b)(2)(A) of the Bankruptcy Code.  However, at the auction held last week, the secured lenders won anyway, with a cash bid of $138.9 million.  The money, of course, will go back directly into their own pockets, and they will take control of the assets.  

Although a good outcome for the secured lenders, in a significant sense the result was the worst possible outcome for bankruptcy practitioners who regularly appear in Delaware and elsewhere in the Third Circuit.  While the Philadelphia Newspapers chapter 11 case itself has been resolved, the decision of the Third Circuit left hanging a shoe that still needs to drop.  The Third Circuit, in ruling that a sale of assets pursuant to a non-consensual plan need not include a secured creditor's right to credit bid under Section 1129(b)(2)(A)(ii), left open the the key question of whether such a sale ultimately could in fact satisfy the "indubitable equivalent" prong of Section 1129(b)(2)(A)(iii), and thus be confirmed over such a secured creditor's objection. 

The secured lenders' victory last week obviates the need for that crucial issue to be determined in the Philadelphia Newspapers chapter 11 case.  The inevitable result will inevitably be another case or cases in which the same strategy is devised as a means of exerting pressure on secured creditors.  However, it will not be until the auction in one of such cases is won by a party other than the secured creditors, for an amount less than the face amount of the debt, that we will know whether the results of such an auction can result in the realization by a secured creditor of the "indubitable equivalent" of its secured claim and thus permit a plan of reorganization to be confirmed without such creditor's consent.  Until this question is resolved, a cloud of ambiguity will hang over contested chapter 11 cases in the Third Circuit. 

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Some cases really should not be all that difficult. However, when judges choose to divorce statutory text completely from any reference to underlying legislative intent and long standing commercial practice, inexplicable results follow.  

A few months ago, I wrote of a decision by the U.S. District Court for the Eastern District of Pennsylvania that denied secured lenders the opportunity to credit bid their loans in connection with a sale under a plan of reorganization of the collateral securing their loans. While the substantive matter at issue – the ability to exercise rights against collateral is an essential part of the protection for which a secured lender bargains – was certainly important, what was more disconcerting was the court’s use of the so-called “plain meaning” rule of statutory interpretation to strike down decades of settled commercial law practice. I stated then:   

Philadelphia Newspapers stands as a quintessential example of the anomalous results that can transpire from the “plain meaning” rule. Particularly with a comprehensive statutory scheme as deeply rooted in centuries of commercial law as the U.S. Bankruptcy Code, the ability to focus in on specific language in single provisions, without relation to the greater whole or long understood practice, leads to no end of vexatious litigation and creates uncertainties and ambiguities where none should exist. The Third Circuit Court of Appeals should use this decision as an opportunity to repudiate strongly this mode of statutory interpretation in bankruptcy cases.

Unfortunately, rather than repudiate the “plain meaning” approach, a majority of the Third Circuit panel that heard this case chose to worship at its altar. Unless overturned by en banc review, or (highly unlikely) by the Supreme Court, the majority’s approach to statutory interpretation and the anomalous result engendered here are binding law within the Third Circuit, including the influential U.S. Bankruptcy Court for the District of Delaware. 

The majority opinion in Philadelphia Newspapers noted that Section 1129(b)(2)(A) of the Bankruptcy Code describes three different means by which a plan of reorganization could be confirmed without the consent of a secured lender class:

1. lender retention of liens securing the obligations and receipt of the present value of its secured claim,
2. sale of collateral free and clear of liens but subject to credit bidding, or
3. the realization by the creditor of the “indubitable equivalent” of its secured claim. 

Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Court held that a sale “free and clear” could also take place without allowing the lenders to credit bid under the “indubitable equivalent” prong. For the Court, the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, then the opportunity to credit bid need not be provided. 

The majority opinion in Philadelphia Newspapers was met by a lengthy dissent. Not surprisingly, this came from the leading bankruptcy expert on the Third Circuit panel, Judge Thomas Ambro, a respected practitioner of many years. In addition to pointing out the flaws in the majority’s reading of the statutory language as “unambiguous”, Judge Ambro noted that the result flies in the face of both the well established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and the long standing expectations that underlie secured lending transactions. Judge Ambro strongly criticized the majority’s refusal to look beyond what it viewed as the sole plausible reading of Section 1129(b)(2)(A) and consider any sense of Congressional purpose or the underlying principles of the Bankruptcy Code as evidenced by complementary Code sections. “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code . . . [and] upset[s] three decades of secured creditors’ expectations[.]”

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A recent decision regarding a secured lender’s right to credit bid its debt in the Philadelphia Newspapers chapter 11 case has raised significant concern among financial institutions and investment funds. The U.S. Court of Appeals for the Third Circuit has agreed to hear arguments on an expedited basis in the lenders’ appeal from the decision by the U.S. District Court for the Eastern District of Pennsylvania that the debtors could proceed with an auction pursuant to a plan of reorganization at which the lenders would not be permitted to bid in the face amount of their prepetition loans. Because decisions of the Third Circuit are binding in the District of Delaware, where numerous large chapter 11 cases are filed, the court’s decision could have substantial far reaching effects.

The substantive questions at issue are important, to be sure. Outside of bankruptcy, the ability of a secured lender to exercise rights against its collateral is the essential protection for which it bargains at the time that it extends financial accommodations to a borrower. If the property cannot be sold for the full amount of the debt, the right to credit bid allows the lender – not the borrower or any other party - to make the basic business decision as to whether it wishes to accept a reduced cash value of the property, or to take ownership of the property in the hope that it will appreciate. The U.S. Bankruptcy Code recognizes this elemental protection of a lender’s security interest whenever property of the bankruptcy estate is sold outside of the ordinary course of business, under Section 363(k). Similarly, Section 1129(b)(2)(A)(ii), the “cramdown” provision, permits plan confirmation over a secured lender’s objection so long as the lender has the right to credit bid at a sale of the collateral, effectively providing it with the precise benefit for which it initially contracted. For these reasons, the Court of Appeals will most likely reverse the District Court decision.

What may be even more important, however, would be a strong repudiation by the Court of Appeals of the so-called “plain meaning” mode of statutory construction employed by the District Court. In reaching its conclusion that a secured lender could be denied the right to credit bid, the District Court ignored the clear interplay of three separate Bankruptcy Code sections that address the rights of secured creditors, unambiguous statements of intent in the legislative history, several judicial interpretations and the weight of treatise authority, in favor of what it viewed as the “plain meaning” of Section 1129(b)(2)(A). As stated, that provision permits approval of a plan over a secured lender’s objection so long as one of three criteria can be satisfied:

• The lender maintains its lien on the collateral and receives the present value of its claim;
• The collateral is sold and the lender has an opportunity to credit bid; or
• The lender in some other manner realizes the “indubitable equivalent” of its claim.

The District Court determined that the “plain meaning” of the use of the disjunctive “or” in Section 1129(b)(2)(A) would permit a debtor to sell property under a plan but deny the lenders the right to credit bid, so long as the lender could still in some way realize the “indubitable equivalent” of its claim.

Philadelphia Newspapers stands as a quintessential example of the anomalous results that can transpire from the “plain meaning” rule. Particularly with a comprehensive statutory scheme as deeply rooted in centuries of commercial law as the U.S. Bankruptcy Code, the ability to focus in on specific language in single provisions, without relation to the greater whole or long understood practice, leads to no end of vexatious litigation and creates uncertainties and ambiguities where none should exist. The Third Circuit Court of Appeals should use this decision as an opportunity to repudiate strongly this mode of statutory interpretation in bankruptcy cases.
 

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