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

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 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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