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.