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.