Monday, June 22, 2009

This Phoenix May Not Rise From The Ashes . . .

In my first piece on the Phoenix court case, I noted that the recent ruling appeared to be a "tenuous" victory for the NHL, Glendale and some of the Coyotes' creditors. I then embarked on a quest to find a copy Judge Baum's actual ruling, as I was curious why he devoted 21 pages to simply conclude that there wasn't enough time to get everything done. My legal background led me to believe that there was more to it, and after reading the opinion, I was correct.

First, understand who the key players are in this drama. Obviously, theres is the NHL, who wants to maintain control over its franchises, both in terms of ownership and location. Second is the City of Glendale, who has a lease with the Coyotes that extends through 2035, and has additional infrastructure and other investment in the Arena itself and the surrounding Westgate City Development. Third, is Aramark, Inc. , the concessions vendor for Arena, who paid $8 million for the concession rights. All of those groups oppose the sale and the contemplated move to Hamilton.

On the other side are Jim Balsillie, the interested parties in Hamilton, Jerry Moyes (Coyotes' owner), and the remaining Coyotes' creditors. These groups support the sale, thought the creditors don't care one way or the other about the move.

Here are some basic facts for you to consider, all taken from Judge Baum's opinion, unless otherwise noted:
  • Balsillie & friends are agreeing to pay $212.5 million for the Coyotes, of which up to $22.5 million goes to Gretzky, as part owner
  • Balsilllie set the deadline of 6/29/2009 for sale to be approved
  • City of Glendale built Arena for $183 million, using bonds to fiance $155 million
  • Lease with Coyotes runs through 2035, and has extraordinarily strict and penal provisions in the event of breach, with damages as high as $795 million, depending when breach occurs.
  • Aramark contract includes a requirement that Coyotes pay $5.1 million in damages if they move.
  • In 2006, Moyes assumed control of Coyotes from Ellman (who is also prime developer of Westgate City) in deal brokered by NHL.
  • Moyes invested $300 million between 2001 and 2008. Team lost $36 million plus per year in 2006, 2007 and 2008. Moyes holds $100 million plus in claims as an unsecured creditor.
  • NHL tried to broker deal with Coyotes, Glendale etc. in the Fall 2008. Glendale refused to make concessions. NHL advanced operating funds, to be repaid from profit sharing revenue.
  • April 2009 -- Moyes goes to NHL and advises that he has buyer who wants to move the team to Ontario. This was not an official request, just a conversation. Bettman says no -- NHL owns the right in Southern Ontario.
  • May 5, 2009 -- Bettman and staff fly to Phoenix with offer to buy the Coyotes in hand, subject to modifications in lease deal. Phoenix files for bankruptcy that day, signs the sales agreement with Balsillie, and the motion to approve the sale and move is filed. (Busy day . . . )
  • June 15, 2009 -- Judge Baum issues his ruling.

While I don't want to bore you with legal technicalities, there are a few things that are notable about the Judge's ruling. First, remember that this is a bankruptcy case, not a lawsuit directly between the NHL and the Coyotes, or Balsillie and the NHL. There is a big difference. In a bankruptcy, the overriding interest of the court is in protecting the rights of the creditors of the bankrupt entity. While a lot of factors come into play, all other things being equal, the course of action that will enhance the payment to the creditors will be chosen. Here, Balsillie is agreeing to pay $212.5 million for the team. Consider that entering the season, Forbes valued the franchise at $142 million, last in the NHL. Given that the team's economic fortunes went nowhere but south during the 2008-2009 season, Balsillie is paying a premium of 80% or more. Hold that thought.

Next, as I alluded to above, he goes to great lengths to issue lengthy opinion, when he really didn't need to. He could have issued an order simply saying "Motion Denied." So, there has to be a purpose behind his ruling. There is, and we shall get there momentarily.

Additionally, the motion was denied "without prejudice", meaning that Balsillie and his team could refile it at any time, and the judge could look at it anew. Intriguing, but not alarming, by itself.

Now let's return to Judge Baum's motive for issuing a fairly lengthy, detailed ruling, when he really did not need to do it. The answer is one word -- Leverage. Each of the parties brought a number of arguments to the table, and Judge Baum spent 21 pages giving each party cause for concern. As for the NHL, he noted that they had previously approved Balsillie as an owner in 2006, and could not in good faith turn around and deny the sale based upon the identity or qualifications of Balsillie and his group. As for Balsillie, he observed that the NHL does own the rights to geographical expansion, and that his motion made no provision for compensating the NHL for the loss of that right in Southern Ontario. For Glendale, he strongly suggested that some of there legal arguments supporting their alleged right to block a move or get huge damages might not hold much water in bankruptcy court.

Judge Baum is using this opinion to send a message to the litigants -- "Don't be too comfortable in your position". The more confident a litigant is in a position , the more entrenched they become. Conversely, the more doubt that creeps in, the more flexible parties become. Judge Baum wants the parties to come to their own agreement, and is using his legal analysis to force a compromise. In a footnote to the decision, he writes:

It was suggested by some parties at the hearing that the parties should attempt to resolve the relocation issue by mediation; if the parties are willing to mediate this and the related issues, the court encourages, as strongly as it can, to do so; sooner rather than later.

That is a clear, but diplomatic, way of saying -- "Fix it, or I will fix it for you."

Reading the whole opinion, the tone is one that says to Balsillie "OK, I like the sale, but we have to address the damage to the NHL, and show me that you can jump the few legal hurdles to get out of the Glendale lease. Since they refused to compromise, they are in trouble. You picked the time frame, so either extend the deadline or go home."

Balsillie's lawyers are no dummies. Within the past two days, they have notified the parties that they are willing to extend the deadline to September 15. The heat is on.

Let's face it. Phoenix wont draw flies this year if they stay in Phoenix, as everyone knows by now that it just is not working, and too much money has already been thrown down the drain trying to fix it. The Balsillie offer makes a lot of $$$ available to the creditors, which is what the court is looking for. The only way to block it is for the NHL to come up with a sweeter offer, but then still be in a bad market with a bad lease.

Prediction: The motion to approve a sale will be refiled within two weeks. Around the same time, serious discussions will be underway. The net result is that the NHL gets some cash and a face-saving arrangement with Balsillie to preserve its territorial rights. Glendale gets a token payment. The price may go up or down a bit, but Balsillie gets the team and goes to Hamilton. Realignment occurs, moving Hamilton into the Central Division of the West with Columbus, Chicago, Detroit and Nashville, while St. Louis moves into one of the other two divsions, and the other appropriate changes are made.

Stay tune for more . . .


curmudgeon said...

There are two parties you are not mentioning. The Toronto Maple Leafs and Buffalo Sabres. Hockey Night in Canada Radio did an extensive program on the Phoenix/Balsillie situation and one of the guests on the program, Al Strachan, columnist for fox and contributor to HNIC television indicated that his sources said that Maple Leaf Sports and Entertainment(MLSE) will go to war to insure their protected territory if the court case results in the possible moving of the Coyotes from Phoenix to the Hamilton area. They would immediately file lawsuits against the NHL and Jim Balsillie personally and would sue any NHL team that played a game against a team in their territory. Is that legal sabre rattling? Possibly, but the other solution mentioned would be to pay the Maple Leafs and Sabres a rights fee to their areas but the MLSE fee would be astronomical which would void the feasibility of a franchise in the area. Any of these 2 possibilities puts the NHL and the Balsillie group in a very difficult positions and basically bars another team into the Southern Ontario region for years due to the litigation.

JAL said...

Curmudgeon --

This has always been a bone of contention,and I am doing more research on the issue. However, there are a few points to consider:

1. From my reading, there has always been a legitimate dispute between the NHL and the Toronto/Buffalo contingent over the rights to Southern Ontario. Judge Baum strongly suggests that the NHL does -- but this issue was not fully briefed or argued.

2. Bettman is a lot of thing, but not stupid. Whatever "agreement" is entered will come in the form of a court order from the Federal Bankruptcy Court. While I am not saying that litigation would not ensue, it would be much more complex.

3. Balsillie is also not stupid. He is taking this one step at a time, and there is a card that has not yet been played.

I could be dead wrong, but in any event it is going to make some great theater over the next several months.

This whole scenario would make a great Bar Exam question! All sorts of juicy issues here . . .

Thanks for the insight.


BZArcher said...

Excellent piece.

For the curious (and if our host doesn't mind), here's the most likely realignment scenario if they wish to keep Phoenix/Hamilton in the Western conference.

Pacific Division:
San Jose

NW Division:
St. Louis


Just curious - if this does go down, do you think it reduces or increases the likelihood of expansion in the next 4-5 years? We keep hearing rumblings about guys like Bruckheimer who want to get in on the NHL ownership picture.

JAL said...

Great post, BZ. I agree completely on the realignment, if that is the way they choose to go.

To digress for a moment, I am working on a piece for later in the summer on realignment and scheduling. In general, eliminate divisions, which are meaningless anyway, and only serve to give two more automatic playoff berths. Play every team home and home (58 games) everybody in your conference 1 more game (14) and 10 teams in conference twice. Alternatively, reduce pre-season to two or three games, and play everyone 3 times (87 games) and start season September 20 or so.

Back on topic, I am not sure that expansion is in the offing. I could see a move of one of the Florda teams to Vegas, and perhaps one more franchise moving from the South to the Northwest (Seattle/Portland). That would enable some sensible realignment and provide some travel relief for a lot of clubs.

Fun to speculate about.

Rob P. said...

Nice work again, JAL...thanks for the legalese translation.

You mentioned Vegas and Seattle/Portland as possible relocation destinations. What about KC and their empty arena? I don't know much about it, but I serously doubt KC could support an NHL team.

So what if an Eastern Coference team moves west, way west...does that move us into the Eastern Conference since we're further east geographically than any other Western Conference team? In the past I've heard Detroit would want to move into the Eastern Conference for the obvious advantage of playing all in-conference games in the Eastern time zone, but I don't see the NHL letting Detroit move out of the West. Can't we just call them the Wales and Campbell Conferences again?