Wednesday, September 30, 2009

Balsille, NHL Bids For Coyotes Rejected

There was (finally!) a ruling today on the bids for the Phoenix Coyotes in Judge Redfield Baum's bankruptcy court. The court rejected, with prejudice, the bid of Jim Balsille and PSE for the Coyotes. The court also rejected the bid from the NHL for the franchise. There is a substantive difference, however, in the ruling that disqualified the bids, and it appears that the court has shut out Balsillie in his effort to acquire the ailing franchise.

Judge Baum ruled that PSE cannot ignore the constitution and by-laws of the NHL in its attempt to gain control of the franchise and move it to Hamilton. Specifically, the PSE bid contended two sections of the bankruptcy code should be set aside to allow the sale and relocation of the franchise. The first, Section 365, requires that a buyer purchasing a business out of bankruptcy must honor all executory, valid contracts that were in place at the time of the bankruptcy filing. PSE wanted to disavow all existing contracts, including the lease agreement with the City of Glendale for Arena. This meant that all valid contracts would have been voided should PSE have won the bid, and in essence, they could walk away from all contractual obligations.

The second section of the code, Section 363, requires that the interest of the representatives of the estate, in this case the NHL and the City of Glendale, must have their interest protected if the assets that are sold are in dispute. Simply put, if Balsillie were to purchase the Coyotes, there must be some reasonable assurance to the NHL and the City of Glendale that their financial interests would be protected and reasonably recoverable if a final ruling went against PSE. Judge Baum ruled, correctly, that PSE had no way to protect these interests, especially if the Coyotes were relocated to Hamilton. PSE claimed in a subsequent filing that the relocation fee paid to the NHL would provide that protection. The court ruled that it would not. Quoting from the ruling by judge Baum, "Typically, the proceeds of sale are held subject to the disputed interest and then distributed as dictated by the resolution of the dispute; such procedures preserve all parties rights by simply transferring interests from property to dollars that represent its value. ...The court does not agree with PSE's assertion that the payment of a relocation fee adequately protects the claimed interest of the NHL."

Furthermore, the court ruled that the NHL has three rights in the case that are at issue: the right to admit only new members who meet its written requirements; the right to control where their members play hockey games; and the right to a relocation fee when a member relocates to a new site. The court held that it could not adequately protect the NHL's membership selection right and control over location right if the court allowed the sale of the franchise to PSE and its subsequent relocation.

Again, quoting from the ruling, "In summary, the clear statutory statement in Section 363(e) requires that the court 'shall prohibit' any sale where the interests sought to be removed by the proposed sale free and clear of such interests, cannot be adequately protected. This conclusion effectively is the end for the efforts of PSE, Balsillie, Moyes, and the Coyotes to force a sale and relocation of the hockey team based upon the claimed powers in Section 363(f)(4) of the Code; i.e., those efforts and related motions are denied with prejudice."

The NHL's bid was also denied, but without prejudice by the court. The basis of that denial was the fact that the NHL was desiring to pay all unsecured creditors with the exception of Jerry Moyes, the current owner, and Wayne Gretzky. The NHL had claimed that by so doing, it was maintaining the "good will" of the team. In essence, the NHL was taking the stance that Moyes and Gretzky were not legitimate creditors. The court stated that the bankruptcy code requires that all creditors be treated fairly and equitably. The court ruled that the NHL's stance was ambiguous and potentially discriminatory, and that it would be "inherently unjust" for the court to disallow consideration of their claims. Therefore, the NHL's bid was dismissed "without prejudice". The court, in essence, put the puck back on the NHL's end of the ice to restructure their bid, and will allow them to resubmit their bid, should they chose to do so.

The significance of dismissing Balsillie's and PSE's bid "with prejudice" is simply this: they are barred from re-submitting a bid in this case. Much has been written by The View and others about the convoluted bid by Balsillie, trying to come in through the so called "side door" rather than playing by the rules established by the League. The bankruptcy of the Coyotes was used as an attempt to circumvent the constitution and by-laws of the NHL and the ownership approval process. The court struck down this tactic and preserved the right of a sports league, in this case the NHL, to set its rules of membership and operation. This is a major victory not only for the NHL, but for all of professional sports and the ability of those leagues to determine their method of operation of their respective leagues.

It is now up to the NHL to decide if the will resubmit a bid, one that respects the rights of all creditors- even those that opposed them in court. I would expect that this will occur in the very near future. And I would expect that we have not heard the last of Jim Balsillie and his attempt to acquire a franchise in the NHL.

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