Fehr Out, Weiner Steps Up to Plate

Donald Fehr, the longtime Executive Director of the Major League Baseball Players Association, has announced his retirement, effective no later than the end of March 2010. Mr. Fehr's likely successor will be Michael Weiner, the current General Counsel for the Union. Jerry Crasnick has a great article on ESPN.com about Mr. Weiner, and I couldn't agree more with what Crasnick says.

In addition to what Mr. Crasnick details in his article, this is a no-brainer choice for the Players Association for several other reasons. First, selecting Mr. Weiner will insulate the Players Association from the type of situation the NFLPA experienced in its recent elections for a successor to the late Gene Upshaw. While the situations are different in terms of circumstances (Upshaw died suddenly, while Fehr is retiring after a transition period), the fact remains that the MLBPA will not have any worries about an election interfering with looming collective bargaining agreement negotiations (the current CBA expires in 2011).

Second, Mr. Weiner has the negotiation experience with the Commissioner's office and owners that others would not necessarily have. Again, drawing a parallel with football, the NFLPA's current Executive Director, DeMaurice Smith, had no prior experience in labor law prior to his election. And while the NFL players obviously thought a fresh face was what the Union needed, the fact remains that Weiner will not have to engage in any on-the-job training.

Third, expect to see no major hiccups in the aforementioned upcoming CBA negotiations. The documented strong rapport Mr. Weiner has with Rob Manfred, the League's top labor lawyer, will surely help negotiations run smoothly. Unlike other sports (i.e., the NFL), the likelihood of a work stoppage appears to be minimal in baseball, and that will not change with Mr. Weiner at the helm.

Finally, from a personal perspective, the MLBPA couldn't have selected a more brilliant person for the job. I have had the opportunity to talk with Mr. Weiner on several occasions. The most recent was at the Seton Hall Sports & Entertainment Law Symposium on November 7, 2008 (an event which I organized and ran). Weiner was one of our panelists that day, speaking on the topic of the health of professional athletes and the obligations to perform. Mr. Weiner was very articulate, abundantly knowledgeable, and most importantly, genuinely passionate about the Union's obligation to protect the health of its players. In a short few weeks, the Seton Hall Journal of Sports & Entertainment Law will be publishing a transcript of the Symposium, including Mr. Weiner's remarks. (I hope you get a chance to check it out.) Rest assured baseball fans, the MLB Players Association is in great hands with Mr. Weiner, and this is one baseball fan who is happy about that.

Jim Balsillie Finally Gets Some Good News.... Sort of...

Earlier this week, Jim Balsillie got the bad news that Judge Redfield Baum rejected his proposed reorganization plan for the Phoenix Coyotes. Yesterday, Balsillie, the co-CEO of Blackberry maker Research in Motion Ltd., received some good news for a change (albeit news of the non-hockey variety): Research in Motion reported first fiscal quarter earnings of $643 million ($1.12 per share) on revenue of $3.42 billion. These numbers reflected a 33% and 53% increase over the same period a year ago. Although the numbers exceeded analysts expectations, shares in RIM nonetheless dropped 6% yesterday and closed down again today. At least Balsillie can take comfort in knowing he is still filthy rich.

Coyotes Crushed

According to the Associated Press, Judge Redfield Baum has rejected Jim Balsillie's proposal to buy the Phoenix Coyotes out of Chapter 11. The ruling will eliminate any chance of Jim Balsillie, the man in charge of BlackBerry-maker Research in Motion, obtaining an NHL franchise any time soon. The ruling also means that the Coyotes are staying in Phoenix (rejoice Coyotes fans!). Beyond that, it is a bit unclear what will happen to the Coyotes. As of right now, the options are three: 1. a sale to one of the other investors expressing interest; 2. no sale and the team is run by the NHL for a season; or 3. a knight in shining armor comes to the rescue, a la Mario Lemieux and the Pittsburgh Penguins during their bankruptcy.

More to come on this in the next few days, most likely through a post over on SportsJudge Blog as part of my regular column there.

Coyotes Bankruptcy Hearing Today

Judge Redfield Baum of the District of Arizona Bankruptcy Court, will hear arguments today regarding whether the court can order the Phoenix Coyotes to be sold to prospective owner Jim Balsillie and moved to Hamilton, Ontario, despite the NHL's objections. The NHL will claim the Bankruptcy Court does not have the power to allow the move based on the NHL Constitution. Jerry Moyes (current owner) and Jim Balsillie will claim that the NHL is violating antitrust rules. A ruling by Judge Baum is expected shortly after the hearing. About the only thing that is certain right now is that the losing side will appeal to the 9th Circuit. In fact, the NHL has already publicly stated it will appeal any adverse ruling on the issue.

For more on this antitrust issue, check out Marc Edelman's post over on SportsJudge Blog. For more on the bankruptcy issues, check out my other posts on this blog or on SportsJudge Blog here.

More Fun with the Phoenix Coyotes

I have a new post up on SportsJudge Blog about the Phoenix Coyotes bankruptcy case. To refresh, the Coyotes filed for Chapter 11 bankruptcy protection on May 5. A lot of issues have been raised since the filing. That in itself is not surprising, considering that the first few days of a bankruptcy case are usually the most hectic. The interesting parts of the case relate to the NHL's involvement. Some of the issues addressed in the post are:

1. Why did the Coyotes file?
2. Did Jerry Moyes have the right to file?
   
3. Will Jim Balsillie's reorganization plan be approved?
4. What happens if Balsillie's plan is not approved?
5. Why did the Coyotes bring an antitrust claim in bankruptcy court?
6. What happens next.

I hope you have the chance to check it out and let me know what you think.

Update: I have posted a sequel to this post on SportsJudge Blog. I hope you get the chance to check it out.

Manny Being Immoral

One item that often gets lost in the tidal wave of media coverage following revelations of an athlete's use of performance enhancing drugs is whether the team employing that athlete has the legal right to terminate the athlete's contract for violation of that clause. Thankfully, at least one individual has taken up the issue. Over on The Hollywood Reporter, Esq., the issue is addressed in detail so far as it relates to Manny Ramirez and his recent 50 game suspension for using performance enhancing drugs. (Marc Edelman, quoted in the article, also has a post on this on Sports Judge Blog.)

I wholeheartedly agree that the Dodgers would seemingly be within their legal rights to terminate Manny. Courts have enforced morals clauses against individuals for drug use before (Nader v. ABC Television). A good counterpoint is raised by a recent post on Sports Law Blog that the MLB Drug Policy may prevent termination by the Dodgers. But when it is all said and done, would the Dodgers even considering terminating his contract? Would they risk terminating his contract and throwing away their World Series chances? After all, baseball is a business, and playing games in October is a sure-fire way to increase revenues.

(For more on morals clauses, check out my law review article that will soon be published in the Seton Hall Journal of Sports & Entertainment Law. You can access a copy here.)

Breaking News: Coyotes File Chapter 11

The Phoenix Coyotes filed for Chapter 11 bankruptcy protection today. I will have more to come on this in the next few days (that is, after I take my last law school final tomorrow night). In the meantime, you can read reports on the filing here and here. You can also read my two previous posts examining a "hypothetical" Coyotes filing here and here. I will be delving into some specifics in the coming days.

Supreme Court Nominations and Sports Law

Interesting post over on Sports Law Blog about Supreme Court Justice David Souter's recently announced retirement. As the blog post points out, one of the potential nominees - Judge Sonia Sotomayor - has a significant connection to the world of sports law, and specifically the Maurice Clarett v. NFL case and 1995 Major League Baseball work stoppage. Judge Sotomayor currently sits on the Court of Appeals for the Second Circuit. I hope you get the chance to check it out.

Confirmation of What We All Already Knew

No surprise here: personal and business bankruptcy filings spiked last year amid the worsening economy. The American Bankruptcy Institute predicts that the number of personal bankruptcies will increase to more than 1.4 million this year, especially if Congress passes legislation to permit homeowners to modify mortgages in bankruptcy. But is it possible that the ABI's 1.4 million prediction is too low?

In my opinion, several events could cause this 1.4 million prediction to be woefully low (unfortunately). First, if Congress passes the aforementioned legislation, more homeowners could seek bankruptcy as a refuge enabling them to keep their homes. Second, a bankruptcy filing by one or both of General Motors and Chrysler would cause hundreds of thousands of people to lose their jobs. Not only would innumerable GM and Chrysler employees lose their jobs, but so would people working for their suppliers. Third, continued declines in consumer spending will prevent the economy from recovering and cause more job losses. A combination of these three factors could cause job losses the like of which this country hasn't seen since the Great Depression.

Granted, there are people much smarter than me that have examined these factors and more, and probably come up with their own conclusions. But the reality is that while some people may think the economy has bottomed out already, the worst may be yet to come. Let's hope I'm wrong.

Time to ShakeThings Up a Little

All of my posts to this point have focused on sports law and sports business. Since this blog is entitled "Sports & Business Blawg," I thought that now would be as good a time as any to start expanding the scope of post topics on the blog. So, over the coming days, weeks, and months, I will begin posting on other interesting topics in the business and legal industries. I hope you enjoy.

Coyote Roundup

My last post discussed, in broad terms, what would happen if the Phoenix Coyotes went bankrupt. Since that post, more details (here and here) about the Coyotes' financial situation have come to light, particularly in regards to their lease with the City of Glendale. The two pieces of particular interest are that (1) the lease has a "poison pill" clause that would impose a $750 million fee on the Coyotes for breaking the lease and (2) the Coyotes just brought their lease payments up to date after seven months of delinquency.

Regarding the $750 million fee, it appears to me to be a liquidated damages clause enforceable to the extent the Coyotes breach their lease obligations. Liquidated damages are damages whose amount the parties designate within the contract for the injured party to collect as compensation upon breach of contract. Whether such a liquidated damages clause is enforceable outside bankruptcy is somewhat debatable, one can be certain that if the Coyotes filed for Chapter 11 protection, the city of Glendale would certainly file a claim for $750 million. (See my previous post about the city potentially having a pre-petition claim for breach of contract under 11 U.S.C. section 365.) The parties would then negotiate the amount of this claim. I would suspect the amount of the claim to be reduced, after taking into account the following numbers:

1. $42,708: amount Coyotes owe Glendale each month under the lease
2. $15,734,880: total amount of monthly payments for 30 year lease

Even if the Coyotes had to pay Glendale $500,000 per game as a percentage of parking fees, sales tax, security costs, and repairs (as required by the lease), that would still only get the total damages to somewhere in the neighborhood of $615 million ($500K times 41 home games times 30 seasons), plus that $15 million above. (And that's a very generous estimate.) Taking into account Glendale's common law duty to mitigate damages, I doubt they could maintain a claim for $750 million. Furthermore, some studies have found that creditors typically only recover 50% of their unsecured claims in Chapter 11 cases. If that were the case here, and the $750 million claim were not reduced, Glendale would still only receive $375 million as payment of their unsecured claim. So, if the Coyotes filed for Chapter 11, broke the lease under Section 365, and moved to another city, the city of Glendale would probably never see anything close to the $750 million.

As for the Coyotes recent payment of their delinquent lease obligations, the team would be wise not to file for bankruptcy until June (if it does at all). Why June? Under 11 U.S.C. section 547, certain transactions between the debtor and creditors can be dismantled if they took place within the 90 days immediately before filing the bankruptcy petition. Seven requirements must be met to void a transaction as a voidable preference: there must be (1) a transfer (2) of the debtor's property (3) to a creditor (4) on account of an antecedent debt owed by the debtor (5) while the debtor was insolvent (6) within the 90 days before filing (7) that allows the creditor to get more than in Chapter 7 liquidation. There are exceptions to the voidable preference section (whereby the transaction, while a preference, is not voidable for policy and practical reasons), such as where the payment was made in the ordinary course of business. These requirements definitely raise a number of other issues (were the Coyotes insolvent, how much would Glendale get in Chapter 7, etc.). Also, there is a strong argument that the payment could fall within the ordinary course of business exception, especially if the Coyotes were consistently late on payments in the past. However, the fact of the matter is that the Coyotes can avoid all this if they just file after the 90 day period. But will they be able to wait that long?

What Would Happen if the Coyotes Went Bankrupt?

Reports have surfaced recently that the Phoenix Coyotes are in trouble financially and may be facing bankruptcy if new investors cannot be found soon. (Two reports are here and here.) In this uncertain economy, many sports teams are facing financial problems; consumers are spending less, and that includes spending a small fortune to attend a game. It's not surprising then to see rumors of bankruptcy floating around a sports franchise.

What would happen if the Coyotes actually filed for bankruptcy? First, the Coyotes would have to decide whether to file a pre-packaged plan. In a pre-pack, the Coyotes and their creditors would negotiate a refinancing structure for the Coyotes' debt before filing, and then to make the deal work, the Coyotes would file Chapter 11 to take advantage of Bankruptcy Code provisions needed to carry out the plan. A pre-pack would resolve the case rather quickly. In the sports context, a pre-pack would likely involve transferring ownership to a new group which would assume most, if not all, of the team's debt. The L.A. Kings used a pre-pack during their bankruptcy in 1995.

If the Coyotes filed a full-blown Chapter 11 petition instead, the team's management would continue to run the franchise during bankruptcy. (This may seem intuitive, but consider that in England, outsiders manage the company when it is in administration, the English Chapter 11.) Filing for bankruptcy would trigger an automatic stay, which would stop almost all lawsuits against the Coyotes, including any creditors' attempts to collect debts.

During the case, the Coyotes would have to find post-petition financing to meet their operating capital needs. The team would also have to decide what to do with any executory contracts and unexpired leases, as the Coyotes would be able to decide whether to perform or not perform such agreements. This would be especially important for the Coyotes; their arena lease is one of the worst in the NHL and is a primary reason why they are financially unstable. Bankruptcy would allow the team to break the lease, or at least renegotiate it like the Pittsburgh Penguins did in 1998. Next, the Coyotes would have to negotiate with the creditors committee, which, among other things, participates in the formulation of a reorganization plan. Finally, the Coyotes would have to get the bankruptcy court to approve a reorganization plan. Plan confirmation is the ultimate goal in Chapter 11. The plan would likely address the financial reorganization of the company, pare down debts, and, most importantly for creditors, include the terms by which creditors would be paid. Secured creditors would receive at least as much as their secured claim, but unsecured creditors may get far less. After plan approval, the Coyotes' debts would be discharged (subject to completing any payments required by the plan) and the Coyotes' creditors would be barred from further pursuing their claims.

So would it work? The Coyotes would have a few issues. First, securing post-petition financing may be problematic given the credit markets' continuing tightness. The repayment priority guaranteed by the Bankruptcy Code to post-petition lenders may not be enough to entice some to lend to a Chapter 11 debtor. Second, rejection of the arena lease would give rise to a pre-petition claim for breach of contract that would be treated as an unsecured claim that would be paid according to the reorganization plan terms. Finally, Chapter 11 would likely allow the team to bring in the new investors it desperately needs. The L.A. Kings, Pittsburgh Penguins, and Buffalo Sabres (the three previous American professional sport franchise bankruptcies since 1978) all emerged from bankruptcy with new owners. The Coyotes have been seeking new investors; perhaps Chapter 11 could facilitate the process. In the end, bankruptcy may work for the Coyotes. However, they should be aware (and I'm sure they are) that not all Chapter 11 reorganizations are successful, and sometimes they become Chapter 11 liquidations.

Sign of the Times? Or Just Poor Business Planning?

Some people may see the closing of the Sports Museum of America, located on Wall Street in New York City, as just another example of a business falling victim to the recession and downturn in consumer spending. But is that really the case?

The Sports Museum of America, by all accounts, was a magnificent display of sports history. Located in New York City, it was the home to the Heisman Trophy and had exclusive relationships with more than sixty sports halls of fame and other organizations. Sounds like the makings of a solid business plan, except for one small detail. The museum was located on Wall Street. Huh? Wall Street? This location doomed the museum right from the start. Wall Street is not exactly a location that screams "weekend foot traffic." The truth is that Wall Street is busy during the work week when people go to Wall Street to work. When people go into New York City on a weekend, they go to Midtown, Central Park, etc. - not Wall Street. Bill Dockery, the president of the Heisman Trophy Trust, even recognized this, saying that the traffic flow to the museum didn't allow the museum to continue as planned. If the museum was located in an area of Manhattan that catered to tourists and weekend visitors, perhaps it would have had a better chance of success. Unfortunately for the museum, it was located in a place that has minimal foot traffic on the weekend, and even less now given the economy. Maybe a better idea would have been to find a place near Madison Square Garden. The museum could have played off the popularity of the "world's most famous arena" while simultaneously being right next to Penn Station.

Another problem facing the museum (which it acknowledged) was a lack of marketing and consumer awareness. The museum's founder even said that 95% of New York City was unaware of the museum due to a poor marketing campaign. All entertainment businesses in the tri-state area are in a constant cutthroat competition for consumers' entertainment dollars. In the area of sports alone, a New Jersey resident can spend his entertainment dollar on the New Jersey Devils, New Jersey Nets, New York Knicks, New York Rangers, New York Islanders, New York Liberty, Seton Hall and Rutgers basketball, and countless other local events. The failure of the museum to market itself doomed it from the beginning.

With that said, one wonders whether a Chapter 11 filing was explored by the museum's board of directors. A Chapter 11 filing, via a reorganization plan, may have given the museum an opportunity to renegotiate the terms of $57 million in tax-free bonds the museum incurred in opening. Granted, any renegotiation would have had to have been agreed to by the creditors or at least given them as much as they would have received in a hypothetical liquidation. And given the fact that the museum was unable to renegotiate the debt during the past six weeks, such a renegotiation within the confines of Chapter 11 was probably unlikely. A Chapter 11 filing may have also allowed the museum to relieve other debt burdens, and thus be able to come to an acceptable arrangement with the bond creditors. However, without knowing the debt situation of the museum beyond the $57 million in bonds, it is difficult to speculate.

In the end, it seems that the closing the Sports Museum of America is more a product of bad business planning than the recession. Indeed, if the museum had acted in a similar fashion during the boom times of yesteryear (i.e., poor location selection, poor marketing, etc.), it would have closed within the same ten months it did now. At least for once, the recession isn't to blame for a business closing.

Phallout Phrom Phelps Pholly

From the Wall Street Journal, February 6, 2009:

Phelps Loses Endorsement Pact, Faces Suspension over Photos
by Suzanne Vranica & Matthew Futterman

Kellogg Co. is severing its relationship with Michael Phelps after the Olympian was photographed smoking marijuana. . . . The Battle Creek, Mich., packaged-food company, whose brands include Frosted Flakes, Rice Krispies and Pop-Tarts, said Thursday it wouldn't continue its endorsement contract with the gold medalist, which comes up for renewal at the end of the month. . . . "We originally built the relationship with Michael, as well as the other Olympic athletes, to support our association with the U.S. Olympic team," a Kellogg spokeswoman said in a statement. "Michael's most recent behavior is not consistent with the image of Kellogg." (Full article here.)

A myriad of reports have come out over the last few days regarding Michael Phelps and his pot-smoking picture. Many of the stories discuss the repercussions Phelps may face from sponsors. As seen above, one sponsor has already decided to discontinue its relationship with Phelps. Others (Visa, Speedo, Omega, Subway) have expressed support for Phelps. But the question is, if these sponsors wanted to terminate their relationship with Phelps because his behavior is "not consistent with the sponsor's image," how could they do it? The answer lies in the oft-mentioned and little-discussed morals clause.

In an article soon to be published in the Seton Hall Journal of Sports & Entertainment Law, I discuss morals clauses in talent agreements in great detail. (Click here for a copy of the article, co-authored by Fernando Pinguelo.) As stated in the article, a morals clause is a contractual provision that gives a company the unilateral right to terminate an agreement with an individual in the event the individual engages in reprehensible behavior or conduct that may negatively impact his/her public image and, by association, the public image of the company. Companies often use morals clauses to terminate sponsorship agreements, such as with Kate Moss/H&M and Michael Vick/Rawlings. These clauses can be very broad, whereby they allow termination for almost anything, or very narrow, whereby they permit termination for specified conduct like felony convictions. Athletes (and their agents) typically prefer narrow clauses so that they can limit their potential exposure, whereas sponsors prefer broad clauses to ensure flexibility. The ability of an individual to secure a narrow clause often depends on their leverage: the more marketable the athlete, the narrower the clause and vice versa (think Michael Jordan v. Milorad Cavic).

So what does this mean for Phelps? Assuming his contracts have morals clauses, the legal reality is that any of his sponsors may have the ability to terminate the sponsorship agreement. After all, smoking pot is certainly not something companies want associated with them. The more likely situation is that some sponsors may decide to not renew his contract (like Kellogg). This also happened to Kobe Bryant with McDonald's and Nutella in 2004. If the contract is set to expire soon, the sponsor may just not use Phelps in any ads, make their payments to him, and then not renew the contract when the term expires. For longer contracts, the sponsor could just ride out the publicity storm and hope that Phelps restores his image with dominant performances at the 2009 World Championships and 2012 London Olympics. So, while Phelps' sponsors may have the legal right to terminate his contract right now, the companies probably want to remain associated with the greatest Olympian ever despite his folly. Just another example of how economic realities can often take precedence over a party's legal rights.

Bears Back in Business

From the Newark Star Ledger, January 8, 2009:

Owner Is Bullish on Future of Bears
By Philip Read

The team may be $1 million in debt in a declining economy, but the new owner of the minor league Newark Bears said he thinks the time is right for his ballclub, despite a recession perhaps not seen since the team captured the President's Cup for winning the highest percentage of games in 1933, during the Great Depression.

"I think especially in this economy ... this is the place to come," said James Wankmiller, who as president and CEO of Bases Loaded Group acquired the Newark franchise for $100,000 and the assumption of some $1 million in debt during a bankruptcy court hearing just two months ago. "They'll come because young baseball players come chasing their dreams." (Click here for the full article.)

I'm certainly a bit late in posting about the Newark Bears emerging from bankruptcy, but I guess this article gives me a bit of a reprieve. The terms of the Bears' reorganization plan called for a sale of the franchise to new ownership for $100,000 and the assumption of about $1 million in debt by the new ownership group. Before the Bears filed for bankruptcy, they owed creditors about $6.4 million. It appears that the Bears' debt load is now substantially smaller, which isn't surprising considering that the goal of a chapter 11 reorganization is typically a reorganization of the company's balance sheet. The Bears' reorganization is largely similar to that of the professional sport organization bankruptcies that I have studied in that the team was sold to a new ownership group. To wit, the Los Angeles Kings were sold to Majestic Anschultz Ventures, the Pittsburgh Penguins to Mario Lemieux's consortium, and the Buffalo Sabres to billionaire Tom Golisano. Now the Bears have been sold to Bases Loaded Group. One reason this may be the case is that if the existing ownership had the financial capability to operate the team, bankruptcy wouldn't be needed. But perhaps there are underlying reasons. Maybe the existing ownership just wants out and is taking advantage of sections of the Bankruptcy Code (such as the ability to terminate executory contracts, eliminating some debt, etc.) to make a sale easier. Or maybe the existing ownership made a bad investment and just wants out. Of course, it is pretty difficult to gauge what existing ownership is truly thinking, but this is just food for thought.