The decision released yesterday by Judge Redfield Baum of the U.S. Bankruptcy Court has received a lot of attention in Canada. Not surprising given that the case involves a request to move the Phoenix Coyotes hockey team from Arizona to Southern Ontario over the objection of the National Hockey League. The basic outlines of the story, however, do not capture the complex legal issues the Bankruptcy Judge had to contend with. A review of the decision reveals the following important points: (a) the agreement between the National Hockey League and member teams provides that a transfer of ownership or relocation can only be made with the consent and approval of the NHL; (b) the City of Glendale Arizona, having provided substantial funding for an arena, secured an agreement that Coyotes home games would be played in Glendale until 2035; (c) the NBA, NFL and Office of the Commissioner of Baseball filed a joint amicus brief in support of the position of the NHL that the league had the right to approve owners and franchise relocations, which could not be superseded by the provisions of the U.S. Bankruptcy Code.
Faced with these circumstances, Judge Baum stated that the case raised “novel and unique issues to the Bankruptcy Court” and that “No cases have been found that precisely or even closely fit this scenario.” The position put forward by the purchaser of the Coyotes was that Section 365(f)(1) of the Bankruptcy Code allowed the contract to be assigned “notwithstanding a provision in an executory contract or in applicable law that prohibits, restricts or conditions the assignment of such contract.” Against that, Section 365(b)(1)(c) of the Bankruptcy Code required that the assignment of a contract provide “adequate assurance of future performance under such contract.” The contract at issue here required that home games be played at the Glendale Arena. Judge Baum stated “It is basic bankruptcy law regarding the assumption and assignment of executory contracts that the asking party cannot assume only the benefits of a contract; rather, assumption is the entire agreement, benefits and burdens.”
The purchasers argued that the contractual provision was unenforceable as it was contrary to Section 365 of the Bankruptcy Code restricting assignment of the contract. Judge Baum concluded “Simply put, this court disagrees with the assertion by the Debtors and PSE (the purchasers) that the relocation request can be excised from the contract because it violates some portion of Section 365…The court concludes that either the requirement of adequate assurance of future performance or of compensation for any actual pecuniary loss resulting from a default dictates that this apparent economic right of the NHL must be appropriately resolved for the Motion to satisfy the requirements of Section 365.” In other words, the purchasers are required to go back to the drawing board and come up with a solution satisfactory to the NHL, perhaps in the form of a relocation payment that addresses the concerns of the parties involved.
While the decision has been portrayed by spokespersons for the purchasers as leaving the door open for the move – and it is true that their motion was dismissed without prejudice – it seems to me that the Judge’s reasoning has left little room for the dispute to be won in Court. The one bright spot may be the statement of Judge Baum that “The principal reason the Motion has been so carefully considered by the court is that it appears that the sale proceeds would most likely provide a material return to the general creditors.” Undoubtedly, we have not heard the last of this story.