Bankruptcy

Tribune Bankruptcy: A Coup for Mark Cuban?

By Adam Levitin

As has been widely reported, the Tribune Company has filed for Chapter 11 bankruptcy in the Delware.  Among the Tribune's major assets are its ownership of the Chicago Shlubs Cubs, a ne'er-do-well "ball" club, but still an extermely valuable Major League Baseball franchise.  (Full disclosure:  I'm a Sox fan.  And please don't ask what color....) 

[Note that this is not the first baseball bankruptcy.  We've had minor league club bankruptcies before, such as that of the Allentown Ambassadors.]

Tribune has already been trying to sell the Cubs.  In fact, bids have already been submitted.  Now, because the Cubs are a MLB franchise, MLB has a veto over any sale.  This likely means that Mark Cuban, the maverick owner of the Dallas Mavericks, who has coveted the Cubs for years, is unlikely to be able to complete a purchase, even if his is the high bid; he's not someone the MLB owners want in their club (in Ivyspeak, he's "not clubable").  And that was before the SEC brought a civil suit against him. 

But bankruptcy might change this picture and let Cuban buy the Cubs.  (Good, we Southsiders say, they deserve each other!).

Continue below the break for two ways Cuban might land the Cubs. 

For the uninitiated, bankruptcy gives the trustee (or in this case debtor-in-possession a/k/a/ DIP) that manages the bankrupt company's assets some remarkable powers:  the DIP may assume and assign many of the debtor's "executory contracts" notwithstanding any contractual provision or law to the contrary.  Also, the DIP may under certain circumstances, sell property of the bankruptcy estate "free and clear" of other interests in it. 

These two powers might make it possible for Mark Cuban to purchase the Cubs regardless of MLB's objection.  If either of these powers is applicable and Cuban submits the high bid to the bankruptcy court, the Cubs are likely to be his. 

So, are these provisions applicable?  Here's my preliminary, quickie analysis.  A caveat:  I'm writing this without knowing the intricacies of the Tribune/Cubs holding structure or the MLB franchise agreement.  I'm making some assumptions, which could prove to be quite wrong. 

Let's first assume that the ownership of the Cubs' franchise is property of the bankruptcy estate.  (It might not be if it is actually the grant of some sort of a non-transferable license--again, no idea how this is structured). If so, then the question is whether the franchise agreement is an executory contract.  Let's use Vern Countryman's definition of executory as requiring material obligations to flow both ways between MLB and the Tribune. Depending on the answer, different Bankruptcy Code provisions might apply. 

1.  If the Franchise Agreement Is an Executory Contract

If it is an executory contract, then the question is whether the Tribune can assume and assign its ownership interest in the Cubs over MLB objections.  As a general matter, a DIP may assume and assign executory contracts.  That mean that Tribune as DIP could sell (=assign for value, thank you Judge Schiendlin) the Cubs franchise to Cuban or whoever else was the high bidder.  It doesn't matter whether or not the franchise agreement or MLB rules or state franchise law prohibits such a sale.  And it doesn't matter if the franchise agreement provides that it terminates on bankruptcy or insolvency.  These provisions are void in bankruptcy.  11 U.S.C. 365(e)-(f). 

But, the Tribune can't assume (and therefore cannot assign) the franchise if MLB is excused by non-bankruptcy law from accepting performance from anyone other than its particular franchisee. 365(c)(1), (e)(1).  I don't know what, if any franchise law might apply, much less create such a condition.  But it's a possible out for MLB.  Another possible out is the Lanham Act, governing trademarks.  The Lanham Act gives the a trademark licensor veto power over the assignment of a non-exclusive trademark; an exclusive mark, however, is freely transferrable by the licensee.  I have no idea whether MLB owns the Cubs' trademark and, if so, whether it is an exclusive license to the franchise.  If it is non-exclusive, there's Delaware caselaw that it may not be assumed and assigned.  In re Golden Books Family Entm't (non-exclusive Scooby Doo license not assignable by DIP).  If it is exclusive, there's at least dicta in a Delaware case, In re Valley Media, Inc., that it is assignable.  (Warning:  I haven't done an exhaustive search of Delaware cases).  But there is a persuasive Ninth Circuit case, Gardner v. Nike, Inc. (9th Cir. 2002) that says that an exclusive licnesee cannot assume and assign the license absent the licensor's consent.  We need to know more facts, but there's at least a possibility that the Tribune could assume and assign the Cubs franchise absent MLB consent. 

(2)  If the Franchise Agreement Is Not an Executory Contract

if the franchise agreement is not an executory contract, but is still property of the Tribune bankruptcy estate, the question is whether the Tribune can sell the Cubs under either section 363(c) or 363(f) over MLB objections.  Let's run this with section 363(f). 363(f) permits the sale "free and clear of all interests in such property of an entity other than the estate" if one of five alternative conditions is met.  If MLB's franchise assignment veto is an "interest," then there is a possible provisions that might permit the sale "free and clear" of the veto, namely that "such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest."  11 U.S.C. 363(f)(5).

This provision has never gotten a lot of attention, although a recent 9th Circuit B.A.P. ruling on that touched on it got some attention.  The 9th Circuit B.A.P. didn't read 363(f)(5) as meaning very much.  But I think it is arguably quite pretty broad--if it is read to involve a hypothetical proceeding, which is how it has to be read to have much meaning, then it would have to include eminent domain actions and foreclosure sales.  A government unit could take the franchise in an eminent domain action (hypothetically), which is a legal proceeding, and compel MLB to take "just compensation" in the form of a money satisfaction.  So, I think there's at least a case that 363(f)(5) would permit the sale of the Cubs to Cuban over MLB's objection. 

If so, what would MLB get?  I think it would leave MLB with something like what a bankruptcy judge would estimate its veto interest to be worth. Now the veto has the effect of limiting bidding on the franchise and holding down the franchise's price.  So the veto must be worth more to MLB than the reduced bids that would exist with the veto.  And we have an easy way to measure this.  Compare the pre-bankruptcy bids for the Cubs with the post-bankruptcy free-and-clear bids.  The spread between the high bids is the measure of MLB's damages--as an unsecured claim.  

So at least two possibilities for Cuban getting the Cubs via bankrutpcy, depending on what the franchise agreement is and his willingness to pay top dollar. 

(There's also a latent question of whether Tribune could sell the franchise under 363, even if it is an executory contract.  Must executory contracts be assumed to be assigned/sold?  Is 365 the sole way of dealing with executory contracts?  I argued (both sides) of this in a moot court some years back.  It's still an open issue in the Third Circuit, as there is a Circuit case that permitted a 363 sale, instead of a 365 assignment.) 

Finally a fascinating possibility:  if the Cubs themselves filed for bankruptcy, they could, arguably, reject the executory contracts of overpaid players and have to pay the players cents on the dollar.  Good luck with the player's union, after such a maneuver, but still it allows for some wonderful baseball fantasies.

Full post as published by Credit Slips on December 08, 2008 (boomark / email).