The Work

October 28, 2009 3:21 PM

Skadden Helps NHL Buy Coyotes; Cadwalader Repping Prospective Buyer

Posted by Zach Lowe

The National Hockey League will take over the ownership of the bankrupt Phoenix Coyotes pending a judge's approval, a fittingly strange end to a case that has had it share of first-impression issues and unexpected twists. 

But of course that's not really the end. The league apparently doesn't want the Coyotes for long, and they are already in talks to sell the team to an investment group represented by Cadwalader, Wickersham & Taft, according to The Globe and Mail in Toronto.

Skadden, Arps, Slate, Meagher & Flom, which represented the league during the bankruptcy case, will serve as lead M&A counsel on any deal to sell the team, according to sources familiar with the matter.

First, let's back up to Monday's hearing at the federal bankruptcy court in Phoenix. The status hearing was the first major gathering of the main legal players since the federal judge handling the case took the unusual step last month of tossing out both bids for the team--the NHL's $140 million bid and a much larger offer from Canadian business mogul Jim Balsillie, who wanted to move the team to Ontario. As we've written before, Judge Redfield T. Baum tossed the bids for very different reasons. He rejected Balsillie because the NHL's owners already had rejected him, and Baum was apparently uncomfortable with the prospect of his courtroom being used as a means for Balsillie to get around league rules governing new owners and relocation of franchises. That was a major win for sports leagues, who had been watching the case carefully to make sure the bankruptcy process respected league bylaws, says Michael McCann, a law professor at Vermont Law School who writes frequently on sports law issues. "It suggests courts will give the leagues some deference," he says.

Baum threw out the NHL's bid because the league, he claimed, planned to pay some unsecured creditors ahead of the team's current owner and its ex-coach, Wayne Gretzky. 

Judge Baum said the league would have to tweak its bid in order to gain his approval. In the meantime, the Coyotes were losing about $1 million a week as the case dragged on, according to Squire, Sanders & Dempsey partner Thomas Salerno, an attorney for the team. 

So at Monday's hearing, all the lawyers involved were eager to make a deal happen; Salerno even suggested in open court that the Coyotes be liquidated if a deal took much longer, he says. But what really happened, according to four lawyers on the case, is that the NHL simply clarified the final bid it submitted more than a month ago. At the outset of the hearing, lawyers for the NHL and the creditors committee (represented by Paul Sala of Allen, Sala & Bayne) pointed out to Judge Baum that the NHL was not actually proposing to pay some unsecured creditors ahead of others. (Sala declined to comment, as did J. Gregory Milmoe, the lead Skadden bankruptcy lawyer on the matter.) Rather, the lawyers told Baum, the league was offering to purchase the claims of those allegedly favored creditors--about $11.6 million, mostly owed to local vendors. The rest of the NHL's bid price--$128.4 million---would go to the bankrupt estate to be distributed to secured and unsecured creditors in the proper manner, according to Salerno and other lawyers who attended the hearing. That is proper under the bankruptcy code, the lawyers told Judge Baum. 

The court then called for a ten-minute recess, but at that point lawyers believed they had a chance to finalize the sale. The recess ended up lasting about 90 minutes, and the various parties came back with the deal outlined above--the same deal, in effect, that the NHL proposed a month before, according to the lawyers. The only major difference in the new proposal is that the NHL agreed to place the $11.6 million in claims they purchased behind the claims of other unsecured creditors in line--except for Jerry Moyes, the current owner of the Coyotes, court records show. The NHL struck a separate deal with Moyes outside of bankruptcy court that cuts his liability stemming from a $30 million guarantee to just $15 million, according to lawyers on the deal. 

Judge Baum is expected to approve the deal as soon as Monday. The next step would be for the NHL to sell the team. The lead bidder appears to be a consortium of eight investors known as Ice Edge Holdings, represented by Cadwalader. Associate Scott Greenberg is leading the Cadwalader team, the firm says. Ice Edge briefly emerged as a bidder during the Chapter 11 process but dropped out after failing to reach a new arena deal with the city of Glendale, which owns the arena where the Coyotes play, according to the Globe and Mail. 

So that's where we stand--with the NHL owning the team under nearly the same terms the league offered more than a month ago. The Coyotes now become the first team in the Big Four U.S. pro sports to be owned by their parent league since Major League Baseball took over the Montreal Expos in 2001, according to McCann. 

One interesting note from McCann: Baum's earlier ruling allowing the NHL in as a bidder reinforces the notion that sports leagues have some momentum in getting around antitrust laws. Earlier this year, the U.S. Court of Appeals for the Seventh Circuit ruled that the National Football League could act as a so-called single entity--exempt from antitrust laws--in signing apparel licensing agreements. (The U.S. Supreme Court had previously reserved single entity status for parents and their wholly owned subsidiaries, McCann says.) One apparel maker (American Needle Co.) has objected, claiming that the 32 NFL teams are separate businesses, and that apparel makers should be able to negotiate separately with all of them. The appeals court rejected that argument, holding that the NFL could be considered a single entity for the purpose of licensing agreements even though the teams are very clearly separate businesses, McCann says. The case is now headed to the U.S. Supreme Court.

The NHL cited the Seventh Circuit's ruling in the Coyotes case, in effect saying the league could bid for and own an individual team. That suggests how much importance leagues are placing on the outcome of the American Needle case, McCann says.

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