Leagues fear Coyotes sale would set precedent

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Documents filed in court yesterday have turned up the heat in advance of Tuesday's showdown between the NHL and Phoenix Coyotes owner Jerry Moyes over his right to sell his club to Canadian billionaire Jim Balsillie.

And among those weighing in were the NFL, the NBA and Major League Baseball, which argue that allowing the $212.5-million sale to Balsillie would damage the very structure that has allowed professional sports to flourish in North America.

"[The NFL, NBA and Major League Baseball]support the NHL's position that any franchise sales procedure prescribed by the court should respect the National Hockey League's rules and procedures regarding transfers of ownership and relocation and not set precedent that has the potential to undermine the business of professional hockey and other major-league sports," the document states.

Further, the leagues argue that allowing Moyes to sell to Balsillie through a bankruptcy proceeding would encourage professional sports franchises to enter bankruptcy protection as a means of avoiding league rules and governance.

The leagues argue "this court should not pursue such a course, which would encourage financially challenged franchises to enlist the aid of the bankruptcy courts in an effort to circumvent established league rules that govern such league decisions."

The legal briefs filed by the three leagues were among those put before the federal bankruptcy court in Phoenix yesterday, preceding Tuesday's hearing before Judge Redfield T. Baum on whether the Phoenix Coyotes may be relocated. Balsillie has offered $212.5-million (U.S.) to purchase the NHL franchise on the condition that it be moved to Southern Ontario, with plans to play out of Copps Coliseum in Hamilton this September.

On the specific issues of relocation, the three leagues argue that owning a franchise does not entitle relocation to another territory at the discretion of the owner under any means.

"A league franchise reflects a license to serve the league's fans and to play league games in a prescribed geographical area for the benefit of the league. The franchise is the means by which the league creates a relationship with a particular community, subject only to change by league decision," the leagues argue.

In documents filed by lawyers for Moyes, it is argued that creditors, including Moyes, would undoubtedly be better served if the court allows the team to be relocated to Hamilton.

"As demonstrated by the analysis provided by the debtors, relocation does not prejudice any of the creditors of the estates. In fact, that analysis shows that creditors - especially unsecured creditors - are better served if relocation is a permitted feature of the auction procedures."

Moyes's lawyers also argue that he is being intentionally marginalized by the NHL and the City of Glendale despite having extended himself financially to keep the team afloat through loans to the club. The document claims Moyes is the Coyotes' single biggest unsecured creditor, having lent the team $104-million (U.S.) beyond his equity in the team.

Adding to the debate about whether the Coyotes could ever become financially viable in Phoenix, a file from Gerald Sheehan of Beacon Sports Capital Partners, concludes it is possible to cut $15.1 million from the Coyotes operating expenses. Included in that is reducing the compensation of head coach Wayne Gretzky from $8 million to $2 million. According to the document filed by Sheehan, Gretzky has been receiving $1.6 million in salary, $5.8 million in annual deferred money and a bonus of 75 basis points of total team revenue.

"It is not uncommon for parties, particularly in a large and hotly contested Chapter 11 proceeding, to argue that the debtor and its owners and affiliates are acting purely out of self-interest and to the detriment of creditors of the estate," states a document filed by Moyes's lawyers.

"It becomes convenient to vilify the owners and gloss over the true economic realities. Plainly, that has happened to Mr. Moyes, who will undoubtedly lose over $200-million in equity in this process. The expedited nature of these proceedings has given free rein to several of the creditors - notably the City of Glendale (the "City") and the National Hockey League ("NHL") - who have portrayed Mr. Moyes as an owner intent on subverting the claim priorities set forth in the Bankruptcy Code. And, in this portrayal of Mr. Moyes, these parties attempt to disregard Mr. Moyes's stake as a legitimate creditor who, separate and apart from his equity investment, loaned nearly $100-million to the team to keep it operating."

Professional sports leagues weren't the only ones filing documents in court yesterday that warned of a dangerous precedent being set if the Balsillie sale goes through.

Aramark Sports and Entertainment Services also expressed concern in a court filing about the Coyotes. Aramark manages concessions at the Jobing.com Arena and many other sports facilities. It says it paid $8-million for the contract and would be owed more than $5-million if the team moved. In its court filing last night, Aramark said the court's decision on whether the Coyotes can move will impact "the relationship that Aramark has with other teams in major sports leagues."

The battle between Moyes's right to sell to Balsillie without NHL approval through the bankruptcy proceeding is the latest in a long series of battles fought by leagues to keep the courts from having a say in how they operate their businesses.

"It's the battle that has been fought for almost 100 years," said Gabe Feldman, director of the sports law program at Tulane University. "It's about the ability to control their teams, make their own business decisions and not be second-guessed by the courts.

"Whether it was the reserve clause or antitrust challenges, in each step leagues have argued that a challenge is improper because they have a right to make all these decisions, without getting into the merits of them. The leagues have sought to insulate themselves from the courts, and [the Coyotes']situation is another challenge. They do their best to seal off loopholes so they can run their businesses without interference and not have their decisions overruled by the courts."

Judge Baum has sounded leery of setting a precedent when the sides are heard again on Tuesday.

During a hearing on May 30, when Baum reluctantly agreed to decide the issue, he referred to it as "the 10,000-pound elephant in the room." He also wondered about the ability of a bankruptcy court to decide whether an NHL club can relocate because it is also an antitrust case.

"If I do that, I am essentially rewriting their constitution for them, and I'm not sure I have the power to do that," Baum said.

He also noted how none of the related case studies "has a fact scenario remotely close to this case."

However, given the value to creditors of Balsillie's offer, Baum has no choice but to consider it. And it is the bankruptcy element of this case that has legal scholars debating an outcome.

Baum, appointed chief bankruptcy judge for the District of Arizona in 2005, has written and lectured extensively on bankruptcy law, and dealt with sports-related cases before. But this decision may well be associated with his name for years to come.

"Intertwined with this bankruptcy matter is one of the most complicated antitrust issues out there, not just in sports, anywhere," said visiting Rutgers University professor Marc Edelman, an expert in antitrust law. "It's a series of issues that the [U.S.]Supreme Court has never decided and a series of issues that circuit courts seem not to agree upon.

"And here we have this bankruptcy judge, who is an expert in protecting creditors, and he has before him one of the most complicated cases out there."

By and large, the courts have been willing to recognize that sports leagues - while not single entities - are joint ventures that require certain decisions to be made at a central level. Under the "rule of reason," it has been accepted that the pro-competitive reasons for allowing leagues to have control over their own business supersede the anti-competitive reasons for doing so.

The critical issue Tuesday is whether Baum will recognize the NHL's right to make decisions concerning location of its franchises, or further, explore whether the league's position constitutes an unfair restriction, particularly if a move from Phoenix to Hamilton satisfies the league's stated criteria for relocation.