The owners of the Nashville Predators may be forced to strengthen their $50-million (all currency U.S.) guarantee with the city because of the discovery of a financial agreement among the owners that has tougher terms than the city guarantee.
A copy of that financial contract, called an indemnity and contribution agreement, was obtained by The Globe and Mail. It was signed in December of 2007, several months after the current owners bought the team.
Under that agreement, if one or more of the owners can no longer meet his financial obligations to the franchise and the NHL or causes a financial loss, then the other owners have to cover the obligations in a ratio of their ownership percentage in the franchise.
The owners also signed two agreements with the NHL, one a financial guarantee for as much as $50-million and the other a consent agreement, that are far more binding than the city agreement. Those contracts give the NHL the right to be at the front of the line of any creditors and the right to revoke the franchise if it decides the owners are no longer meeting their obligations. They also do not allow any of the owners to escape financial commitments by declaring bankruptcy.
Under the lease guarantee with the city, the owners only have to give the city a certificate of their net worth equivalent to their ownership percentage. They are also permitted to use their shares in the Predators in the calculation of their net worth and do not have to include any of their financial obligations to the NHL and any outside parties in the calculation.
The city, which owns the Predators' arena through the Metro Sports Authority, is seeking assurances from the team owners about their financial situation. This became necessary after the news last month that David Freeman, who has the largest share of the team at 31 per cent, had a $3.3-million federal tax lien placed on his house. If Freeman cannot settle the lien, he and the team could be found in default on the city guarantee. While some city officials do not think it is necessary to toughen up the guarantee, which calls for a $50-million payment from the owners if they are found in default, others do.
One of them is Rusty Lawrence, the chairman of the Sports Authority's finance committee.
When he was contacted by The Globe yesterday, Lawrence said he was not aware of the indemnity and contribution agreement among the owners. He said he now plans to bring it to the attention of the Sports Authority committee that is negotiating with the Predators owners and add it to his list of reasons why the city's guarantee needs to be strengthened.
"I will definitely include that now," Lawrence said. "What I plan to do is recap with the [negotiating]committee what we should be looking for.
"Why they would sign a [tougher]agreement with themselves and not with the city is a great question and now I can ask it."
Lawrence sent a memo last week to the negotiating committee - Nashville's legal director Sue Cain, local attorney Larry Thrailkill and Sports Authority member Lauren Brisky - outlining what the city needs in a new guarantee with the Predators.
He said the early escape clause in the lease, which allows the Predators to break it by this May if they do not reach an average attendance of 14,000 a game and post a cumulative total of $20-million in losses since 2007, should be moved to 2012. Lawrence also does not want to allow the owners to include their shares in the Predators in their net worth statements because those shares could become worthless in the event of bankruptcy and their certifications should be free of any other financial liabilities.
As for making good to the city if one of the owners goes into default, Lawrence wants the guarantee to become joint and several, just like the indemnification agreement the owners made among themselves. That would force the other owners to take financial responsibility for each other.
Freeman declined to comment when asked about the indemnification agreement. Cain and Thrailkill did not respond to requests for comment.
However, a source familiar with the indemnification agreement said it was actually based on a different legal concept than the one with the city. The source said the indemnification agreement was concerned mostly with making the other owners responsible in proportion to their shares for any losses incurred by one of them through things like lawsuits rather than forcing them to cover continuing costs.
The source also said it was relatively rare for team owners to sign lease guarantees with communities that own the arenas in which they play.
Lawrence said the negotiating committee plans to meet with the owners early next week. Their report will be delivered to a special meeting of the finance committee on Jan. 28.Report Typo/Error