Analysis: Court denies quick sale of Phoenix Coyotes, but Balsillie's battle will rage on

Pursuant to his ruling this evening which shot down Jim Balsillie's bid to buy the Phoenix Coyotes in a June 22 auction and forcibly relocate them to Hamilton, the 21-page document has been posted over at The Star (PDF) for public consumption. It appears that while timing issues were critical to rejecting Balsillie's motion, the judge left the door wide open for him this sale to go through at a future date.

Obviously the process will go on, but without question the timetable involved makes a sale and relocation of the team this summer all but impossible.

The real meat of this document is the "Analysis and Discussion" section, which allows Judge Baum to lay out the relevant legal issues and provide his opinion on each. Feel free to jump into some (admittedly incredibly amateurish) analysis below...

Part A

The first point Baum digs into is Section 365 of the Bankruptcy Code, which addresses, in part, the fact that while a party taking over an organization through bankruptcy assumes the current contracts that the bankrupt entity is bound to, exceptions can be made if those contracts are found to have "anti-assignment clauses". In other words, the portion of the NHL Constitution that relates to ownership transfer can possibly be invalidated in such circumstances, and Balsillie allowed to buy the team (assuming everything else sorts out). Of interest here is the following:

"Significant to the court here regarding the objection to the transfer of ownership of the Phoenix Coyotes is the fact that in 2006 the NHL approved PSE [Balsillie's firm] to become a member of the NHL. The court has the firm sense that if the only issue here was PSE purchasing the Phoenix Coyotes [no relocation term] there would be no objection from the NHL."

Then shortly thereafter, we have the following:

"Absent some showing by the NHL that there have been material changes in PSE's circumstances since 2006, it appears to the court that the NHL can not object or withhold its consent to PSE becoming the controlling owner of the Phoenix Coyotes."

This point, I'm guessing, is part of why the NHL has been asking about the recent OSC/SEC violation that Balsillie was caught up in with his company, Research in Motion - it's a recent development since 2006 which ended up with Balsillie resigning as chairman. The fact that he's barred from being the officer or director of a public corporation because of that scandal could provide some grist for an NHL argument that perhaps the situation has changed since that earlier approval, and another review would be necessary.

I'm still kicking myself about this, because when Gary Bettman made his annual visit to Nashville, I got to sit in on his press conference. I specifically asked if this OSC/SEC matter would throw a roadblock in Balsillie's path towards NHL ownership, and Bettman easily dismissed the question because he didn't want to speculate about an individual like that. I let it go, but in retrospect, should have followed up with a general question about any candidate who was subject to such SEC sanctions, and whether that would pose an issue.

Anyways, Point One says that the NHL simply can't bar Balsillie out of hand (small victory for the Blackberry Kid). It's gets a lot messier from here on out, however...

The next issue relates to relocation - Balsillie's basic argument is that the part of the Coyotes contract with the NHL that requires all home games to be played in Glendale amounts to one of those "anti-assignment clauses" - in other words, a gimmick intended to block ownership transfer. Baum disagrees, however, and instructs that just because a portion of the contract is burdensome, doesn't mean it's unenforceably anti-assignment:

"It is basic bankruptcy law regarding the assumption and assignment of executory contracts that the assuming party can not assume only the benefits of a contract; rather assumption is the entire agreement, benefits and burdens."

Baum draws a distinction between precedents that have involved franchises relocating "within the area of their existing business" (i.e. from one arena to another within a city), but nothing akin to abandoning a market altogether. Baum further notes that he "does not consider the provision establishing the Debtors' location obligation as a term prohibiting, restricting or conditioning the assignment of the agreement.

Point Two, then, basically says that the NHL's restriction of a team to its market does not amount to an anti-assignment clause that can be stricken down (big victory for the NHL).

Point Three covered the rights of the NHL to exact a relocation fee should Balsillie be allowed to move the team. The specific motion that Baum ruled on today didn't address this point, but Baum notes that it's an issue that still needs to be sorted out if the entire matter is to be decided (a draw).

Part B

The second portion of the Judge's analysis digs into the antitrust allegation that Balsillie brought against the league, attempting to use non-bankruptcy law to force his transaction through. Antitrust is messy stuff, but Baum wades into the muck, because this is where both Balsillie and the league make their strongest arguments.

He draws on two particular precedents, that of the NFL's Raiders (who relocated from Oakland to L.A. against the league's wishes), and the NBA's Clippers (who moved from San Diego to Los Angeles). The gist of the issue comes down to the following three conclusions from the Clippers case:

"First, that for purposes of antitrust claims, professional sports league franchise movement restrictions are not invalid as a matter of law. Second, the question of what restraints are reasonable is one of fact... Third, the mere existence of terms and conditions for franchise relocations cannot violate antitrust law."

A real whammy of a quote comes from the Raiders ruling - "the nature of NFL football requires some territorial restrictions in order both to encourage participation in the venture and to secure each venturer the legitimate fruits of that participation."  These points line up strongly in the NHL's favor, backing its ability to enforce the sanctity of team markets.

In addition, Baum says that the process needs to play out more fully before the issue of antitrust can even be addressed. Since Balsillie only filed a relocation request well after taking the NHL to court, the NHL hasn't even had the chance to apply its standards and approve (haha) or reject the request. That factual history is essential to building a case for antitrust violation, because Balsillie needs to prove that a genuine legal dispute exists between the two parties that remains unresolved. Another quote from the ruling:

As noted above, antitrust claims are inherently factually driven cases and it is not an antitrust violation for professional sports leagues to have terms and conditions on relocations of member teams.

Baum simply states that Balsillie's team has much more to do to demonstrate a "bona fide dispute" between the interests of the league and that of the Coyotes when it comes to sale & relocation. Between that and the fact that Balsillie's June 29 deadline provides too little time to establish and sort out all the issues noted above, Judge Baum decides not to let the antitrust allegation trigger the sale of the team (big win for the NHL).

Part C

Next the judge turns to the City of Glendale and its concerns. A key argument there is that if the city can demonstrate that a relocation would cause them to "be damaged disproportionately to any benefit to be derived by the general creditors", their claims should not simply be stricken as part of the bankruptcy. Since Judge Baum has decided not to grant the motion here, he doesn't get into the act of balancing Glendale's concerns against those of the various creditors. That, I'm sure, could escalate into a long, drawn-out battle all its own (a draw).

Part D

In noting the interests of the other professional sports leagues, which don't want to see their rules and procedures for franchise relocation invalidated, Judge Baum dismisses the idea that such relocations "wreak havoc" on professional sports. He asserts that the rule of law determines which rules are enforceable or unenforceable (small win for Balsillie).

Part E

Ultimately, the June 29 deadline that Balsillie had placed on the process proves too tight to sort through all the various legal points that Judge Baum has gone through. By denying Balsillie's motion, he also scraps the June 22nd auction date for the team (big win for the NHL).

The Aftermath

So where do we go from here? The Make It Seven folks immediately issued the following press release:

Jim Balsillie's bid to bring a seventh NHL team to Canada continues. We're still here. The Phoenix court confirmed Mr. Balsillie was approved as an NHL owner in 2006 and remains so. We believe he has made the best offer and Hamilton remains the best location for this team.  

The court did not approve either our approach or the NHL's. Judge Baum did state he does not have time to decide all the relocation issues. But the court still controls the sale process. As a result, we look forward to hearing from the NHL soon on its view of our relocation application and an appropriate relocation fee, so as to allow the court to determine if that fee is reasonable. We still think there is enough time for the NHL to approve Mr. Balsillie's application and move the team to Hamilton by September.

Makeitseven supporters need to make their voices heard to convince the league by participating in Make It Seven day on June 19. Read more about how you can support Make It Seven Day at www.makeitseven.ca. Jim will be emailing all of us with his planned next steps, so we continue to ask you to urge people to sign up now to show their support. Tell your friends, family members, neighbors and co-workers to sign up.

Together we will Make It Seven. 

If you're hanging your hat on the fact that the judge said, "yes, the league approved him in 2006," you're really grasping for some positive news. Today's ruling is certainly a disappointment for the Balsillie camp. Not a final defeat, by any means, but it is the denial of a quick victory.

Basically, the next steps would appear to be that the NHL needs to decide upon Balsillie's relocation request, after which there will probably be a legal fight over the size of any relocation fee. Then, the matter of balancing the interests of the general creditors against that of the city of Glendale will have to be decided. How they "still think there is enough time for the NHL to approve Mr. Balsillie's application and move the team to Hamilton by September" is beyond me.

The bigger question is how will potential sale of the team to other buyers proceed? If the NHL tries to move forward with another buyer, will Balsillie try to tie that process up in court while he carries on his fight, asserting that his offer provides the strongest return to the general creditors? Or does he cut bait eventually, and go after some other prey?

The bottom line is that if Balsillie weren't so hell-bent on Hamilton, he could have bought any one of several NHL teams by now. His obsession with having an NHL team exactly where he wants it, when he wants, has proven to be his undoing time and time again, and that appears to be the case with today's ruling as well.

UPDATE: The NHL's Bill Daly issued the following statement:

"We're pleased the Court recognized the validity of League rules and our ability to apply them in a reasonable fashion. We will turn our attention now toward helping to facilitate an orderly sales process that will produce a local buyer who is committed to making the Coyotes' franchise viable and successful in the Phoenix/Glendale area. We are confident that we will be able to find such a buyer for the Coyotes and that the claims of legitimate creditors will be addressed.”

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