Dallas Stars, L.A. Dodgers Make Delaware Home Court for Sport Bankruptcies

Dallas Stars attorney Martin A. Sosland spurned Texas courts when he put the hockey team into bankruptcy this month, partly because of the way the Texas Rangers baseball club was treated by a hometown judge.

The day the Rangers entered Chapter 11 protection in May 2010, Sosland, the team’s attorney, sought permission to quickly pay small creditors such as hot dog and beer suppliers, who were owed less than $3.5 million. U.S. Bankruptcy Judge Michael Lynn in Fort Worth, Texas, rejected the request and creditors had to wait months until the team was sold at auction for $593 million, court papers show.

This time, Sosland opted for the bankruptcy court in Delaware, more than 1,400 miles (2,250 kilometers) from the Stars’ offices in Frisco, Texas. The day after the team’s Sept. 15 filing, U.S. Bankruptcy Judge Peter Walsh took just minutes to approve immediate payment to vendors owed about $1.1 million. Walsh approved a plan to sell the Stars less than a week later.

“Some courts don’t grant those motions,” said Sosland, who works in Dallas for New York-based Weil Gotshal & Manges LLP, of the request to pay vendors. Typically, creditors of a bankrupt company must wait until the company’s reorganization plan is approved to be repaid.

That flexibility has helped to make Delaware’s bankruptcy bench in Wilmington, long popular with failing companies, the favored refuge of cash-strapped professional sports teams. Three of the last four U.S. major league teams to enter bankruptcy -- the Stars and Major League Baseball’s Los Angeles Dodgers and Chicago Cubs -- filed in Delaware.

‘In and Out’

“For the Stars, it looks like they want to get in and out as quickly as possible and Delaware is typically the best place to do that,” Evan Flaschen, a bankruptcy attorney in Connecticut with law firm Bracewell & Giuliani LLP, said in an interview. “The owners of the Dodgers and the Cubs may have been reluctant to be exposed to their hometown press and rabid fans every single day.”

Under the U.S. Bankruptcy Code, companies can file in any federal court district where they do business or are incorporated. Dallas Stars LP, while it has no operations in Delaware, is legally incorporated in the state, along with more than half of the 500 biggest U.S. companies listed in Fortune magazine’s annual ranking.

There are 94 U.S. bankruptcy courts, including one in Guam and another in the Virgin Islands. Since 1980, about one-third of all large public companies that filed for bankruptcy did so in the Delaware court, according to a database maintained by Lynn LoPucki, a law professor at the University of California, Los Angeles.

Cubs Sale

The Stars were preceded in bankruptcy by the Dodgers in June and the Cubs in 2009. The Cubs went to Delaware because that was where the team’s former owner, Tribune Co., filed its own Chapter 11 case in 2008, said Brian Krakauer, the team’s lead bankruptcy attorney.

Tribune, a Chicago-based newspaper publisher, was burdened by debt from a 2007 leveraged buyout led by real-estate billionaire Sam Zell. After Tribune worked out a deal to sell control of the Cubs, the team entered court protection to complete the deal and exited within days.

The Dodgers filed to reorganize after baseball Commissioner Bud Selig rejected owner Frank McCourt’s proposed television deal with News Corp.’s Fox Sports. The Dodgers are seeking to sell TV rights at auction while in bankruptcy. Selig says McCourt should be forced to sell the team.

The Dodgers’ lead bankruptcy attorney, Bruce Bennett of law firm Dewey & Leboeuf LLP, declined to comment on why the team chose to file in Delaware rather than California.

‘Fire Drill’

Delaware offers advantages to companies, or sports teams, looking for court protection, said Samuel J. Gerdano, executive director of the American Bankruptcy Institute. The group’s 13,000 members include lawyers and financial advisers who specialize in corporate reorganizations.

Judges in Delaware and its main rival for bankruptcy business, New York, handle so many large Chapter 11 cases that they know how to avoid getting bogged down in legal wrangling, especially in the early days, when a company needs quick approval to keep the lights on, pay employees and satisfy vendors, Gerdano said.

“The Delaware bankruptcy court is widely respected and regarded as one of the top two venues for complicated Chapter 11 matters,” Gerdano said in a telephone interview. “It’s not a fire drill for them.”

Chapter 11 refers to the part of the bankruptcy code that allows companies to cut debt, reorganize and continue operating.

Sabres, Coyotes

Including the Stars, at least seven major league professional franchises have filed U.S. bankruptcies since 1998, four from the National Hockey League and the three baseball teams. In addition, the NHL’s Ottawa Senators sought protection in Canada in 2003.

The NHL’s Buffalo Sabres filed the same year in Buffalo, New York, after owner Adelphia Communications Corp. entered bankruptcy. The Phoenix Coyotes followed in 2009 in Phoenix. The Pittsburgh Penguins filed in Pittsburgh in 1998.

Robert Sable, a bankruptcy attorney who helped guide the Penguins through Chapter 11, said sports teams face burdens most companies don’t when they file for bankruptcy at home. Angry fans may pack the courtroom, and local judges may be influenced by the team’s impact on the community, he said.

“There is a great deal of interest and people are charmed by celebrity,” Sable said.

‘Not Leaving’

In the Penguins’ and Coyotes’ cases, bankruptcy judges rejected sales to bidders who sought to move the teams.

“The judge in the Penguins case said, ‘This team is not leaving Pittsburgh,’” Sable said. Filing in another city “might have opened up the possibility of a sale” to a buyer who wanted to move the team, fetching a higher price, he said.

The Pittsburgh court eventually approved a sale to a group that promised to keep the team in town, led by former all-star hockey player Mario Lemieux. The NHL ended up buying the Coyotes and is seeking a new owner that will keep the team in Arizona.

The Stars’ auction is set for Nov. 21. Team owner Thomas Hicks previously sold the Rangers and his stake in the U.K.’s Liverpool Football Club. Hicks, who fell off the Forbes list of billionaires in 2010, invested cash and loans valued at about $150 million in the Stars, according to court records.

Stars Auction

Under a plan approved by the Stars’ major lenders, the team will be sold at an auction with an initial bid of about $150 million by Vancouver-based businessman Tom Gaglardi. Chuck Greenberg, former co-owner of the Rangers, has said through his attorneys that he will also bid for the team.

For Gerdano, the lesson is clear: “If you are looking to do something that might be viewed as a hostile act locally, you might want to find another venue.”

The Delaware cases are In re Dallas Stars LLP, 11-12935, The Los Angeles Dodgers LLC, 11-12010, and Tribune, CNLBC, LLC, 09-13496 U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net; Dawn McCarty in Wilmington, Delaware, at dmccarty@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.