Editor’s Note: For more information about this case, please read two features by Jonathan S. Covin and David G. Gamble that were published in the July/August and October 2010 issues, respectively.
If anyone doubts that baseball still lies in the soul of the American psyche, all they have to do is observe the controversy and emotion that surrounded the Texas Rangers bankruptcy case. More than any of the histrionics and battles between billionaires for control of the team, the Rangers case showed that bankruptcy law can withstand an outraged fan base screaming for their hometown hero, Nolan Ryan, to win the bid, withstand death threats to court officers from those same fans, endure lawyers trying the case in the media and rebuff the media itself as it whipped up fan emotion in its posture as the people’s advocate. The court and bankruptcy, in the end, did what they were designed to do: provide a fair price or fair process, and return $100 million more back to the creditors and the franchise than they would have received otherwise.
The Prologue
For the first time in team history, the Texas Rangers won two playoff series and advanced to the World Series in October 2010 to play the San Francisco Giants. This accomplishment is even greater than it seems on paper because they spent the majority of the season in bankruptcy. While the Rangers continued to play games and vie for the championship, a similar fight was taking place in the U.S. Bankruptcy Court for the Northern District of Texas.
On May 24, 2010, one month before I was appointed chief restructuring officer (CRO), the Rangers voluntarily filed for bankruptcy with a prepackaged plan to sell the team to a group of investors led by Chuck Greenberg and Nolan Ryan for $495 million on an exclusive basis. Though the Greenberg-Ryan Group received approval from Tom Hicks and Major League Baseball (MLB), the lenders objected to the plan, as it did not cover the defaulted loans they were holding and there were more lucrative offers on the table.
Greenberg and Ryan—the team’s functioning president and national idol of Texas baseball fans—were backed by the money of oil pipeline magnate Ray Davis and XTO Energy founder Bob Simpson, who sold his company to ExxonMobil. Greenberg would perform the negotiations, and Ryan would front for the group, which they called the Rangers Baseball Express (RBE), a take-off on Ryan’s old nickname, the Ryan Express.
When I was appointed CRO, it was clear that we needed either a fair price or a fair process to provide a satisfactory and transparent process—in other words, an auction—to get the best value for the Rangers. It was my responsibility to drive the best results for stakeholders by ensuring either fair price or fair process, which proved to be more difficult than one might expect.
The Decision against the Stalking-Horse Bid
The Rangers were in the middle of their season and playing well. The court, and Hon. D. Michael Lynn, were under immense pressure to get the team sold to a new owner while things were going well. Judge Lynn admitted that he did not want to drag the case out until the fall. It would have been simple to give in to the community pressure and sentiment for their baseball hero, Ryan. The court gave until July 8 to vote on the stalking-horse bid submitted by RBE.
In order to get a fair process or fair price or both, something was amiss on all fronts. First of all, there was the process, and only one week was given to analyze a transaction that had been in preparation for a year. The second red flag was the price.
The transaction negotiated between Hicks and RBE allowed Hicks to retain ownership of the parking lots and associated real estate surrounding Arlington Stadium, worth approximately $70 million. He was also to receive 1 percent of the team, transfer professional fees worth $9 million along with some personal debts, and receive a lease for the Stars-Rangers’ Boeing 757 to the team.
On June 30, during a meeting with Greenberg at the stadium in Arlington, I indicated that I was not in favor of voting the equity shares of the team to accept the stalking-horse bid. At that time, Greenberg indicated that he would accept a shortened auction process for the team and would derail the pre-bankruptcy deal. Prior to that time, Dallas investor Jeff Beck and Houston trucking magnate Jim Crane had shown their interest in buying the Rangers. Crane’s stalking-horse bid was $50 million higher than RBE—and the shortened auction process was on.
On July 6, a preset mediation presided over by Hon. Russell Nelms was held in Dallas. Crane revealed that they were having trouble obtaining financing and that the MLB indicated it had not approved Beck’s bidding team due to a lack of paperwork. In that case, the fair process that was developed would no longer yield the highest value for the Rangers, and it became imperative to work with the Greenberg-Ryan Group to negotiate a fair price.
The auction was called off, and Greenberg-Ryan were put on hold, much to the objection of the fans who were being fanned into a froth by the media. Due to death threats directed against the turnaround professionals, the U.S. Marshals got involved. There were negotiations with Crane to be the stalking horse with a new auction procedure that carved out the payments to insiders, of which the team was informed and the Greenberg-Ryan Group started to revamp their offer.
On July 12, RBE filed a lawsuit that compelled me to follow the plan of reorganization procedures. On July 13, the Greenberg-Ryan Group filed a new auction procedure; Judge Lynn modified it and entered the order for an auction to occur on Aug. 4. Although the judge later chided me for changing my mind, I had thought it important to remain flexible because if I was not going to get a fair process (i.e., an auction), I would get the best price possible for stakeholders. With a new stronger bidder emerging, a fair process would once again emerge, and it made sense to pursue the procedure.
Legal Fireworks
The time leading up to the July 13 hearing produced fireworks among the lawyers representing MLB, those representing the Greenberg-Ryan Group and Judge Lynn. The New York Times [2] reported that in a previously unreleased taped meeting with the lawyers on the case, Judge Lynn threatened to sanction Greenberg and Tom Lauria for trying the case in the media, stating that “I do not like being bullied, and I will not be bullied.” According to the newspaper, Judge Lynn threatened to file an ethics grievance with the state of Pennsylvania, where Greenberg practices law, if he ever used his status as a principal in the case to discuss bankruptcy law in the news media. “I don’t care if he says I’m wrong and I don’t care if he calls me an idiot,” Judge Lynn told Greenberg’s lawyer. “But he must do it as a principal.”
During the July 13 hearing, Andrew M. Leblanc, an attorney with Milbank, Tweed, Hadley & McCloy representing the ad hoc group of first-lien lenders, reported that RBE attorneys, including Lauria, had pressured to get the team sold before the July 31 MLB trade deadline because it was causing constraints on player trades. Noting that the Rangers obtained catcher Bengie Molina and star pitcher Cliff Lee, Leblanc said “that there aren’t meaningful constraints, despite what the court had been told about the constraints of July 31 as the trade deadline.” [3] Judge Lynn replied, “Mr. Lauria is an officer of this court, just as you are., and if I catch Mr. Lauria lying about that, his career is over. That villa in Tuscany will have to go back to the bank. So that’s why I have faith in Mr. Lauria, just as I do in you.”
Later, when referring to the RBE’s statement that their financing would fall apart by Aug. 12 if their bid was not approved, Judge Lynn said, “Yes, but by then, if it’s Aug. 13th when we default and Rangers Baseball Express comes back, they’ll come back without Mr. Lauria’s law license, unless they show why they got an extension.”
An Alternative Bid as a Back-Up
On July 15, the judge entered an order adopting his own auction procedure, pushing aside the procedure recommended by the debtors. By now I had concerns over the Aug. 4 auction. I had information that there were more potential bidders, but that there was not enough time for them to arrange their equity and debt financing.
I had a series of meetings with RBE/Greenberg-Ryan Group, and after a few choice words and some hair-pulling, I convinced them to remove the Hicks side deals from their bid. In my mind, I had a clean deal that was financed and resulted in more money for the creditors and team, so I filed a motion on July 29 to pre-empt the auction, which Judge Lynn denied at the banks’ request.
That wasn’t the end to the pre-auction moves. On Aug. 3, Greenberg negotiated a deal with the first-lien lenders. The second-lien lenders did not approve of the deal, and Judge Lynn, when telephoned at home by the lenders’ attorneys, reportedly said, “We’re going to have an auction.”
By then, the Crane-Cuban Group, as I anticipated, had run into problems. Cuban’s lenders did not give him a qualified bid. The term sheet that the banks gave to Cuban was contingent. At 1:30 a.m., they refaxed the term sheet, but only half of the banks had signed it, and Crane-Cuban was $100 million short.
An Auction or a Circus?
At 8 a.m. Aug. 4, we gathered for the auction at the courthouse in Fort Worth. Greenberg was ecstatic because as far as he knew as of 8 p.m. the previous night, Crane-Cuban was not a qualified buyer. However, working with Mediating Judge Nelms, Cuban was able to bridge the $100 million gap and the bidding started at 2:45 p.m.
At 4:15 p.m., RBE overbid, then it got more bizarre. MLB told the court that even if he were to get approved by the league, it most likely would not be until January. The league leaked word to the creditors that Cuban may never get approved. For the next four and a half hours, a raucous “Cuban discount” debate occurred, during which expletives between attorneys flew and Greenberg threatened to pull out of the auction if a Cuban discount was not imposed. Cuban, amenable and agreeable through the whole case, meanwhile was calling MLB owners and saying, “See, they will approve me.”
My counsel, Lou Strubeck of Fulbright and Jaworski LLP, came up with a settlement that required Crane-Cuban to bid in $10 million increments, while RBE could bid in $2 million increments, but there was no “Cuban discount” and bidding went up by $15 million and $20 million increments anyway. At 1:30 a.m., RBE won the team with a $593 million cash and assumed liabilities bid.
Happy Campers?
Here’s how Leblanc, the first-lien creditor’s attorney summarized the auction results in testimony during the confirmation hearing: “Our greatest fears of the process were not realized. Our greatest hopes of the process were, and I’m very happy to say that we were wrong... By our calculations, the proceeds to the lenders may have increased from as low as $210 million to as high as $340 million, which is an enormous result.” [4]
If there’s anything to be learned from the Rangers bankruptcy process, it is important for the CRO to remain flexible amid changing circumstances and stay focused on ensuring fair price or fair process. That is the only way to maximize value for all stakeholders and allow a winning team to emerge from bankruptcy with brighter prospects than ever before. The role of the two bankruptcy judges in this case was critical to its outcome. Judge Lynn was never intimidated by the external pressures and maintained transparency in the case. Judge Nelms worked tirelessly behind the scenes, keeping the process moving and keeping emotions to a minimum.
The postscript on the case is interesting. The acrimony in this case has lingered on far past the sale for a record price, as the creditors objected to fees charged by Weil Gotshal & Manges, the law firm that represented a Hicks Sports Group entity that owned the team, and to fees charged by investment banking firm Perella Weinberg Partners, which marketed the team for sale. Crane and Cuban asked for but withdrew their request for $2.6 million in fees and RBE withdrew a $100 million lawsuit against the Hicks group for breach of contract. The battling seemed to never end in this case.
1. As the court-appointed CRO in the case on June 22, 2010, the author had a large picture-window view of the case that had lawyers trying to intimidate judges, judges threatening lawyers with their licenses, hundreds of millions of dollars changing hands and after it was all over, battles over fees. This article is about his experience during the course of the case.
2. The New York Times, “In Rangers’ Case, an Annoyed Judge,” Richard Sandomir, Nov. 22, 2010.
3. Texas Rangers Baseball Partners v. Rangers Baseball Express, No. 10-43400-dml-11 (Bankr. N.D. Texas) July 13, 2010.
4. Texas Rangers Baseball Partners, confirmation hearing (Aug. 5, 2010) (Bankr. N.D. Texas).
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