A CRITICAL ANALYSIS OF SPORT ORGANIZATION BANKRUPTCIES IN THE
UNITED STATES AND ENGLAND: DOES BANKRUPTCY LAW EXPLAIN THE
DISPARITY IN NUMBER OF CASES?
Timothy D. Cedrone
I. Introduction
Under most prevailing definitions of “sports law,” the topic encompasses a wide range of
substantive legal fields, including contracts, labor, antitrust, tort, constitutional, agency, criminal,
tax, real estate, intellectual property, entertainment, communications, administrative, and
employment.1 One area of law absent from this list is bankruptcy law and its application to sport
franchises. The relative infrequency of American sport franchise bankruptcies may explain why
bankruptcy law has been pushed to the periphery of sports law discussion in the United States.
Since the passage of the 1978 Bankruptcy Code, only three franchises among the five major
professional sports leagues2 have filed for protection under the statute – the Pittsburgh Penguins,
Buffalo Sabres, and Los Angeles Kings, all franchises in the National Hockey League (“NHL”).3
In England, the story is much different; football clubs4 file for insolvency protection much more
frequently, with forty-three administration cases arising under the 1986 Insolvency Act as of the
end of 2007.5 Two of the most notable cases involved Wimbledon FC and Leeds United. The

B.S. in Business Administration with concentrations in Sport Management and Finance, 2006, Seton Hall
University; J.D., expected May 2009, Seton Hall University School of Law. Special thanks to Professor Stephen
Lubben for his invaluable guidance and assistance. Special thanks also to Professor Kurt Rotthoff and Professor
Marc Edelman for their help on this project.
1
Timothy Davis, What Is Sports Law?, 11 MARQ. SPORTS L. REV. 211 (2001).
2
For the purposes of this article, the five major professional sports leagues are Major League Baseball, Major
League Soccer, National Basketball Association, National Football League, and National Hockey League.
3
Joe Lapointe, Hockey; A Financial Sign of the Times, N.Y. TIMES, Jan. 28, 2003, at D1.
4
Certain differences in American and English vernacular have been taken into account in this Comment. As such,
the American term “soccer” will not be used in reference to the game in England; the term “football” will be used.
“Bankruptcy” and “insolvency” (and their derivatives) are used interchangeably.
5
See Paul Robinson, Leeds United in the Balance, YORKSHIRE EVENING POST, Aug. 3, 2007 [hereinafter In the
Balance] (stating that all forty-one English Football League clubs who exited administration before Leeds United
did so via a company voluntary arrangement). Luton Town FC, playing in the third tier of English football (League
One), entered administration on November 22, 2007, making it the forty-third administration case. League 1 Luton
Town Enter Administration, ESPN, Nov. 22, 2007, http://soccernet.espn.go.com/news/story?id=484132&cc=5901.
1
Wimbledon FC case highlighted a key issue concerning the interaction of English insolvency law
with football clubs, specifically that of creditor repayment terms. More recently, the financial
and football freefall of Leeds United brought widespread attention to the interaction between
financially distressed teams and insolvency law in England.6
Why the disparity between the two countries? While one expects that certain economic
and financial conditions factor into the disparity, it may be possible that differences in the two
legal systems play a role. Taking this a step further, the underlying issue to examine is whether
one system is more suited to the potential parties involved in a sports bankruptcy case. This is
the basic question this Comment seeks to address – is the American or English bankruptcy
system better for debtors and creditors, thereby explaining the disparity in number of cases? A
comparison of the treatment of debtors and creditors in the United States against the same parties
in England reveals that the American system is generally superior in its administration of sport
organization bankruptcies When the primary advantages of the American system are juxtaposed
against those of the English system, the American system strikes a balance that best serves the
interests of debtors and creditors consistently and fairly while not benefiting one party at the
expense of the other. In short, the American bankruptcy system is better suited for handling
sport organization bankruptcies than the English system. Because the American system is better
suited, the disparity in filing numbers is not necessarily attributable to the structure of each legal
system, but rather to economic and sporting factors unrelated to bankruptcy law.
However, Luton Town had yet to exit administration as of May 1, 2008. Phil Hay, Leeds United 15 Points Row:
League to Stand Firm Over Points Policy, YORKSHIRE EVENING POST, May 8, 2008. Two other English football
clubs entered administration after January 1, 2008: AFC Bournemouth and Rotherham United. Neither had emerged
from administration as of May 1, 2008. Id.
6
A simple search of the BBC’s website, http://www.bbc.co.uk, conducted on October 31, 2007 resulted in
approximately 2,200 hits in regards to the 2007 Leeds United bankruptcy. While not all of these were about the
Leeds United bankruptcy, many of the resulting entries did relate to the football club. BBC – Home of the BBC on
the Internet, http://www.bbc.co.uk (search “Leeds United” “in administration” 2007) (last visited Oct. 31, 2007).
2
Accordingly, this Comment analyzes the preceding question through an examination of
three underlying components. Part II presents a factual background of selected sport franchise
bankruptcies in the United States and football club insolvencies in England: the Los Angeles
Kings, the Pittsburgh Penguins, and the Buffalo Sabres from the United States; and Wimbledon
FC and Leeds United from England. Part III explores the bankruptcy systems of the United
States and England, and the pertinent sections of the Bankruptcy Code and Insolvency Act,
respectively. Part III also discusses the sections of each statute that apply to American and
English sport organization bankruptcies, respectively, as seen through the representative cases.
Part IV compares the two bankruptcy systems as they relate to sport organization bankruptcies
based on the aforementioned teams. The Part addresses both the similarities and differences
between the two systems. Part V concludes the Comment.
This Comment seeks to serve two other purposes. First, it endeavors to inject bankruptcy
law into the sports law landscape by providing insights into the American and English
bankruptcy law and their treatment of sport organizations. Second, this Comment intends to
present a general, broad description of American and English sports bankruptcies for nonbankruptcy practitioners with basic knowledge of the two systems. It is not intended to be an
exhaustive analysis of the American and English bankruptcy systems and their treatment of sport
organizations for the experienced bankruptcy practitioner, knowledgeable academic, or the like.7
As such, this Comment examines the largest issues for sport bankruptcies under the two systems
and then draws its final conclusion in favor of the American system based on that examination.
II. Background of Sport Organization Bankruptcies in the United States and England
A. United States Sports Bankruptcies
7
For a more thorough and comprehensive analysis of American professional sport franchise bankruptcies, see Ralph
C. Anzivino, Symposium: Reorganization of the Professional Sports Franchise, 12 MARQ. SPORTS L. REV. 9 (2001).
3
Since the inception of the 1978 Bankruptcy Code, only three franchises among the five
major professional leagues have filed for protection under the Code: the Los Angeles Kings, the
Pittsburgh Penguins, and the Buffalo Sabres.8 On September 20, 1995, LAK Acquisition Corp.,
doing business as the Los Angeles Kings, filed a petition for protection under Chapter 11 of the
Bankruptcy Code.9 The bankruptcy of the team flowed from the individual bankruptcy of one-
8
Lapointe, supra note 3, at D1. These are not the only three franchises to have entered bankruptcy in the history of
American sports. During the late 19th century, several baseball teams in the National League declared bankruptcy
and folded. Scott Rosner, Symposium 6-4-3 (Double Play!) Two Teams Out: Contraction in Baseball Squeeze Play:
Analyzing Contraction in Professional Sports, 10 VILL. SPORTS & ENT. L. J. 29, 29 (2003). The teams included
franchises in Baltimore, Louisville, Washington, and Cleveland. Id. at 29 n.2. In 1954, the Indianapolis Olympians
of the National Basketball Association went bankrupt. Id. at 34. The California Golden Seals of the NHL went
bankrupt twice in the early 1970s before merging with the Minnesota North Stars. Id. at 35. This Comment will not
address these bankruptcies for two reasons. First, there is a lack of factual history on the franchises and their
financial difficulties as compared to the more recent cases. Second, the current U.S. Bankruptcy Code was enacted
in 1978 (and since amended), making any analysis of sport bankruptcies before 1978 uninformative for lack of
applicability to the current system.
Several teams in the North American Soccer League (“NASL”) filed for bankruptcy protection during its
existence from 1968-1985, including the Washington Diplomats, Minnesota Kicks, and Vancouver Whitecaps.
Sports; Roundup, N.Y. TIMES, Oct. 31, 1981, at D7; Kicks Ask Bankruptcy, N.Y. TIMES, Nov. 15, 1981, at D10;
Once-Flourishing NASL Comes to an End, N.Y. TIMES, Mar. 29, 1985, at C10. Several teams in the Major Indoor
Soccer League (“MISL”) filed for bankruptcy protection during that league’s existence from 1978-1992. (This
league was a predecessor to the current incarnation of the MISL.) Those teams included the Denver Avalanche, San
Diego Sockers, New York Arrows, New York Express, and New Jersey Rockets. Offer Expected for Denver Club,
N.Y. TIMES, Aug. 24, 1982, at B17; Marc Appleman, Sockers Grumble Way into Game 2, L.A. T IMES, May 11,
1988, at 3-1; Alex Yannis, Cosmos Triumph with Birkenmeier, N.Y. TIMES, July 26, 1984, at B9; N.Y. Express Kicks
the Bucket, CHI. TRIB., Feb. 18, 1987, at C9; Alex Yannis, Indoor Soccer Starts a New Season as a One-League
Sport, N.Y. TIMES, Nov. 7, 1982, at 5-13. This Comment will not address these bankruptcies any further in light of
the relative lack of information available on the specific situation of each team.
The Ottawa Senators of the NHL filed for bankruptcy protection in 2003. First-Place Senators File for
Bankruptcy Protection, ESPN, Jan. 9, 2003, http://espn.go.com/nhl/news/2003/0109/1489961.html. However, the
Senators did not file for protection under the US Bankruptcy Code. Id. The Senators filed under Canada’s federal
Companies’ Creditors Arrangement Act. Id.
Finally, a distinction should be drawn between American sport organizations that formally filed for chapter 11
bankruptcy protection and those that simply ceased operations without filing for bankruptcy protection. The NASL
disbanded without filing for bankruptcy in 1985. Once-Flourishing NASL Comes to an End, supra. The Women’s
United Soccer Association (“WUSA”) ceased operations in part to avoid filing a bankruptcy petition. Scott French,
Beginning or End – What Went Wrong in WUSA?, SI.com, Oct. 15, 2003, http://sportsillustrated.cnn.com/2003/
soccer/10/15/wusa.wrap.sa/index.html. The NFL, NBA, MLB, and NHL all had teams fold during the leagues’
formative years without bankruptcy petitions being filed. Rosner, supra, at 30-36. In some instances, such as with
Major League Baseball, this was because chapter 11 did not exist at the time. The MLS also contracted two teams
in 2002 (Tampa Bay Mutiny and Miami Fusion), although neither filed for bankruptcy protection. Id. at 36.
Because these organizations ceased operations without filing a bankruptcy petition, their situations are beyond the
scope of this Comment.
9
Petition for Chapter 11 Bankruptcy, In re LAK Acquisition Corp., No. LA9534180 (Bankr. C.D. Cal. Sept. 20,
1995).
4
time owner Bruce McNall, which left the team in financial disarray in the early 1990s.10 The
Kings’ case was unique in that the team filed for bankruptcy protection and was sold to a new
partnership group in the same day.11 The bankruptcy filing was essentially designed to approve
the sale of the team previously negotiated and approved by the NHL.12 Under the sale
agreement, the new ownership group, Majestic Anschultz Ventures (“MAV”), assumed all of
LAK’s hockey-related obligations, including player contracts, deferred compensation
agreements, arena and television contracts, $8.4 million owed to the NHL, and the NHL
Constitution.13 As a pre-packaged bankruptcy, the Kings’ bankruptcy was not a typical chapter
11 case.14 Nonetheless, it highlights aspects of the bankruptcy system that typical free-fall
chapter 11 cases do not.15
On November 13, 1998, the Pittsburgh Penguins filed a petition under chapter 11 of the
Bankruptcy Code.16 At the time, the Penguins owed creditors approximately $127 million17
while the team was valued at less than $100 million.18 Former player Mario Lemieux was the
Penguins’ largest unsecured creditor, with a claim for $32.5 million in deferred compensation.19
Then-owner Roger Marino cited losses of $37 million from 1996-98 and an inability to negotiate
NHL’s Kings Sold to Partnership, CHI. TRIB., Sept. 21, 1995, at N2.
Id.
12
Richard Wynne, Presentation at ABI Bankruptcy Battleground West, Sports Franchises and Bankruptcy Law 2
(Mar. 19, 1999) (transcript available at www.kirkland.com/siteFiles/kirkexp/publications/2572/Document1/Sports
%20Franchises.pdf).
13
Id. at 5.
14
Id.
15
Id.
16
Petition for Chapter 11 Bankruptcy, In re Pittsburgh Hockey Associates, No. 9828175 (Bankr. W.D. Pa. Nov. 13,
1998). The Penguins also filed for bankruptcy in 1974. Team Able to Continue Playing this Season, ESPN, Jan. 11,
2003, http://espn.go.com/nhl/news/2003/0109/1489961.html. However, the 1974 Penguins bankruptcy case will not
be discussed since it was filed before the current Bankruptcy Code was enacted in 1978.
17
Helene Elliot, Power Player; Lemieux Seems as Unstoppable as Ever in New Role as Penguin’s Owner, L.A.
TIMES, Nov. 2, 1999, at D1.
18
Wynne, supra note 12, at 7.
19
Elliot, supra note 17, at D1.
10
11
5
a more favorable lease at the site of Penguins’ home games as reasons for filing.20 About ten
months later, U.S. Bankruptcy Judge Bernard Markovitz approved a $95 million reorganization
plan under which an investment group led by Lemieux took control of the franchise and brought
it out of bankruptcy.21 According to press accounts, every unsecured creditor except Lemieux
received 100% full payment; Lemieux’s claim was settled for $21 million of the original $32.5
million.22 The Public Auditorium Authority also forgave $12 million owed for arena
improvements under terms of the plan.23 Unlike the Kings’ case, the Penguins bankruptcy was a
more exemplary chapter 11 case where the debtor entered bankruptcy with the purpose of
reorganization.
The most recent American sports bankruptcy case involved the Buffalo Sabres. The
Sabres filed a chapter 11 petition on January 13, 2003.24 When the petition was filed, the Sabres
owed their forty largest creditors more than $206 million.25 The Sabres’ creditors included
Adelphia Communications Corporation (the largest creditor with a $130 million claim), the City
of Buffalo, players, and the NHL Pension Society.26 While in bankruptcy, the Sabres were able
to obtain post-petition financing in the form of a $25 million loan to cover current operating
expenses.27 About three months after filing, the Sabres were sold to Tom Golisano in a $92
20
Wynne, supra note 12, at 6.
Court Gives Mario Lemieux OK To Take Over Penguins, CHI. TRIB., Sept. 3, 1999, at C2; Hat Trick Complete:
Super Mario Gets Court Approval to Own Penguins, CNN/SI, Sept. 11, 1999, http://sportsillustrated.cnn.com/
hockey/nhl/news/1999/09/04/penguins_lemieux_ap/.
22
Dave Molinari, Lemieux’s Settlement: $21 Million, PITTSBURGH POST-GAZETTE, Oct. 19, 2007, at A1.
23
Timothy McNulty, Council OKs Assumption of Penguins’ Arena Debt, PITTSBURGH POST-GAZETTE, July 29,
1999, at B1.
24
Petition for Chapter 11 Bankruptcy, In re Buffalo Sabres Inc., No. 0310216 (Bankr. W.D.N.Y. Jan. 13, 2003).
25
Sabres Officially File for Chapter 11, ESPN, Jan. 13, 2003, http://espn.go.com/nhl/news/2003/0113/1491754.
html.
26
Id.
27
N.H.L. Roundup; Yzerman Returns for Detroit, N.Y. TIMES, Feb. 25, 2003, at D7.
21
6
million reorganization plan.28 The plan included $45 million to assume liabilities, $25 million
for the Sabres’ debt, a $22 million loan, and payments for unsecured creditors of $2.5 million.29
Similar to the Penguins, the Sabres took advantage of chapter 11 to emerge from bankruptcy
with an improved financial situation.
B. English Football Insolvencies
Bankruptcies of professional football clubs in England occur much more frequently than
bankruptcies of American sport franchises in the five major U.S. professional leagues.30 There
are ninety-two professional football clubs in England, of which twenty are Premier League
members (the first tier of English football) and seventy-two are Football League members (three
lower divisions).31 These ninety-two clubs have combined to file forty-three administration
cases under the Insolvency Act between 1986 and 2007,32 including nineteen cases between 2001
and 2004.33 The two most notable English football insolvency cases involved Wimbledon FC
and Leeds United.
28
Jayson Blair, New Owners but the Same City for the Sabres, N.Y. TIMES, Mar. 15, 2003, at D1. The NHL had
assumed control of the franchise in June 2002 after John Rigas, the founder and chairman of Adelphia, was indicted
on federal fraud charges. Id.
29
Id.
30
English football clubs have a long history of financial instability. In 1931, the club Wigan Borough was £20,000
in debt and forced to resign from playing in September 1931. Babatunde Buraimo, Rob Simmons, & Stefan
Szymanski, The Financial Crisis in English Football, THE RIMINI GROUP, 5 (2004), http://www.imperial.ac.uk/
business/dynamic/other/RiminiGroup/report120304/Reports/England.doc. Thames FC disbanded in 1932 due to
significant debt and strong competition. Id. Accrington Stanley folded in 1966 after accumulating more than
£60,000 in debt. Id. at 6. Finally, Bradford Park Avenue folded in 1974 after sixty-six years of competition. Id.
All these cases arose before the passage of the 1986 Insolvency Act. As such, any analysis of these cases would be
inappropriate since they did not arise under the current system of English insolvency law.
31
David Smith, Reality Starts to Bite for Football, LONDON TIMES, Mar. 31, 2002.
32
See In the Balance, supra note 5. This number also includes the insolvency case of Luton Town FC that was still
pending as of May 1, 2008. There have not actually been forty-three clubs that have entered administration; some
clubs have entered administration more than once. For instance, Bradford City FC, Luton Town FC, and Swindon
Town FC each entered administration twice between 1999 and 2004. Buraimo, supra note 30, at 19. Luton Town
FC entered administration for a third time on November 22, 2007. League 1 Luton Town Enter Administration,
supra note 5.
33
Buraimo, supra note 30, at 20.
7
Wimbledon Football Club Limited entered administration on June 5, 2003.34 At the time,
Wimbledon FC, then a member of the Football League, owed its unsecured creditors more than
£24 million while only having assets totaling £230,000.35 In March 2004, Milton Keynes Dons
Limited and Wimbledon FC’s administrators agreed to a rescue plan under which Milton Keynes
Dons would purchase the assets of Wimbledon FC and assume certain of the club’s liabilities
and obligations.36 A substantial majority of Wimbledon FC’s creditors approved the terms of the
company voluntary arrangement (“CVA”).37 Under the terms of the CVA, Milton Keynes Dons
assumed control of the club and agreed to discharge £245,000 in debt, preferential creditors
received 30p-on-the-£1 for debts owed, non-preferential creditors received nothing, and football
creditors were paid in full (i.e., 100p-on-the-£1), despite their non-preferential status.38 One
preferential creditor, Inland Revenue Commissioners (“IRC”), did not initially agree to the
terms. IRC, which was owed £525,000, brought an action under Section 6 of the Insolvency Act
(“Section 6”) to either revoke or suspend the CVA on the grounds that the CVA violated Section
4(4) prohibiting non-preferential creditors from being paid in full before preferential creditors.39
The trial court held that the full payment of non-preferential football creditors did not violate
Section 4(4) since a third party purchaser of Wimbledon FC – Milton Keynes Dons – used its
own money to pay the creditors.40 Although the Wimbledon FC case was not distinctive for its
facts, the legal dispute between IRC and Wimbledon FC was a landmark case in English football
insolvency law.
34
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [2] (Eng.).
Id. at [2]-[3].
36
Id. at [5].
37
Id. at [21], IRC v. Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, [1] (Eng.), aff’d, [2004] EWCA
(Civ) 655 (Eng.).
38
Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, at [7], [17], [22].
39
Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, at [1].
40
Id. at [17].
35
8
In 2000, Leeds United was a semifinalist in the UEFA Cup.41 That same season, Leeds
finished third in the Premier League and qualified for the following season’s UEFA Champions
League, where the team reached the semifinals.42 Despite these football successes, Leeds United
was relegated (demoted) from the Premier League to the League Championship (second tier of
English football) after the 2003-04 season.43 The 2006-07 season found Leeds at the bottom of
the Championship table, and at the end of the season, the team was relegated to League One
(third tier of English football) for the first time in its history.44 In the span of just seven years,
Leeds United went from an English and European soccer powerhouse to a third tier team, a
spectacular collapse only rivaled by the club’s financial failures during the same period.
Leeds United Association Football Club Limited entered administration on May 4, 2007,
with debts of about £35 million.45 Shortly after three administrators from KPMG were
appointed, 46 the assets of Leeds United were sold, subject to creditor and Football League
approval, to a new company, Leeds United Football Club Limited.47 The head of the new
company was Ken Bates, who had previously taken control of the club in January 2005 when he
41
Leeds United the Official Website, Club History Through the Years 1990s, http://www.leedsunited.com/page/
ThroughTheyearsDetail/0,,10273~1033237,00.html [hereinafter Official Website] (last visited Oct. 24, 2007). The
UEFA Cup is organized by the Union of European Football Associations (UEFA) and is open to certain European
football teams finishing behind domestic league winners, winners of League Cup championships in certain
countries, and winners from two other qualifying rounds, the Intertoto Cup and the Fair Play League. UEFA.com,
UEFA Cup Competition Format, http://www.uefa.com/competitions/uefacup/format/index.html (last visited Oct. 24,
2007). Since the competition involves teams finishing behind the winners of their respective domestic leagues, the
UEFA Cup is largely regarded as the second most prestigious European football club championship behind the
UEFA Champions League.
42
Official Website, supra note 41. The UEFA Champions League is the most prestigious club competition in
Europe. UEFA.com, UEFA Champions League Competition Format, http://www.uefa.com/competitions/ucl/
format/index.html (last visited Oct. 24, 2007). This prestige is largely due to the competition participants, which
include the winner of each country’s domestic league and clubs finishing just behind the winners in certain countries
(such as England, Germany, Italy, France, Spain, and Portugal). Id.
43
Julie Tonney, The Demise of Leeds United, BBC, May 4, 2007, http://news.bbc.co.uk/sport2/hi/football/teams/l/
leeds_united/6601611.stm.
44
Id.
45
Press Release, Leeds United Ass’n Football Club Ltd., Statement (May 4, 2007) (available at http://www.
leedsunited.com/page/NewsroomDetail/0,,10273~1021180,00.html). Football League Withhold Leeds’ “Golden
Share,” ESPN, July 12, 2007, http://soccernet.akamai.espn.go.com/news/story?id=445046&&cc=5901.
46
Press Release, supra note 45.
47
Id.
9
bought a 50% stake in the club.48 By early June 2007, 75.2% of creditors backed Bates’ plan to
offer them 1p-on-the-£1 of debts owed.49 This amount was later raised to 8p50 and 52.9p-on-the£1 after HM Revenue and Customs (“HMRC,” England’s tax department), a club creditor,
mounted a legal challenge to the initial deal.51 HMRC later dropped the legal challenge,
allowing Leeds to exit administration under a 52.9p-for-every-£1 open market sale to Bates.52
Because Leeds did not exit administration via a CVA under which football creditors receive
every penny owed53 (as preferred by the Football League), the club suffered a fifteen point
penalty in the standings at the start of the 2007 season.54
III. The Bankruptcy Systems of the United States and England
A. The United States Bankruptcy System and the Bankruptcy Code, 11 U.S.C. §101
1. Chapter 7 of the Bankruptcy Code
The current bankruptcy system in the United States is codified in the federal Bankruptcy
Code.55 The Code was first enacted in 1978 and has since been amended several times, most
recently in 2005.56 A company will file a petition for protection with the Bankruptcy Court
48
Id.
MP Demands Inquiry into Leeds United, BBC, June 13, 2007, http://news.bbc.co.uk/1/hi/england/west_
yorkshire/6748465.stm.
50
Leeds Lose Points Appeal, BBC, Aug. 9, 2007, http://news.bbc.co.uk/sport2/hi/football/teams/l/leeds_united/
6937521.stm.
51
Paul Robinson, Taxman Pulls out of Leeds United Court Challenge, YORKSHIRE EVENING POST, Aug. 31, 2007
[hereinafter Taxman].
52
Id. The creditors will only receive 52.9p for every £1 owed if Leeds returns to the Premier League within ten
years of the deal, which is the start of the 2017-18 season. We Want the Lot from Leeds United, YORKSHIRE
EVENING POST, Aug. 7, 2007.
53
In the Balance, supra note 5.
54
Taxman, supra note 51. Leeds filed an appeal of the fifteen point penalty with an English court, arguing that the
Football League acted outside its jurisdiction in levying the penalty. Leeds to Hear Points Appeal Fate on
Wednesday, ESPN, April 15, 2008, http://soccernet.espn.go.com/news/story?id=526077&cc=5901. An independent
arbitration panel subsequently ruled against Leeds after both parties agreed to move the case out of English court.
Leeds 15-point Deduction Stands, Says Tribunal, ESPN, May 1, 2008, http://soccernet.espn.go.com/news/story?id=
530776&cc=5901.
55
Bankruptcy Code, 11 U.S.C. §§ 101-1532 (2005).
56
Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. 109-8, 119 Stat. 23 (2005).
49
10
under one of two chapters: chapter 7 liquidation57 or chapter 11 reorganization.58 When a
company files a bankruptcy petition under chapter 7, a court appointed trustee will liquidate the
company’s assets.59 The company does not receive a discharge of its debts; however, a
discharge typically is not needed since a liquidated company is unlikely to be sued by creditors. 60
American sport franchises can file for chapter 7 liquidation; however, no professional sports
team has filed a chapter 7 petition since 1978.61 The liquidation of chapter 7 debtors makes it
unlikely that a sport franchise would file for chapter 7 protection, particularly since chapter 11
gives the franchise an opportunity to emerge from bankruptcy as a going concern.
2. Chapter 11 of the Bankruptcy Code
Chapter 11 is most relevant to American sports bankruptcies. Generally, the purpose of
chapter 11 is to restructure a business’s finances so that it may continue to operate.62 Businesses
may commence a chapter 11 case on a voluntary basis.63 A business entity filing for chapter 11
protection may be a partnership, a corporation, or any other type of businesses.64 Insolvency is
not a prerequisite for filing a chapter 11 bankruptcy petition; a business may simply be unable to
11 U.S.C. § 701.
Id. § 1101.
59
John D. Ayer, Michael Bernstein, & Jonathan Friedland, Welcome to the Jungle, 22-6 ABIJ 24, 25 (2003)
[hereinafter Welcome to the Jungle].
60
Id.
61
See Lapointe, supra note 3, at D1 (stating that since the passage of the 1978 Bankruptcy Code, only three
professional sport franchises have filed for protection under the statute – the Pittsburgh Penguins, the Buffalo
Sabres, and the Los Angeles Kings – and they filed under chapter 11). One sport organization to have filed a
chapter 7 petition since 1978 was the Continental Basketball Association (“CBA”). Petition for Chapter 7
Bankruptcy, In re IT Acquisitions LLC, No. 0101806 (Bankr. W.D. Mich. Feb. 23, 2001). C.B.A.; League Files for
Bankruptcy, N.Y. TIMES, Feb. 26, 2001, at D8. Since the CBA was a league with constituent member teams, its
structure does lend itself to further analysis and comparison with solitary franchise bankruptcies. As such, the CBA
liquidation, with no clear English parallel, will not be addressed.
62
In re Dolton Lodge Trust No. 35188, 22 B.R. 918, 922 (Bankr. N.D. Ill. 1982).
63
11 U.S.C. § 109(d).
64
Id.
57
58
11
pay creditors and other debts.65 A company initiates a voluntary66 chapter 11 case by paying the
requisite filing fee and filing a petition for relief with the Bankruptcy Court clerk. 67
Several key players emerge after a bankruptcy petition is filed. The first is the
bankruptcy judge, who makes the key determinations in a bankruptcy case.68 The second key
player is the debtor in possession (“DIP”). Upon commencement of a chapter 11 case, the debtor
generally remains in possession of its property and continues to manage it.69 Consequently, the
directors and officers of the DIP will continue to manage the business’s operations.70 This is in
contrast with chapter 7 liquidation, in which an outside trustee liquidates the company on the
company’s behalf.71 The third key player is the creditors’ committee, which must be appointed
“as soon as practicable after the order of relief under chapter 11.”72 The committee consists of
unsecured creditors and additional committees may be appointed if the U.S. Trustee deems it
appropriate.73 The committee’s responsibilities include negotiating a plan of reorganization with
the debtor and overseeing the operations of the DIP.74
These three key players – the judge, the DIP, and the creditors and their committee – all
must conduct their affairs in a bankruptcy proceeding pursuant to the statutory provisions of the
Bankruptcy Code. The most significant Bankruptcy Code provisions for sport organizations are:
2 COLLIER ON BANKRUPTCY § 301.11 (15th ed. 2007) (citing In re Beery, 680 F.2d 705, 711 (10th Cir. 1982)).
Creditors may commence involuntary cases against businesses under chapter 11. 11 U.S.C. § 303.
67
John D. Ayer, Michael Bernstein, & Jonathan Friedland, The Life Cycle of a Chapter 11 Debtor Through the
Debtor’s Eyes: Part I, 22-7 ABIJ 20, 50 (2003) [hereinafter Life Cycle Part I].
68
Welcome to the Jungle, supra note 59, at 24.
69
11 U.S.C. §§ 1101-1108 (2005). A trustee may be appointed by the court to operate the business if there is cause,
including “fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current
management.” 11 U.S.C. § 1104(a).
70
7 COLLIER ON BANKRUPTCY § 1100.06 (15th ed. 2007).
71
Welcome to the Jungle, supra note 59, at 25.
72
11 U.S.C. § 1102(a)(1).
73
Id.
74
Id. § 1103.
65
66
12
the automatic stay,75 post-petition financing,76 executory contracts,77 voidable preferences,78 the
reorganization plan,79 and discharge of the case.80
When a company files a bankruptcy petition, an automatic stay is placed into effect.81
The automatic stay essentially operates as an injunction against legal actions affecting the debtor
or its property,82 thus giving the DIP a chance to reorganize and preventing creditors from
disassembling the DIP’s property.83 The automatic stay protects creditors as a group by halting
any actions by individual creditors seeking to satisfy their claims using state law remedies.84
Section 362(b) provides several exceptions to the automatic stay85 and creditors and other
“parties in interest” may seek relief from the stay provided the parties meet the standards set
forth in Section 362(d), including establishing cause via a lack of adequate protection.86 The
automatic stay plays a significant and important role in bankruptcy proceedings for the DIP,
creditors, and others, because it ensures the debtor a chance to reorganize without disruptive
litigation and guarantees more equitable treatment of creditors.
Id. § 362.
Id. § 364.
77
11 U.S.C. § 365 (2005).
78
Id. § 547.
79
Id. § 1121.
80
Id. § 1141.
81
Id. § 362. Section 362(a) states that a petition filed pursuant to the Bankruptcy Code “operates as a stay,
applicable to all entities of the commencement or continuation…of a judicial, administrative, or other action or
proceeding against the debtor that was or could have been commenced before the commencement of the case under
[the Bankruptcy Code].”
82
Life Cycle Part I, supra note 67, at 51.
83
7 COLLIER ON BANKRUPTCY § 1100.05 (15th ed. 2007) (citing 11 U.S.C. § 362 and H.R. REP. NO. 95-595, at 340
(1977)).
84
Life Cycle Part I, supra note 67, at 50.
85
11 U.S.C. § 362(b). The exceptions provided in Section 362(b) are numerous, as evidenced by the twenty-eight
subsections contained in Section 362(b). Some of the exceptions where the stay is not applicable include criminal
proceedings against the debtor, civil actions concerning certain domestic and family relations issues, certain
securities and commodities actions, and specified taxation cases.
86
Id. § 362(d).
75
76
13
In a sport bankruptcy case, the automatic stay will protect the franchise’s contract rights
and leases (the franchise’s primary property) from litigation.87 In the Penguins case, SMG
Pittsburgh, the lessor of the Civic Arena to the Penguins, sought relief from the stay for cause to
permit a pending arbitration between SMG and the Penguins to go forward.88 However, the
court did not find sufficient cause to lift the stay.89 The Penguins’ ability to halt the arbitration
proceedings by virtue of the automatic stay is a clear example of the power of Section 362.
A DIP may require working capital to operate its business after filing the bankruptcy
petition.90 Such post-petition financing is typically arranged before the bankruptcy petition is
filed, although the DIP may secure financing via cash collateral financing or post-petition credit
after filing.91 Cash collateral is cash (or equivalents) in the DIP’s possession subject to the
claims of a secured creditor.92 Cash collateral financing entails obtaining court approval to use
such cash for expenses in the post-petition period.93 The Code further provides that post-petition
financiers receive priority over other creditors if they extend post-petition credit.94 This
administrative priority for post-petition lenders entitles lenders to repayment before other
unsecured creditors.95 This rule therefore gives lenders an incentive to loan money to bankrupt
companies that are likely to successfully emerge from chapter 11.
The need for and ability of a sport franchise to obtain post-petition financing is of utmost
significance due to a franchise’s large operating expenses. As such, teams will likely move
87
Anzivino, supra note 7, at 24-25.
Id. at 26 (citing Motion for Relief from Automatic Stay at 3-4, Penguins’ bankruptcy (No. 98-281740); Record at
38).
89
Id.
90
7 COLLIER ON BANKRUPTCY § 1100.07 (15th ed. 2007).
91
Anzivino, supra note 7, at 19.
92
11 U.S.C. § 363(a) (2005).
93
Id. § 363(c). See also Anzivino, supra note 7, at 19-20 and Charles J. Tabb, A Critical Reappraisal of CrossCollateralization in Bankruptcy, 60 S. CAL. L. REV. 109, 141 n.165 (1986).
94
11 U.S.C. § 364(c)(1).
95
7 COLLIER ON BANKRUPTCY, supra note 90 (citing 11 U.S.C. § 364).
88
14
quickly to obtain the needed funding. For example, the Buffalo Sabres were able to secure, with
court approval, a $10 million line of credit to be used for operating expenses one day after filing
the bankruptcy petition.96 The Penguins’ procurement of post-petition financing was more
intricate. First, the Penguins used cash collateral generated from ticket sales, advertising
revenues, and television revenues to finance expenses.97 Second, the Penguins secured a $2.5
million post-petition line of credit.98 Finally, the court granted the Penguins “authority for a
superpriority lien over existing secured creditors” for a maximum of $20 million.99 Given the
ways in which the Sabres and Penguins secured post-petition financing, it is clear that courts are
willing to approve a variety of post-petition financing arrangements for a bankrupt sport
franchise due mostly to the significant current operating expenses of the franchise.
During the bankruptcy period, the DIP may assume or reject any of its executory
contracts or unexpired leases, subject to court approval.100 The decision whether to perform
(assume) or not to perform (reject) executory contracts is typically based on the potential of the
contract’s profitability.101 The subsections of Section 365 provide for limited exceptions where
the DIP may not assume or assign certain executory contracts. Under Section 365(c)(2), a
chapter 11 debtor may not assume an executory contract or unexpired lease if the contract is “a
contract to make a loan, or extend other debt financing or financial accommodations, to or for the
benefit of the debtor.”102 In other words, where an executory contract contains a financial
96
Sabres to Have Revenue Coming in, ESPN, Jan. 14, 2003, http://espn.go.com/nhl/news/2003/0114/1492743.html.
Anzivino, supra note 7, at 21 (citing Interim Order Authorizing Use of Cash Collateral at 5, Penguins’ bankruptcy
(No. 98-28174); Record at 30).
98
Id. at 22.
99
Id. at 23 (citing Memorandum Opinion, Penguins’ bankruptcy (No. 98-28174); Record at 259).
100
11 U.S.C. § 365(a) (2005). “An executory contract is one in which performance remains due to some extent on
both sides” of the agreement. Life Cycle Part I, supra note 67, at 51.
101
7 COLLIER ON BANKRUPTCY, supra note 90.
102
11 U.S.C. § 365(c)(2).
97
15
accommodation agreement, the contract is generally non-assumable.103 Despite this exception,
Section 365 provides a company with an effective mechanism to help itself reorganize as it
allows the company to exit contracts that may be inhibiting the company from being solvent.
The ability of the DIP to assume or reject any executory contract or unexpired lease may
be a sports franchise’s most important tool in successfully reorganizing for three reasons. First,
the debtor sport franchise has the power to assume its franchise agreement with its league,
thereby maintaining its membership in the league.104 Assumption of the franchise agreement is
imperative as it is the foundation for a franchise’s reorganization.105 Furthermore, since
assumption of the agreement will ensure the agreement remains in force, any ipso facto clause in
the agreement that causes the agreement to terminate upon the franchise’s bankruptcy will be
unenforceable.106 The unenforceability of the ipso facto clause ensures that the debtor
franchise’s membership will not be revoked and the team will not be eliminated.107
Second, the DIP’s ability to assume or reject unexpired leases is significant in relation to
the facility in which the franchise plays home games. Since not all franchises play in facilities
they own, some must lease one for home games.108 The decision to assume or reject the lease
will be largely based on the lease terms and whether the team can obtain more financially
favorable terms.109 Before the Lemieux plan was filed, the bankruptcy court had determined that
the lease with SMG for use of the Civic Arena was not a “true” lease but a “financing device to
103
U.S. Dept. of Air Force v. Caroline Parachute Corp., 907 F.2d 1469 (4th Cir. 1990); In re Nitec Paper Corp., 43
B.R. 492 (Bankr. S.D.N.Y. 1984).
104
Anzivino, supra note 7, at 28-29.
105
Id. at 31.
106
Id. at 35.
107
Id. at 29, 35. See also Wynne, supra note 12, at 8-12.
108
See Anzivino, supra note 7, at 37. For example, the New York Giants and New York Jets of the National
Football League and Red Bull New York of MLS all lease Giants Stadium, site of their home games, from the New
Jersey Sports & Exposition Authority. Meadowlands.com, Giants Stadium Facts & Figures, http://www.
meadowlands.com/giantsFacts.asp?navID=7 (last visited Oct. 28, 2007).
109
Anzivino, supra note 7, at 38-39.
16
ensure that [the Penguins] repaid a loan SMG had made to enable the group led by [previous
owner] Howard Baldwin to purchase the Penguins.”110 This could have implicated the financial
accommodation agreement exception to Section 365; however, this issue was not fully resolved
as the decision was later vacated.111 In the end, the Penguins rejected their lease under the
Lemieux plan and reduced their rent payment to SMG from $6 million per year to $1 million.112
Third, the contract of each player who plays for the bankrupt franchise is treated as an
executory contract since some future performance is due to a material extent on both sides.113 As
an executory contract, the franchise has the power to reject or assume each player’s contract. If
the team rejects a contract, the rejection is considered a breach of contract,114 and the player will
have a pre-petition claim for the breach.115 Finally, Section 365 may potentially be applicable to
contracts for luxury suites, personal seat licenses, club seats, ticket sales, naming rights,
advertising, and concessions.116 Regardless of the subject matter of the contract, rejection or
assumption of an executory contract is a powerful means by which the debtor franchise can
improve its financial position.
Some creditors also receive protection under the voidable preferences section of the
Bankruptcy Code.117 Regardless of the debtor’s intent, any transfer of an interest of the debtor to
a creditor for a debt owed by the debtor may be voided if it was made while the debtor was
insolvent and within ninety days before the date of the filing of the bankruptcy petition, such that
it enables the creditor to receive more than the creditor would have received if the business were
110
In re Pittsburgh Hockey Assoc. Holding Co., 239 B.R. 75, 86 (Bankr. W.D. Pa. 1999), vacated, 1999 Bankr.
LEXIS 1872 (1999).
111
Id.
112
Elliot, supra note 17, at D1.
113
Anzivino, supra note 7, at 45.
114
11 U.S.C. § 365(g) (2005).
115
Anzivino, supra note 7, at 46.
116
Id. at 47-59.
117
11 U.S.C. § 547.
17
liquidated under chapter 7.118 Provided the transfer does not fall within one of the statutory
exemptions,119 Section 547 can provide for more equitable distributions to creditors by
preventing one creditor from receiving an unjust payment over another creditor.
Although voidable preferences have not been a significant issue in sport franchise
bankruptcies, it is possible for an issue to arise. For example, a team foreseeing an impending
bankruptcy filing may wish to pay a portion of a player’s deferred compensation if the player is a
favorite of the team and the fans. Wayne Gretzky was owed millions in deferred compensation
when the Kings filed for bankruptcy.120 If a team made a transfer to Gretzky within ninety days
of filing the petition which would have given Gretzky more than he would have gotten under
liquidation, the transfer could be voidable under Section 547. A voidable preference could also
arise in relation to league loans. It is not uncommon for leagues to lend money to its teams. For
example, the NFL loans teams up to $150 million for new stadiums.121 If a team were to pay
down a portion of that debt before filing a bankruptcy petition, it could potentially be voided as a
preferential transaction.
The last significant step in a typical bankruptcy case is the submission and confirmation
of a reorganization plan.122 Reorganization plans frequently provide for comprehensive changes
in the financial structure of the debtor.123 A key component of a reorganization plan is the
payment terms, i.e., what creditors can expect to receive as a result of the reorganization
process.124 Some reorganization plans are pre-packaged plans, where the DIP negotiates a
reorganization plan with its major creditors and obtains the requisite consent of those creditors
Id. § 547(b).
Id. § 547(c).
120
Wynne, supra note 12, at 5.
121
Josh Peter, Building NFL Fortunes, THE TIMES-PICAYUNE, July 14, 2002, at S1.
122
11 U.S.C. § 1121.
123
John D. Ayer, Michael Bernstein, & Jonathan Friedland, The Life Cycle of a Chapter 11 Debtor Through the
Debtor’s Eyes: Part II, 22-8 ABIJ 32, 44 (2003) [hereinafter Life Cycle Part II].
124
7 COLLIER ON BANKRUPTCY § 1100.09 (15th ed. 2007).
118
119
18
before filing for protection.125 Pre-packaged plans can gain court approval rather quickly, 126 as
seen in the Kings’ case. Sport organization reorganization plans commonly consist of selling the
debtor franchise to a third party, 127 as exemplified in the Kings, Penguins, and Sabres cases.
At the outset of the bankruptcy process, only the DIP can propose the reorganization plan
for the first 120 days after filing the bankruptcy petition.128 If each class of creditors has not
accepted a plan filed within the 120 day exclusivity period, the period can be extended another
sixty days.129 After expiration of the exclusivity period, any party in interest may file a plan for
reorganization.130 The party proposing a plan will first negotiate the plan with creditors and then
draft a disclosure statement containing the information a reasonable investor would need to make
an informed judgment when voting on the plan.131 After approval of the statement is obtained
from the court, a vote is taken and the plan goes to the court for approval.132 If the required
majorities of creditor classes are obtained in the vote, as set forth in Sections 1126 and 1129(a),
confirmation typically proceeds unimpeded.133 If the required majorities are not obtained, the
plan can still be confirmed and imposed on creditors (“crammed down”), provided at least one
class of creditors voted to accept the plan and the treatment provided for the creditors under the
125
Id.
Id. Pre-packaged plans are different than Section 363(b) sales, which allow for the DIP to use, sell, or lease
property of the estate outside the ordinary course of business after notice and a hearing. Elizabeth Rose, Comment,
Chocolate, Flowers, and § 363(b): The Opportunity for Sweetheart Deals without Chapter 11 Protections, 23
EMORY BANKR. DEV. J. 249, 249 (2006) (citing 11 U.S.C. § 363(b)). Such a sale allows the debtor to achieve a
quick approval for the sale of all or substantially all of its assets without complying with the plan confirmation
requirements of Section 1129. Id. None of three NHL cases was a Section 363(b) sale.
127
See Anzivino, supra note 7, at 60 (citing In re Lehigh Valley Prof’l Sports Club, Inc., No. 00-11296DWS, 2000
WL 290187, at 15, 20 (Bankr. E.D. Pa. 2000)).
128
11 U.S.C. § 1121(b) (2005).
129
Id. § 1121(c)(3).
130
Id. § 1121(c). The definition of a party in interest is rather broad; however it is not intended to include every
conceivable entity that might be involved in or affected by a chapter 11 case. 7 COLLIER ON BANKRUPTCY § 1109.03
(15th ed. 2007). “In general, an entity that does not hold a financial or legal stake in the case is typically excluded
from the definition of ‘party in interest’.” Id.
131
Life Cycle Part II, supra note 123, at 44. 11 U.S.C. § 1125.
132
7 COLLIER ON BANKRUPTCY, supra note 124.
133
See Life Cycle Part II, supra note 123, at 44-45.
126
19
plan does not discriminate unfairly and is equitable.134 Regardless of how the plan is confirmed,
confirmation discharges the debtor from any unpaid claims and binds all parties to the terms and
conditions of the plan.135 The discharge upon confirmation essentially concludes the bankruptcy
period for the DIP, although there are post-plan considerations in many cases.136
Sport franchise reorganization plans will restructure the franchise either through a plan in
which the current ownership maintains control or through a liquidating plan in which new
ownership takes over the team.137 The plans for the Kings, Penguins, and Sabres all involved
new ownership where the previous owners were replaced with new (and solvent) investors. The
Kings’ reorganization plan consisted of a pre-packaged sale of the team from LAK Acquisition
Corp. to MAV. Under terms of the plan, MAV, pursuant to Section 365, assumed all of LAK’s
hockey-related obligations, including player contracts, deferred compensation agreements, arena
and television contracts, $8.4 million owed to the NHL, and the NHL Constitution.138 In the
Penguins case, three plans were submitted to creditors after the exclusivity period ended.139 One
was proposed by SMG and a local television network, one by the NHL, and one by Mario
Lemieux and his group of investors; Lemieux’s was the plan approved by the court.140 The
Sabres also had multiple reorganization plans proposed. The first was presented by Mark
Hamister, but his bid to buy the team failed because of a lack of financing.141 Tom Golisano’s
proposed reorganization plan was accepted by the court.142 The latter two cases are examples of
134
Id. at 44.
11 U.S.C. § 1141 (2005).
136
Life Cycle Part II, supra note 123, at 45. The author points out that after a plan is confirmed, “[a] number of
important aspects often remain to be completed after confirmation. This may include consummating transactions
provided for in the plan, resolving claims and litigating adversary proceedings.” Id.
137
Anzivino, supra note 7, at 60.
138
Wynne, supra note 12, at 5.
139
Anzivino, supra note 7, at 62.
140
Id. at 62-63.
141
N.H.L. Roundup; Yzerman Returns for Detroit, supra note 27.
142
Blair, supra note 28, at D1.
135
20
teams reorganizing under plans proposed after the exclusivity period expires. In addition, all
three cases were resolved after substantial negotiations with interested parties,143 ensuring that no
contested cram-down would occur. Based on these cases, it is evident that professional sport
franchises are most likely to exit chapter 11 via a sale to a third party under a reorganization plan
proposed by the third party purchaser.
B. The English Bankruptcy System under the Insolvency Act
1. Non-Football Specific Provisions of the Insolvency Act
In 1986, the English Parliament passed the Insolvency Act, which instituted the current
bankruptcy law regime in England.144 The Insolvency Act governs all bankruptcy proceedings in
England.145 Under the Insolvency Act, there are three primary insolvency procedures:
liquidation, company voluntary arrangements (CVAs), and administration.146
As in the United States,147 liquidation is the statistically most common insolvency
procedure for English companies, with the majority of cases relating to small companies.148
When an English company liquidates, its assets are distributed to its creditors in the statutory
Wynne, supra note 12, at 2 (stating the Kings sale “had been negotiated by the major parties, the bank which had
financed the team, the NHL and the creditor constituents”); Golisano Closing in on Sabres Purchase, N.Y. TIMES,
Apr. 5, 2003, at S6 (stating NHL commissioner Gary Bettman helped broker the transaction between Tom Golisano
and Adelphia Communications, the previous owner of the Sabres); Elliot, supra note 17, at D1 (stating Lemieux, his
advisors, the bankruptcy judge, several politicians, and a mediator all engaged in contentious negotiations).
144
Insolvency Act, 1986, c. 45, preamble, sched. B1 (Eng.). The Insolvency Act of 1986 was amended by the
Insolvency Act of 1994, the Insolvency Act of 2000, and the Enterprise Act of 2002. Unless otherwise stated, all
references to the Insolvency Act are to the version in force as of 2007 and as cited here.
145
Id.
146
RICHARD E. BAINES, DOING BUSINESS IN THE UNITED KINGDOM § 15.03(1) (Barbara Ford ed., 2002) (available
on Lexis-Nexis). Until the Enterprise Act of 2002, administrative receiverships were a fourth method under which
insolvency proceedings could be brought. However, the Enterprise Act abolished the procedure. John Armour &
Rizwan Jameel Mokal, Reforming the Governance of Corporate Rescue: The Enterprise Act 2002 2 (ESRC Centre
for Business Research, Working Paper No. 288, 2004), available at http://ssrn.com/abstract=567306 [hereinafter
Reforming Corporate Rescue]. As such, administrative receiverships will not be further addressed.
147
Douglas A. Henry, Subordinating Subordination: Worldcom and the Effect of Sarbanes-Oxley’s Fair Funds
Provision on Distributions in Bankruptcy, 21 BANK. DEV. J. 259, 268 n.72 (2004) (citing CHARLES J. TABB, THE
LAW OF BANKRUPTCY 1.22, at 68 (1997)).
148
BAINES, supra note 146, at § 15.06(1).
143
21
order of priority.149 The two forms of liquidation under the Insolvency Act are winding up by
the court (compulsory or involuntary winding up) and voluntary winding up.150 Regardless of
whether the winding up is voluntary or involuntary, the company is essentially dissolved upon
completion of the process.151
While liquidation may be the most statistically common insolvency procedure for
companies in England, it is highly unlikely that an English football team would liquidate. Since
1986, no English football clubs have liquidated pursuant to the Act; instead, any club seeking
protection under the Act has filed an administration order.152 Dissolution of a club would seem
unlikely since both a CVA and an administration order would provide the insolvent club with an
opportunity to continue as a going concern, thereby undoubtedly appeasing fans, players, the
Football Association (“FA”; the governing body of football in England), and most likely
creditors. One court has even stated that liquidation of a football club must be avoided at all
costs so that player contracts will not be terminated.153
Company voluntary arrangements primarily serve two purposes within the English
insolvency system. For small companies, a CVA can be used as a stand-alone rescue
procedure.154 More commonly, CVAs are used in conjunction with administration proceedings
where the CVA enables the company to expedite a binding compromise with its creditors.155
Specifically, this procedure is available when the administrator of the debtor company intends to
149
Id. See also Exeter City Council v. Bairstow, [2007] EWHC (Ch) 400, [55] (Eng.).
Insolvency Act § 73.
151
BAINES, supra note 146, at § 15.06(1).
152
See In the Balance, supra note 5.
153
IRC v. Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, [8] (Eng.), aff’d, [2004] EWCA (Civ) 655
(Eng.).
154
BAINES, supra note 146, at § 15.03(1). A small company is defined under the Companies Act of 1985 as a
company satisfying two or more of the following requirements: turnover (the English term for revenue) of less than
£5.6 million, balance sheet assets not exceeding £2.8 million, and no more than 50 employees. Companies Act,
1985, c. 6, § 247 (Eng.).
155
BAINES, supra note 146, at § 15.05 (citing Insolvency Act §§ 1-7).
150
22
make a proposal to the company and its creditors for a composition of debts to be conducted
under the supervision of a bankruptcy practitioner.156 Regardless of whether the CVA is used as
a stand-alone or a rescue procedure, the assets of a company are used to pay preferential
creditors before non-preferential creditors; if they are not, the CVA may not gain approval and is
subject to legal challenge.157 This was evidenced by IRC v. Wimbledon Football Club, where
IRC brought an action under Section 6 to either revoke or suspend the CVA precisely on these
grounds.158 Upon approval of a CVA by creditors and the insolvent company’s board of
directors, the decision to implement the CVA binds all creditors of the company, including
unknown creditors, and the CVA process is concluded.159
Company voluntary arrangements are the norm in English football insolvencies.
Although CVAs can be used as a stand alone procedure for rescuing small companies, no
football club has used a CVA in such a manner. Rather, football clubs typically use CVAs as an
exit route from administration, with all but one club having done so between 1986 and 2007.160
By using a CVA to exit administration, clubs can avoid a potential fifteen point reduction in the
standings similar to the one suffered by Leeds United.161 Under the terms of a CVA, all of the
football club’s creditors will be bound by the agreement, including players.162
The third insolvency procedure available to English companies is administration.
Administration is a procedure for appointing an administrator to a company with a goal of
ensuring the survival and rehabilitation as a going concern of a potentially or actually insolvent
Insolvency Act § 1.
Id. § 4(4). A preferred creditor is one who has a higher statutory claim to payment of debts owed than another.
See BAINES, supra note 146, at § 15.06(4)(a). The specified statutory order of payment is: HMRC (formerly Inland
Revenue), H.M. Customs & Excise, social security contributions, occupational pension program contributions, and
employee wage-related debts. Insolvency Act Sch. 6.
158
Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, at [1].
159
BAINES, supra note 146, at § 15.05(7)(h). See also Insolvency Act § 5.
160
In the Balance, supra note 5.
161
See Taxman, supra note 51.
162
BAINES, supra note 146, at § 15.05(7)(h). See also Insolvency Act § 5.
156
157
23
company.163 Wimbledon FC was an example of a club that was actually insolvent, with assets of
only £230,000 against debts surpassing £24 million.164 Administration is essentially a court
order that places a company under the control of an insolvency expert (the administrator) and
offers legal protection from actions brought by creditors and other parties.165 A company enters
administration premised on one of three purposes: rescue of the company if reasonably practical;
to obtain a better result for creditors than under liquidation if rescue is not reasonably practical;
or, if neither of the previous two is practical, to distribute the company’s property among secured
or preferred creditors.166
An administration case commences upon the filing of an administration application, or
petition. The insolvent company, the company’s directors, or any creditor of the company may
file a petition with the court for an administration order.167 After the petition is filed, the court
will hold a hearing on the application, and decide whether to dismiss it or grant a final
administration order.168 Two factors must be satisfied before the order is granted: first, the
company must be, or is likely to become, unable to pay its debts and second, the administration
order is reasonably likely to achieve the purpose of administration (rescue of the company).169 In
all forty-three administration cases between 1986 and 2007, it has been apparent that each club
has had a reasonable chance of emerging as a going concern, thereby enabling the club to enter
administration with the purpose of rescuing the club as opposed to liquidating.
BAINES, supra note 146, at § 15.04(1). See also Exeter City Council v. Bairstow, [2007] EWHC (Ch) 400, [55]
(Eng.).
164
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [2]-[3] (Eng.).
165
Buraimo, supra note 30, at 19. See also BAINES, supra note 146, at § 15.04(1).
166
See BAINES, supra note 146, at § 15.04(4)(a). The Enterprise Act of 2002 replaced the four statutory purposes of
administration as stated in the Insolvency Act of 1986 with this three-part test. Id.
167
Id. at § 15.04(2)(a).
168
Id. at § 15.04(2)(d).
169
Hammonds v. Pro-fit USA Ltd., [2007] EWHC (Ch) 1998, [18]-[20] (Eng.).
163
24
Once the administration order is granted, the stay on legal proceedings instituted when
the petition was initially filed remains in force.170 The granting of the administration order also
has other effects, including dismissal of any previously presented winding up petitions and a bar
on creditors attempting to enforce any security over the company’s property. 171 During the
period of administration, a football club will enjoy a stay on any legal proceedings in which it is
involved and a prohibition on the institution of new legal proceedings against the club.172 The
stay is subject to specific provisions in the Insolvency Act permitting legal actions, such as
Section 6, which permits certain parties to challenge a CVA if it “unfairly prejudices the interests
of a creditor” or if there has been an irregularity at a creditors meeting.173 It was pursuant to
Section 6 that IRC was able to bring suit against Wimbledon FC in relation to the CVA terms.
While a company is in administration, certain transactions may be invalidated by the
court upon request of the administrator, thereby relieving the company of potentially financially
debilitating obligations.174 Examples include transactions at an undervalue175 and preferential
transactions.176 A transaction at an undervalue is one in which a company enters into a
transaction with a party where the company receives no consideration or the value of the
consideration received is “significantly less than the value . . . of the consideration provided by
the company.”177 However, if the company entered into the transaction in good faith and for the
purpose of carrying on its business, and there were reasonable grounds to believe the transaction
would benefit the company at the time it was entered into, the transaction cannot be voided.178
BAINES, supra note 146, at § 15.04(2)(e). See also Insolvency Act, 1986, c. 45, §§ 6-28 (Eng.).
Insolvency Act §§ 6-28.
172
BAINES, supra note 146, at § 15.04(2)(e). See also Insolvency Act § 10(1)(c).
173
Insolvency Act § 6.
174
Id. §§ 238-241.
175
Id. § 238.
176
Id. § 239.
177
Id. § 238(4).
178
Ramlort Ltd. v. Reid, [2004] EWCA (Civ.) 800, [27] (Eng.).
170
171
25
In the sporting context, a transaction at an undervalue could occur where a club’s player becomes
unable to play for the team before having played in a game. In such a case, the consideration
given by the club in the form of payment to the player would arguably be significantly more than
the consideration given by the player. Although an administrator may be able to challenge a
player’s contract under Section 238, an administrator is more likely to relieve the club of the
contractual obligation by selling the player to another team.
A preferential transaction occurs when a company enters into a transaction with a creditor
where the result of which is to put that person, upon insolvency of the company, in a position
better than he would have been if the transaction had not occurred.179 Such a transaction is
voidable if it was entered into within six months of the start of the insolvency case.180 For
example, a payment to HMRC in excess of the percentage it should otherwise receive could be
invalidated with court approval as a preferential transaction. In short, the administrator will need
to look at the football club’s transactions to determine if he can invalidate any to improve the
club’s financial situation.
The administrator has other significant powers. Upon appointment by the court, the
administrator takes control of the business and has the power to do all things necessary for the
management of the business.181 This can include selling company property,182 such as player
contracts, 183 to generate cash for the company. An administrator may also secure loans to
finance the company, with such lenders typically receiving priority over other creditors.184 The
Insolvency Act § 239(4).
Id. §§ 239-240.
181
Id. at § 14(1)(a). See also Re T&N Ltd., [2004] EWHC (Ch.) 2361, [76] (Eng.).
182
Insolvency Act §§ 14-15.
183
While in administration, Luton Town FC sold several key players to other clubs to raise needed funds. Blackwell
and Backroom Staff Set to Quit Luton, ESPN, Jan. 11, 2008, http://soccernet.espn.go.com/news/story?id=
497326&cc=5901.
184
See Reforming Corporate Rescue, supra note 146, at 34 (citing Insolvency Act, 1986, c. 45, Sch. B1, ¶ 99(4)
(Eng.)).
179
180
26
administrator may, but is not required to, permit the directors of a business to continue to
exercise their responsibilities.185 The Leeds United administrators were three KPMG
employees.186 The administrator is generally not subject to the direct control of the court or
creditors.187 The administrator must propose the rescue plan to creditors for a vote within eight
to ten weeks after his appointment.188 After the vote is taken, the administrator will propose to
the court a statement for achieving the purposes set forth in the administration order within five
months (unless given an extension by the court) of approval of the order.189
In pursuit of achieving the purposes of administration, exit routes, including CVAs, are
introduced into the process where possible.190 The exit routes can include rescue and/or
reorganization plans, sales to new entities under a CVA or at open market, or other steps that will
achieve a better realization of the debtor’s assets if rescue is not possible.191 Rescue plans almost
always provide for a new ownership group to take over control of the club,192 such as in the
Wimbledon FC case where Milton Keynes Dons purchased the team out of bankruptcy.193 Upon
successful completion of a rescue plan, football clubs usually emerge with significant buying
power in the players market, having freed themselves of previously burdensome debt.194 The
Football League prefers clubs to exit administration via a CVA, and not an open market sale, to
185
See Re T&N Ltd., [2004] EWHC (Ch.) 2361, at [76].
Press Release, supra note 45.
187
BAINES, supra note 146, at § 15.04(3)(e).
188
John Armour, Audrey Hsu, & Adrian Walters, The Costs and Benefits of Secured Creditor Control in
Bankruptcy: Evidence from the UK 4 (Center for Business Research, Research Programme on Corporate
Governance, Working Paper No. 332, 2006), available at http://ssrn.com/abstract=912302 (citing Insolvency Act,
¶¶ 49, 51).
189
BAINES, supra note 146, at § 15.04(3)(d).
190
Id. at § 15.04(4)(f).
191
Id.
192
Buraimo, supra note 30, at 26.
193
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [5] (Eng.).
194
Adam M. Rapp, Explaining the Bankruptcy “Crisis” in English Football: Ownership Style and the WagePerformance Relationship 1996-2003 55 (May 2004) (unpublished A.B. thesis, Stanford University) (available
online at http://www-econ.stanford.edu/academics/Honors_Theses/Theses_2004/Rapp.pdf).
186
27
ensure that football creditors are paid in full.195 Of the forty-two completed administration cases
between 1986 and 2007, only Leeds United exited via an open market sale.196 Because the Leeds
United exit route was an open market sale and not a CVA, the other seventy-one members of the
Football League voted to penalize the club fifteen points in the standings for the 2007-08
season.197 Wimbledon FC, on the other hand, exited administration via a CVA, and was
therefore not additionally penalized in the same manner as Leeds United.198
2. The Football Creditor Rule and the Insolvency Act
Section 4(4) of the Insolvency Act prohibits non-preferential debt from taking priority
over preferential debt under the terms of a CVA.199 Under Section 4(4), it would appear that
football creditors (players, coaches, the FA, employees, etc.), who are non-preferential creditors,
would have lower priority than would HMRC and other preferential debtors. However, under
the Football League’s football creditor rule, all football creditors are to be paid in full if the club
wishes to remain a member of the League after exiting administration.200 Any club which fails
to pay football creditors in full when exiting administration will not be permitted to transfer its
share in the Football League to a new ownership group, thereby retaining league membership.201
Consequently, football creditors, normally last in preference under the Insolvency Act, are
preferred over other creditors. Despite the facial incongruity of Section 4(4) and the football
creditor rule, the legality of the rule was affirmed in IRC v. Wimbledon Football Club. In
Wimbledon FC, the Chancery Division held that if a third party purchaser of a company in
195
In the Balance, supra note 5.
Id. See also Taxman, supra note 51.
197
Taxman, supra note 51.
198
See In the Balance, supra note 5 (stating that all forty-one English Football League clubs who exited
administration before Leeds United did so via a CVA).
199
Insolvency Act, 1986, c. 45, § 4(4) (Eng.).
200
IRC v. Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, [5]-[6] (Eng.). See also TheFA.com,
Constitution and Administration, http://www.thefa.com/TheFA/RulesAndRegulations/Additional/Postings/2005/11
(last visited Oct. 29. 2007).
201
Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, at [5].
196
28
administration uses its own money to pay creditors of the company, it does not amount to a
payment of non-preferential creditors in priority over preferential creditors in violation of
Section 4(4).202 The court reasoned that the Insolvency Act did not preclude such payments and
there could therefore “be no objection to payment by the buyer of the priority debts in full.”203
As a result of Wimbledon FC, two conclusions are apparent. First, football creditors will receive
priority over non-football creditors, regardless of the statutory scheme. Second, any third party
purchaser of a club in administration must pay all football creditors in full before the club can
retain its membership share in the Football League.
3. Non-Statutory Issues in Football Insolvency Cases
Any football club entering administration also has certain non-statutory concerns it must
examine. First, any of the ninety-two professional football teams in England that enters an
insolvency event is subject to a deduction in points,204 commonly ten in total.205 This could
potentially cause the relegation of a team to a lower tier if the ten point deduction drops the team
to the bottom of the division. When Leeds United entered administration, the ten point
deduction ensured relegation from the League Championship to League One.206
Second, a club entering administration runs the risk of losing its membership share. Each
of the seventy-two clubs in the Football League owns one of seventy-two shares of Football
League Ltd., with such ownership being a precondition for participation and membership in the
Football League.207 Upon entering administration, the Football League will withhold this
202
Id. at [17].
Id.
204
TheFA.com, The Football Association Financial Advisory Committee – Report to the Football Association Board
and the Independent Football Commission 2004, 8, http://www.thefa.com/NR/rdonlyres/C78670E4-FC3D-4AF2A526-59DEA094982E/56533/FAC_2004Report.pdf [hereinafter 2004 FAC Report] (last visited Oct. 30, 2007).
205
Id.
206
Leeds United Call in Administrators, BBC, May 4, 2007, http://news.bbc.co.uk/2/hi/business/6624731.stm.
207
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [1] (Eng.). A club in administration can play
without its golden share for up to eighteen months. In the Balance, supra note 5.
203
29
“golden share” unless and until the club exits administration, upon which the share will be
returned or transferred to the new ownership, provided several conditions are met.208 These
conditions primarily include paying all football creditors in full, providing projected financial
forecasts and funding confirmation of the club’s ability to operate, and satisfying any other
conditions implemented by the Football League.209 In the case of Leeds United, the Football
League transferred the club’s golden share to Ken Bates’ ownership group despite the open
market sale and only after the fifteen point deduction in the standings.210 Point deductions and
the inability of English football clubs to control their league membership are two critical factors
for a club’s management to examine before deciding to enter administration.
IV. Similarities, Differences, and Comparison of American Sport Franchise and English
Football Club Bankruptcies
A. Similarities between the Two Systems
The similarities between the treatment of American sport franchises under the
Bankruptcy Code and English football clubs under the Insolvency Act involve six topics:
liquidation, certain procedural and eligibility rules, stays on legal proceedings, voidable
preferential transfers, post-petition financing, and reorganization plans.
Under each system, a team is able to liquidate if the organization is sufficiently insolvent
that recovery as a going concern is a practical impossibility.211 In both countries, the team would
discontinue its business operations. The organization would no longer play in the league in
which it is a member; in the U.S., the franchise agreement would be breached and in England,
Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, at [1], [5] (quoting the Football League’s articles of
association and its insolvency policy).
209
Id.
210
Leeds Lose Appeal Against 15-Point Penalty, ESPN, Aug. 9, 2007, http://soccernet.espn.go.com/news/story?
id=451461&cc=5901. See also Leeds United Will Start the Season with a 15-Point Deduction, LONDON TIMES,
Aug. 10, 2007, at 72.
211
11 U.S.C. § 701 (2005). Insolvency Act, 1986, c. 45, § 84 (Eng.).
208
30
the club’s golden share would be withdrawn. Liquidation in both systems for sport organizations
is essentially equivalent in terms of the ultimate impact on the debtor team: dissolution.
Certain conceptual and procedural parallels also emerge from the foregoing discussion.
First, both chapter 11 and administration have a primary purpose of restructuring a company’s
finances so that it may continue as a going concern.212 Second, voluntary and involuntary
proceedings are possible in both systems, and a case commences with the filing of a petition for
protection.213 Third, the debtor team need not actually be insolvent to file a petition; the sport
organization need only be unable to meet certain debt obligations.214
One critical similarity between the two systems is the stay on legal proceedings instituted
at the commencement of a case.215 The stay provides sport organizations in both systems with
the opportunity to reorganize without cumbersome litigation being brought by creditors.
Without the stay, creditors in both systems would likely disassemble an organization’s assets,
leaving nothing for some creditors and potentially resulting in the team being unable to continue
as a going concern.216 Furthermore, the stay enables franchises in the United States and clubs in
England to focus on the reorganization process as opposed to focusing on litigation brought by
overzealous creditors.217 Thus, in both systems, the stay on legal proceedings is essential to the
team emerging as a going concern.
Both the Bankruptcy Code and the Insolvency Act permit preferential transactions to be
voided where the transaction results in giving a creditor more than it would have received if the
212
In re Dolton Lodge Trust, No. 35188, 22 B.R. 918, 922 (Bankr. N.D. Ill. 1982). Exeter City Council v. Bairstow,
[2007] EWHC (Ch) 400, [55] (Eng.). See also BAINES, supra note 146, at § 15.04(4)(a).
213
11 U.S.C. § 109. BAINES, supra note 146, at § 15.04(2)(a).
214
2 COLLIER ON BANKRUPTCY § 301.11, supra note 65. Buraimo, supra note 30, at 19.
215
11 U.S.C. § 362. Insolvency Act § 6-28. See also In re Petition of Brierley, 145 B.R. 151, 166 (Bankr. S.D.N.Y.
1992).
216
See Anzivino, supra note 7, at 24.
217
See id.
31
company were to be liquidated.218 Although the two systems differ in timing (ninety days in the
U.S. versus 180 in England219), the general principle is still the same: teams can void preferential
transactions, thereby recovering money previously transferred to creditors to be used in a more
equitable distribution to all creditors.
Debtor sport organizations in both systems will be able to obtain post-petition financing
with relative ease. Under the Bankruptcy Code, sport franchises have several options available
to secure necessary funding. Based on their ability to do all things necessary for the
management of the club, 220 an administrator has a similar level of flexibility in acquiring
financing. Furthermore, both systems provide post-filing lenders with repayment priority over
certain other creditors.221 Although the Insolvency Act lacks specific post-petition financing
provisions, this dissimilarity with the Bankruptcy Code does not mitigate the two overarching
congruencies between the two systems: the debtor’s ability to obtain funding after filing and
lenders receiving priority over other lenders.
The most significant way in which the American and English bankruptcy systems parallel
each other is the reorganization plan. First, the rules of chapter 11 and administration allow
parties other than the debtor team and its creditors to pull the team out of bankruptcy.222 For
example, the Sabres were sold out of bankruptcy to Tom Golisano under a $92 million plan.223
Similarly, Wimbledon FC exited administration via a sale agreement with Milton Keynes Dons
11 U.S.C. § 547 (2005). Insolvency Act, 1986, c. 45, § 239 (Eng.).
11 U.S.C. § 547(b). Insolvency Act § 240(b).
220
See BAINES, supra note 146, at § 15.04(3)(a) (citing Insolvency Act § 14(1)(a)).
221
11 U.S.C. § 364(c)(1). See Reforming Corporate Rescue, supra note 146, at 34 (citing Insolvency Act ¶ 99(4)).
222
11 U.S.C. § 1121. BAINES, supra note 146, at § 15.04(4)(f).
223
Blair, supra note 28, at D1.
218
219
32
pursuant to a CVA.224 Leeds United was sold out of administration in an open market sale to
Leeds United Football Club Limited and Ken Bates.225
The second way in which reorganization plans in both countries are similar is that they
both provide the terms by which creditors will be paid. In the Kings’ case, MAV simply
assumed all of LAK Acquisition’s outstanding debt.226 The Lemieux plan took a different
approach, with all secured and unsecured creditors receiving 100% of money owed except for
Lemieux himself, who received about 65% of what he was owed.227 In the Sabres case, $45
million was used to assume liabilities, $25 million for debt service, and $2.5 million for
unsecured creditors.228 In England, the terms of creditor payment vary to the extent that football
creditors (unsecured creditors) receive 100% of money owed when the club exits via a CVA.229
In the Wimbledon FC case, preferential creditors received only 30p-on-the-£1,230 and in the
Leeds United case, creditors received 52.9p-on-the-£1.231 While there may be differences in how
much creditors receive under plans in the two countries, the basic, key concept is still the same:
reorganization plans in both systems state the terms by which creditors are paid.
The final way in which the reorganization process in each country is similar is in the
inclusion of creditors in the process. In typical American bankruptcies, creditors will vote on the
reorganization plan.232 Similarly in England, creditors will vote on whether to approve a
proposed CVA.233 The involvement of creditors in sport organization bankruptcies is readily
apparent from the Penguins, Wimbledon FC, and Leeds United cases. Before his plan was
224
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [17] (Eng.).
Taxman, supra note 51.
226
Wynne, supra note 12, at 5.
227
Molinari, supra note 22, at A1.
228
Blair, supra note 28, at D1.
229
In the Balance, supra note 5.
230
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [17] (Eng.).
231
Taxman, supra note 51.
232
11 U.S.C. § 1129 (2005).
233
Insolvency Act, 1986, c. 45, § 258(1) (Eng.).
225
33
approved by creditors and the court, Mario Lemieux negotiated with several creditors, bringing
in a mediator at one point.234 In the Wimbledon FC case, a “substantial majority” of creditors
approved the CVA, notwithstanding the legal challenge brought by IRC.235 Despite initially
gaining the approval of 75.2% of creditors, Ken Bates negotiated with creditors extensively,
particularly HMRC, until the creditors received the 52.9p-on-the-£1 deal.236 Thus, creditor
involvement in sport organization bankruptcies appears to be the norm, and is also characterized
by contentious disputes over payment terms.
In sum, the similarities between the two systems provide a foundational basis for
understanding the two systems and their treatment of sport organization bankruptcies. By
drawing out the similarities between the two systems, a person familiar with one system should
have an improved conceptual framework of how the alternative system operates. Furthermore,
the similarities between the two systems serve to highlight the differences between the
Bankruptcy Code and the Insolvency Act, which are discussed below.
B. Differences in the Two Systems and the Advantages They Create
The differences in treatment of sport organizations under each system relate to six areas:
choice of protection under the relevant statute, control of the organization’s operations, league
membership, executory contracts and transactions at an undervalue, treatment of creditors, and
non-statutory, league-based sanctions. Within each of these areas, one system treats debtors and
creditors in a superior manner than does the other.
234
See Elliot, supra note 17, at D1 (stating Lemieux, his advisors, the bankruptcy judge, several politicians, and a
mediator all engaged in contentious negotiations).
235
Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, at [21].
236
MP Demands Inquiry into Leeds United, supra note 49. Taxman, supra note 51.
34
American sport franchises seeking bankruptcy protection will generally be limited to
filing a chapter 11 petition (assuming it wishes to continue as a going concern).237 In England,
football clubs wishing to continue as a going concern have two insolvency protection options:
CVAs and administration. While all forty-three clubs that have sought protection under the
Insolvency Act between 1986 and 2007 have entered administration, the CVA as a stand-alone
procedure for rescue is available for any club fitting within the meaning of a small company
under the Companies Act of 1985.238 Thus, at least a small number of football clubs can choose
between a stand-alone CVA and administration when seeking insolvency protection. No such
option exists under the Bankruptcy Code for sport franchises planning to continue operations;
they must file for chapter 11 protection.239 In this situation, the debtor team has an advantage in
the English system to the extent that it is a small company, because it can choose the procedure
best suited to meet the club’s financial goals. Where the club is not a small company, neither
system presents an advantage for the debtor team in terms of choices because there are none.
237
Anzivino, supra note 7, at 10.
Although many clubs will not fit within the meaning of a small company, some lower division clubs have in the
past. For example, the 2004-05 season had at least three teams that fit within the definition of a small company
under the Companies Act. Oxford United FC Ltd. had turnover of £2.379 million and exactly 50 employees during
the 2004-05 season, during which the club played in League Two, the fourth tier of English football. The Political
Economy of Football, Oxford United FC Ltd., http://www.footballeconomy.com/stats2/eng_oxford.htm (last visited
Jan. 9, 2008). Then-League One side Torquay United FC Ltd. had turnover of £1.480 million and exactly 50
employees. The Political Economy of Football, Torquay United FC Ltd., http://www.footballeconomy.com/
stats2/eng_torquay.htm (last visited Jan. 9, 2008). Finally, York City FC had turnover of £1.255 million and 48
employees while playing the 2004-05 season in the Football Conference, England’s fifth tier of professional
football. The Political Economy of Football, York City Association and Football Club plc, http://www.
footballeconomy.com/stats2/eng_york.htm (last visited Jan. 9, 2008).
239
Businesses wishing to emerge from bankruptcy as a going concern have the option of reorganizing under state
law. Alan J. Feld, Note, The Limits of Bankruptcy Code Preemption: Debt Discharge and Voidable Preference
Reconsidered in Light of Sherwood Partners, 28 CARDOZO L. REV. 1447, 1447-1449 (2006). See also Erika Lovley,
Small Firms Spurn Chapter 11, WALL ST. J., Jan. 24, 2007, at B6B (stating that some states also regulate the
bankruptcy process). States have the power to enact creditor collection regimes without being preempted by the
federal Bankruptcy Code. Feld, supra, at 1448. States are also free to enact statutes regulating assignments for the
benefits of creditors, which are voluntary transfers of property, usually to a trustee or “general assignee,” who
administers the property, liquidates it, and distributes the proceeds equitably to all creditors. Id. at 1448 (citing John
Hanna, Contemporary Utility of General Assignments, 35 VA. L. REV. 539, 539-540 (1949)). One study has
concluded that state insolvency proceedings are faster and less expensive than federal bankruptcy proceedings.
Lovley, supra, at B6B. However, state systems are typically ill-equipped for handling multiple creditor dealings.
Id. As such, sport franchise bankruptcies are therefore exceedingly unlikely to reorganize under a state law regime.
238
35
The same holds true for creditors, where the English system is advantageous only if the club is a
small company. Otherwise, creditors in one system do not enjoy an advantage over creditors in
the other in terms of choice of procedure.
The Bankruptcy Code generally permits a debtor franchise to remain in possession of its
property and to continue managing that property.240 The directors and officers of the debtor’s
business also continue to operate the business.241 For an American sport franchise, this means
that the team can continue administering player contracts, run facilities it owns, and let the front
office staff conduct team business operations as it normally would. The team maintains control
over itself. In England, the administrator takes control of the football club when appointed by
the court and he has the power to do all things necessary for the management of the business.242
Unless the administrator permits otherwise, the football club’s management loses control of
business operations. This difference is a significant point of departure between the two
systems.243 Consequently, the debtor team enjoys an advantage operating under the American
system because it retains control of the business while pulling the team out of bankruptcy. The
English system places the debtor team at a comparative disadvantage since a person potentially
unfamiliar with the intricacies of the club gains control. Creditors are not at a distinct advantage
under either system as reorganization plans are subject to creditor and court approval.244
The treatment of a sport organization’s continuing membership in its respective league is
fundamentally different in the United States and England. In the United States, league
membership exists where a team has a franchise agreement in force with the league.245 In
11 U.S.C. §§ 1101-1108 (2005).
7 COLLIER ON BANKRUPTCY, supra note 70.
242
See BAINES, supra note 146, at § 15.04(3)(a) (citing Insolvency Act, 1986, c. 45, § 14(1)(a) (Eng.)).
243
Re T&N Ltd., [2004] EWHC (Ch.) 2361, [36] (Eng.). In re Petition of Brierley, 145 B.R. 151, 164 (Bankr.
S.D.N.Y. 1992).
244
See 7 COLLIER ON BANKRUPTCY, supra note 124, and BAINES, supra note 146, at § 15.04(3)(d).
245
Anzivino, supra note 7, at 28.
240
241
36
English football, league membership is conferred on a team when the team owns one of the
seventy-two available shares of the Football League or one of twenty shares of the Premier
League.246 Since a franchise agreement, and therefore league membership, can be assumed at
will by a debtor team in the U.S., the team essentially decides whether it will remain a part of its
league. In England, a football club has no such control. As seen with Leeds United, the Football
League has all the power (in contrast to the Kings’ case, where MAV assumed the N.H.L.
Constitution and league membership as part of the pre-packaged plan). First, it will withhold a
team’s golden share when the team enters administration.247 Second, it can withhold that share
until it is satisfied by the terms of the club’s exit from insolvency.248 This difference in control
results in debtor franchises having an advantage in the American system because the team
determines if it continues playing in the league. In England, a football club has no such choice.
It may seem that creditors would enjoy an advantage under the English system in that the
Football League could withhold the golden share until it is satisfied with the payment terms for
creditors. However, creditors may not actually enjoy an advantage within the English system.
The ability to assume executory contracts enables a debtor franchise to eliminate the risk of
potentially losing league membership by assuming the executory franchise agreement. By
continuing operations, a team has a higher potential to pay creditors. In England, a football club
can not eliminate such risk, and the possibility of a club and its revenues being eliminated create
a disadvantage for creditors. Therefore, creditors enjoy an advantage in the American system as
they are certain a team will retain membership in its league.
In the U.S. and England, the debtor and administrator, respectively, both have the ability
to relieve the team of certain contractual obligations. In the U.S., the debtor franchise can reject
246
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [1] (Eng.).
Id. at [1], [5].
248
Id.
247
37
any executory contract.249 In England, the administrator can invalidate any transaction at an
undervalue.250 In the context of player contracts, the debtor franchise operating under the
Bankruptcy Code has a broad power to reject player contracts for any reason within the team’s
best interests.251 In contrast, the administrator of a football club would need to prove that a
player’s contract is a transaction at an undervalue. This may be difficult since the administrator
would have to show the contract was not part of the club’s normal operations.252 An
administrator is more likely to relieve the club of player contractual obligations by selling a
player to another club for cash. Despite this advantage for English clubs in regards to player
contracts (they can sell players for cash), an American franchise’s broader ability to assume or
reject any executory contract places the franchise at a comparative advantage since the power
extends to all contracts not within the limited statutory exceptions. Given this dichotomy, it is
reasonable to conclude that creditors, particularly players, have an advantage under the English
system since player contracts are less likely to be rejected. While this is true to a certain extent,
there is one practical consideration. An American team is unlikely to reject player contracts if it
wishes to remain competitive in its league. If a team were to reject many contracts, it may
become uncompetitive, causing fans and sponsors (two large revenue streams) to lose interest in
the team. Therefore, the practical improbability that American teams will reject player contracts
balances out the perceived advantage player-creditors enjoy under the English system.
Another point of division between the American and English systems is the treatment of
creditors. Under the Football League’s football creditor rule, all football creditors are to be paid
11 U.S.C. § 365 (2005).
Insolvency Act, 1986, c. 45, § 238 (Eng.).
251
Anzivino, supra note 7, at 46.
252
Ramlort Ltd. v. Reid, [2004] EWCA (Civ.) 800, [27] (Eng.).
249
250
38
in full if the club wishes to remain a member of the League after exiting insolvency.253 This rule
creates a disadvantage for the debtor football club under the English regime as it requires the
club to pay football creditors who may have large contracts. Conversely, the debtor franchise in
the U.S. would be able to reject such a contract. The Bankruptcy Code also requires the debtor
to treat all creditors equally within their respective classes. Because of the football creditor rule,
creditors as a whole in England are at a disadvantage as compared to in the United States. The
English system allows discriminatory payment of unsecured creditors within a rescue plan
whereas any such plan in the United States is unlikely to be approved by the bankruptcy judge.
For example, in the Wimbledon FC case, non-preferential football creditors received 100p-onthe-£1 while preferential creditors received only 30p-on-the-£1 and all other non-preferential
creditors received nothing.254 Thus, the less discriminate treatment of creditors in the U.S. gives
those creditors operating within the system a comparative advantage over creditors in England.
The final notable difference between American and English sport bankruptcies is nonstatutory, league-based sanctions. American sport franchises do not incur penalties in the
standings imposed by the league when they enter chapter 11. Of the three American
bankruptcies that have been discussed, no team was penalized by a points reduction by the NHL
during or after the season in which they filed for bankruptcy protection.255 This policy is in stark
contrast with that of the FA, which has a policy of imposing “sporting sanctions, by way of a
253
IRC v. Wimbledon Football Club Ltd., [2004] EWHC (Ch) 1020, [5]-[6] (Eng.).
IRC v. Wimbledon Football Club Ltd., [2004] EWCA (Civ) 655, [7], [17], [22] (Eng.).
255
The Kings filed for bankruptcy at the start of the 1995-96 season. The team proceeded to compile a record of 2440-18 and finished with sixty-six points (two points for each of 24 wins and one point for each of 18 ties).
NHL.com, History – Final Standings: 1990s, http://www.nhl.com/history/fstand90s.html. The Penguins filed for
bankruptcy in November of the 1998-99 season, during which the team finished 38-30-14 for a total of ninety
points. Id. The Sabres filed for bankruptcy during January of the 2002-03 season. The team finished with a record
of 27-37-10 for seventy-two points. NHL.com, History – Final Standings: 2000s, http://www.nhl.com/history/
fstand2000s.html. In each of the three cases, the team’s final point total equals the number of points earned from
each win (two) and tie (one). Thus, there was no reduction in points imposed by the NHL when the teams entered
bankruptcy.
254
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points deduction . . . for any club entering an insolvency event.”256 Consistent with this policy,
Leeds United suffered an automatic ten point deduction in the standings during the season in
which it entered administration, ensuring relegation from the League Championship to League
One.257 Leeds United then suffered an additional fifteen point deduction at the start of the 200708 season (thus starting on -15 points) when the club did not exit administration via a CVA.258
In the Penguins case, the NHL proposed a plan for reorganization as a contingency only if a plan
to keep the Penguins in Pittsburgh was not approved by the court.259 The preference of the NHL
was to keep the Penguins in Pittsburgh. Yet if that was not satisfied, it would not have imposed
a points penalty in the standings on the franchise under the terms of its proposed plan.260
The debtor team has an obvious advantage when it is an American team as it will not be
penalized in the standings if it files for bankruptcy. Conversely, an English football club will
suffer a potentially crippling points deduction if it enters administration. Creditors also have an
advantage under the American system: a team’s revenues, as related to standings, will not be
affected. For example, a team that makes the playoffs can realize a substantial increase in
revenues.261 A point deduction could eliminate such revenues by dropping the team low enough
in the standings such that it misses the playoffs; however, there is no points deduction, so this
risk for creditors is non-existent. On the other hand, English football clubs who suffer relegation
due to a points deduction can suffer similar loss in revenues. The last place team in the Premier
256
2004 FAC Report, supra note 204, at 8.
Leeds United Call in Administrators, supra note 206.
258
Taxman, supra note 51.
259
Anzivino, supra note 7, at 63.
260
See id.
261
According to a report released by the New York State Comptroller detailing the economic impact of the Buffalo
Sabres on western New York, the team’s “playoff games bring increased attendance, and increased ticket prices,
producing an average of $1.4 million in direct team revenues per game. With a multiplier of 1.5, this brings the
average amount of revenue derived per playoff game to $2 million. In the 2000-2001 season the Sabres played
thirteen playoff games, of which seven were home games. The amount of revenue produced during the playoffs was
$14 million. If the Sabres had made the Stanley Cup Finals, the anticipated revenue would have been more than $20
million.” The State Comptroller’s Economic Impact Statement: The Buffalo Sabres and Western New York, NEW
YORK STATE COMPTROLLER, Feb. 2003, http://www.osc.state.ny.us/press/releases/feb03/22503report.htm.
257
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League will earn about £30 million in revenues from the League’s television rights contract
during the 2007-08 season.262 Hypothetically, if a team were to be relegated from the Premier
League to the League Championship because of an administration-related ten point deduction, it
would lose such revenues. With a decrease in revenues, a team could potentially have an issue
with creditors and failing to meet creditor repayment terms. Creditors operating within the
purview of the American system need not worry about such “loss of revenue risk,” whereas
creditors in England must account for this. Thus, creditors, by virtue of having less risk, enjoy
an advantage under the American system which their counterparts in England do not.
The primary comparative advantages a debtor sport organization derives from operating
under the Bankruptcy Code as compared to the Insolvency Act include: maintaining control over
the team; the unilateral power to affirm league membership; an ability to assume and reject
executory contracts; the manner in which it deals with creditors; and the absence of nonstatutory, league-imposed sanctions. The primary benefits accruing to football clubs under the
English system as compared to the American system are a limited choice of insolvency
procedure and an ability to sell players for cash when relieving itself of player-related contractual
obligations. The major advantages creditors have in the United States as opposed to England are
knowledge that the team will continue to operate as a member of its league, less discriminate
treatment of each creditor class, and no risk of lost revenues due to league sanctions. Creditors
in England have a slight comparative advantage in regards to choice of insolvency procedures
and to the extent a party is a football creditor. Given these considerations, the American system
treats debtors and creditors better than does the English system. In comparative terms, the
American bankruptcy system confers more comparative benefits to both debtors and creditors
David Bond, Premiership Shares £900 TV Windfall, THE TELEGRAPH, Jan. 18, 2007, available at
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/01/18/nfootie18.xml.
262
41
than does the English regime. Consequently, the American system better balances the interests
for those parties, thereby making the American system superior to the English system in its
administration of sport organization bankruptcies and better for debtors and creditors as a whole.
Based on the foregoing analysis, it is logical to conclude that the disparity in number of
professional sport organization bankruptcies between the United States (three cases between
1978 and 2007) and England (forty-three cases between 1986 and 2007) is not necessarily a
result of the English system being superior to the American system in its administration of cases.
Rather, the difference in filing numbers must be attributable to economic and sporting factors
outside the scope of bankruptcy law. Indeed, one study concludes that the primary causes of
English football clubs entering administration are “insufficient revenue generating capability, . . .
loss of revenues from relegation, . . . excessive [player] wage costs, . . . [and] an inability to
adapt player wage contracts to demotion to lower divisions.”263 In American sport franchises,
two of these four primary causes are non-existent. American sports leagues do not have a
relegation system; therefore, teams will not lose revenues from relegation. Secondly, in the
absence of a relegation system, American teams need not adapt player contracts and other
expenses to demotion to a lower division and its associated lower revenues. Thus, the difference
in filing numbers between the United States and England appears to be the result of financial and
sporting factors rooted in English football’s relegation system. Accordingly, the greater number
of English football club insolvencies is not necessarily an indication that the English system is
better suited than the American system in its administration of professional sport organization
bankruptcies.
263
Buraimo, supra note 30, at 23-24. Other, secondary factors causing clubs to enter administration include large
debts to other clubs relating to player transfer payments, declining attendance, inability to make rent payments on
facilities leased for home games, poor financial management, a de-emphasis on profit maximization and financial
return on investments, and club expenditures being based on anticipation of future revenues rather than realization of
revenues. Id. at 3, 7, 8, 11, 15.
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V. Conclusion
Despite the substantial revenues of sports franchises in the United States and football
clubs England,264 teams on both sides of the Atlantic are not immune from financial turmoil.
When a sport organization encounters severe financial difficulties, it may be left with only one
choice: file for bankruptcy protection. Depending on whether a team is in the United States or
England, the debtor franchise and its creditors will enjoy certain advantages or be at a
comparative disadvantage. The comparative advantages debtors and creditors enjoy when a
sport franchise files for chapter 11 bankruptcy bring to light certain aspects of the English system
that may in fact need reformation. One such component in need of reform is the discriminate
nature with which creditors are paid pursuant to the football creditor rule. Although the rule has
been upheld by English courts, it could and should be quickly discarded by the FA so that the
Insolvency Act is not circumvented. A second component in need of evaluation is the relegation
system. An examination of the system by the FA with a focus on aiding demoted clubs
financially would enable the FA to support its relegated constituent members, perhaps through a
scheme similar to the revenue sharing system of Major League Baseball. However, until these
and other changes are made in the English system, its treatment of sport franchise bankruptcies
will lag behind the United States and the stark difference in filing numbers between the two
countries will persist.
264
The combined revenues of the NFL, NBA, MLB, and NHL for 2006 were $16.39 billion. Sports Statistics,
Plunkett Research, Ltd., http://www.plunkettresearch.com/Industries/Sports/SportsStatistics/tabid/273/Default.aspx
(last visited Jan. 8, 2008). The top ninety-two football clubs in England had collective revenues of €1.86 billion for
the 2005-2006 season. DELOITTE & TOUCHE, LLP – SPORTS BUSINESS GROUP, DELOITTE ANNUAL REPORT OF
FOOTBALL FINANCE 2007 6 (2007), available at http://www.deloitte.com/dtt/cda/doc/content/UK_ARFF_2007_
Highlights.pdf. In U.S. dollars, this equates to approximately $2.366 billion (using the exchange rate of €1 =
$1.27210 from July 1, 2006). Oanda.com, FXHistory – Historical Currency Exchange Rates, http://www.oanda.
com/convert/fxhistory (last visited Jan. 8, 2008).
43