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Sunday, August 06, 2006
Welfare for Billionaire Team Owners? Paul Allen, the Portland Trail Blazers, and Chapter 11 Bankruptcy

Helen Jung of the Portland Oregonian has an excellent article on Portland Trail Blazers' owner Paul Allen and what he plans to do with his franchise (Will He Hold the Ball, Dish, or Drive?, Aug. 5, 2006). Until last week, Allen, who co-founded Microsoft with Bill Gates and who Forbes Magazine ranks as the world's 6th wealthiest person with a net worth of $22 billion, had planned to sell the team, in part because of frustrations over the revenue he obtains from his deal with the Portland Arena Management group, which hosts the Trail Blazers' home games in the Rose Garden, and in part because of poor management decisions concerning player talent and player contracts (e.g., Zach Randolph's $86 million deal). In fact, the Blazers, which had the NBA's worst record last season, are expected to lose over $100 million in the next few years. But Allen could not find a buyer that met his price, even though the Arena Management group claims that he turned down several lucrative offers.

Blazers' fans are now wondering what Allen--who, if the Seattle Supersonics relocate to Oklahoma City, may seek to relocate the Blazers to Seattle, where he already owns the Seahawks and lives nearby--will do.

As Jung details, one option would be to do nothing. When you are worth $22 billion and you get to own an NBA team, what's a $100 million in losses, really? And actually, because of federal income tax write-offs, he might be able to write-off the losses, thus taking some of the sting out of them.

A second option would be to buy back the Rose Garden, which he owned from 1995 to 2004. That is said to be Commissioner David Stern's preferred option, although bad blood between Allen and the Arena Management group apparently makes that unlikely.

A third and perhaps more controversial option would be to try to put the Blazers into Chapter 11 bankruptcy protection, which would enable the Blazers to stay in business while a bankruptcy court managed its reorganization and franchise-related decisions. Part of the reorganization could entail the Blazers being relieved of the obligation to pay some or all of the player contracts. However, those contracts are guaranteed by the NBA, meaning the NBA would likely pick up the tab for Paul Allen, at least until the reorganization was complete. So that means the other 29 NBA ownership groups would be paying off the contracts of Allen, the NBA's wealthiest owner.

Jung interviews me for the story on this point:
Another significant obstacle would be getting the NBA and other team owners to go along with a bankruptcy-filing-and-relocation attempt, said Michael McCann, a law professor at the Mississippi College School of Law and sports-law expert.

The league -- and other team owners -- might have to take on the responsibility of paying player contracts in a bankruptcy situation, McCann said. Plus, there's the league's image.

"There comes a point where fans say enough is enough," he said.

So how realistic would Chapter 11 be for Allen? I don't think it's very realistic. Depending upon how a court grants relief (and if it grants relief), using Chapter 11 protection to "protect" the Blazers could potentially set-off a disastrous precedent for the NBA and pro sports leagues in general: if teams can get out of bad player contracts by simply declaring bankruptcy, other franchises would seemingly be penalized, since they would be paying off the contracts of the bankrupted franchise (sort of like an unintended form of revenue-sharing). Granted, other NBA owners could agree to not use that mechanism in the future, and could try to condition future purchases of NBA franchises upon the waiving of the right to declare bankruptcy, and thus make this a one-time problem--a Coase Theorem style solution, if you will.

But even as a one-time event, an NBA franchise going into bankruptcy would seem very embarrassing for the NBA--especially considering Allen's profound personal wealth--and possibly damage the league's reputation and hurt the value of other NBA franchises. It would also call into question whom exactly bankruptcy law is supposed to protect; I don't think billionaires like Paul Allen are the intended beneficiaries.

For much more on this story, be sure to check out Henry Abbott's excellent post on True Hoop and Dwight Jaynes' excellent on-line column. There's some other great stuff on Helen Jung's blog, Playbooks and Profits.


I'm not sure that the league could require that future owners waive the right to file for bankruptcy protection. Clauses like that exist in many settings, but they're generally unenforceable. Any attempt to act on such a contract would be a violation of the automatic stay.

Anonymous Anonymous -- 8/06/2006 6:43 PM  

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Blogger BroBlog -- 8/06/2006 6:48 PM  

Please allow me to make some corrections to my last comment. Here is the corrected copy:

Great piece of work on this story; first, I don't think billionaires should get the benefit of bankruptcy filing as if they are just like common folks when they not; let's not create a Trumpism by allowing Paul to do this. I think the team should stay where it is. The Trailblazers will lose some money again this year, yes, but I think with Nate at the coaching helm, the team does have the right man in place to get things turned around. Make some good decisions in the draft and market the team better, this once proud franchise will get back on its feet.
Lastly, I don't think moving the team to Seattle is the answer. There is no building for them to play in. The Key Arena and its lack of aesthetic appeal is what may drive the Sonics out of town. Hello, people, this is not an option. Take your lumps, Paul; being a successful business man means you have had some failures before! Just my thoughts!


Blogger BroBlog -- 8/06/2006 7:19 PM  

A corporation or other lim.liab. company is a fictional person distinct from its owners. It files bankruptcy, not its owners. Preventing billionaires from taking advantage of bankruptcy laws means preventing them from forming corporations or other limited liability companies. Naked class warfare that even I might not support. Besides, I thought most people would be happy to see an owner get out of having to pay Zach Randolph the rest of his $86 mil.

Blogger SmittyBanton -- 8/06/2006 7:40 PM  

How could Allen use chapter 11 to get out from under the players contracts while maintaining control of the franchise? If the Blazers reject the contracts, the players would become general unsecured creditors of the team. In that case, absent consent of the players, the cram down provisions of the bankruptcy code would prevent the equity holders of the team from taking anything unless the creditors were satisfied first.

Anonymous PK -- 8/06/2006 10:04 PM  

The whole article just makes me sick at my stomache to think about...

How can someone worth $22 Billion be that much of a pain. I always say leave good enough alone. If he tries to file bankruptcy I'm going to laugh uncontrolabley.

If I'm the other owners, I'm not happy at all and would take every legal angle to make sure he pays HIS OWN PLAYERS what there contracts say they should get. The others owners didn't make the contracts, the Blazers did.

Anonymous Sports Overload -- 8/07/2006 1:25 AM  

Great discussion on Bankruptcy--this is a complicated area and I appreciate the insight.
Allen's beef is actually with the Portland Arena Management Corp. and it looks like he wants to get out of the lease agreement that the Blazers have with PAM. If he was able to declare Bankruptcy, would that help him to get out of the Rose Garden lease? If so, how?
Also, apparently he has an exclusive site agreement with the city of Portland--how binding is that and could Bankruptcy get him out of it?
Are there any other ways that the Blazers have of getting out of their links to Portland, such as arguing that PAM has breached the agreement by being unreasonable if PAM refuses to sell the stadium to the Blazers for the same price that was quoted to other buyers? (I assume that a price was set for the Rose Garden during the negotiations).

Anonymous Anonymous -- 8/07/2006 2:33 AM  

Thank you all for these comments, they are excellent.

Anonymous 1: Great point about how a clause that requires future owners to waive the right to file for bankruptcy protection may not be enforced by a court. I wonder if the context of a pro sports league may be sufficiently distinguishing, however? It sounds like you have some expertise in bankruptcy law, and I appreciate you commenting.

Broblog: I think you are right about the Blazers, they will soon turn it around. Although I am a Celtics fan, I've always liked the Blazers, and they have a pretty deep team right now. Brandon Roy was a great draft pick, too. I thought he was the best player in the draft.

Andre (SmittyBanton): I never thought you would be the one defending billionaires! But you make some great points. I think we have a cognitive inclination to group together the corporate entity declaring bankruptcy with the person running it, but you are right--it's not about the person running it; it's about the underlying corporate entity.

PK: you're right, Allen loses control of the franchise (or at least he is supposed to) under Chapter 11. But I wonder how a bankruptcy court would actually run the team--would it take a proactive role, as bankruptcy courts do in certain circumstances, or would it would let the franchise operate with some autonomy? Or would the NBA even let it get that far--would it immediately jump in and start paying the salaries to avoid the obvious public relations disaster? It's really a fascinating fact-pattern, and could lead to various forms of litigation and transactional behavior.

Sports Overload: I agree, it does seem pretty unseemly that bankruptcy law would protect someone worth $22 billion, but SmittyBanton makes some good counter-arguments above.

Anonymous 2: Those are some excellent questions. Declaring bankruptcy could help him get the Blazers out of the lease because it is a contractual obligation, but that would be up to the bankruptcy court. There's some evidence that courts are less willing to relieve leases than other forms of contractual obligations, especially if the lease obligation is short-term, although the obligation here, I believe, is a 30-year one. In terms the exclusive agreement, that's an interesting point should the Blazers declare bankruptcy; without seeing the agreement's text, it's hard to know how binding it would be on future lease agreements concerning Allen and the Blazers. I don't think Allen can argue that the PAM is being unreasonable to not sell the stadium to him, unless his lease agreement explicitly calls for a lease-to-own clause that he has satisfied.

Blogger Michael McCann -- 8/07/2006 6:48 PM  

i guess my post yesterday didn't go through.

anyway, i wanted to address the site agreement portland has with the blazers. the rumor is that it is a pretty strong agreement and that paul allen is personally liable on the agreement. so, if i am not mistaken, allen would have to declare personal bankruptcy to get away from that agreement. someone with better bankruptcy knowledge would have a better idea on that though.

Blogger The Fan's Attic -- 8/08/2006 1:56 PM  

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