IAAL but not a bankruptcy lawyer, so I don’t get this story, Chicago Cubs may file bankruptcy. According to the story, the bankruptcy filing may be needed “clear the team of liabilities and make its sale easier.”
I don’t understand this. AFAIK, anyone buying a baseball team or a widget factory structures the transaction so that they buyer is just buying the seller’s assets and not its liabilities. (For these transactional purposes player contracts are considered assets.) That’s been the way sales of businesses have been structured by all lawyers ever since Bill Veeck sold the Cleveland Indians in 1949. Under that arrangement the buyer gets to write off the assets, including the player contracts, as depreciation. The buyer NEVER buys the liabilities - why would he? - so there’s no need to wash them through bankruptcy. That being the case, since the intervention of the bankruptcy court is not necessary at all in order to give clear title to the Cubs’ buyer, then methinks there’s something fishy on the north side of Chicago. What am I missing?
You are very much mistaken. Liabilities don’t disappear when you sell a business. The Chicago Cubs were part of the Tribune Corporation when the Tribune Corporation incurred debts, and if the remaining assets of the Tribune Corporation can’t satisfy their creditors, they will most certainly come after the Cubs.
I am not at all mistaken. It is just that as far as the buyer is concerned, the liabilities are not his problem. The liabilities remain the seller’s problem, presumably to be paid off from the sales proceeds. See “Buying or Selling A Small Business the Right Way”, Ohio CLE Institute Reference Manual Volume 93-19/29. The Tribune Co is already in bankruptcy and so the sale of its assets must be already approved by the bankruptcy court and trustee, however, assuming the sale is on the up and up, the buyer takes the property - the Cubs - free and clear of the Tribune Co’s claimants. The question is, why is there a separate bk filing necessary for the Cubs?
The buyer would have to honor contracts and union agreements, unless the bankruptcy judge decided otherwise.
The Cubs were not part of the original Tribune bankruptcy filings. Also remember Sam Zell when the bought Tribune, announced his intention to sell the Cubs, as soon as he could get, what he termed, a “decent offer.”
When you sell something, you the seller decide the terms. When you’re in Chapter 11, reorganization, you decide the terms, then your creditors can object, then the bankruptcy judge decides who is right. Then if the creditor don’t agree they can file another court challange to show the bankruptcy judge was in error.
A company to sell assets “free and clear” of a lender’s lien and without the creditors’ consent under certain circumstances, this is called a Section 363.
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There’s a lot of laws but basically it boils down to this, no one is going to buy something especially for 900 million dollars and not have clear title to it. A secured creditor has a right to go after all assets in a company FIRST, then the unsecured have a claim.
If they sold the Cubs and assured the new owner they wouldn’t occur any liabilities, and the judge OK’d it and later was proven wrong, by another lawsuit, you’ve just bought no only liabilities for the Cubs, but other debt the Tribune has.
So bankruptcy is the only assured way to wipe the slate clean.
It would also allow the court to re-examine union and negotiated contracts.
The bankruptcy reasoning might be false or not. If a specific liability is not cleared, it possibly could come back in the future. However, this is pretty unlikely (it would normally take a very weiord contractual arrangement to allow that). A better bet is that the team’s owners would rather clear their liabilities if they can do so advantageously under the law (and that would depend on the bankruptcy provisions), and then sell the team for a large profit.
That’s not always true, and in particular, it may not be true when you’re buying the assets of a company in financial distress. There are at least two reasons for this:
First, there is the Uniform Fraudulent Transfer Act, of which I believe there is some version in place in every state. You can see the Texas version here. Simplifying somewhat, this statute prohibits debtors who are insolvent from transferring away their assets without receiving “reasonably equivalent value” in exchange. If the statute is violated, both the transferor and the transferee (i.e., the buyer) are potentially liable to the creditor who did not get paid.
Of course, the UFTA is not an absolute bar to buying a troubled business’s assets, but if you’re a potential buyer, it creates a risk that you’ll be on the hook if the seller “takes the money and runs.”
The second reason that a debt may follow assets is in the case of secured debt, such as a mortgage or a lien. Technically, the debt itself may not transfer to the buyer, but the buyer might find itself losing (through foreclosure) the assets it paid for, if the seller does not take care of its debt.
As Markxxx notes above, bankruptcy proceedings can sometimes address these concerns, by removing security interests from particular assets, and/or providing the buyer an assurance that he will not be pursued by the seller’s creditors. I can’t say whether a bankruptcy was necessary in this particular case, but bankruptcy can be helpful in facilitating these kinds of transactions.
A sale of an entity as large and complex as a baseball team isn’t usually structured as a pure asset sale. I’m obviously not privy to the details of this pending transaction, but I’d be shocked if the buyer of the Cubs wasn’t assuming, at a minimum, the liabilities associated with the player contracts–deferred compensation, and so forth. (And yes, there can also be assets associated with the contracts, per the “Veeck rule”, although my understanding is that the IRS has somewhat clamped down on this for tax purposes.) All of this is tangent to the main point of this thread, which is the Cubs potential liability for Tribune liabilities which aren’t explicitly transferred. But it’s simply not true that large business sales are pure “asset sales”.
If the Tribune Co is in bankruptcy court already, then how can the Cubs, a subsidiary of the Tribune Co. with the Tribune Co as its parent company, not be in bankruptcy already too?
I’m guessing - and it is only a guess - that if the Cubs were a stand-alone company they wouldn’t be eligible for bankruptcy because their assets would exceed their liabilities. Is that why they aren’t already part of Tribune Co.'s bankruptcy filing, because while the Tribune Co itself is insolvent, the subsidiary Cubs are solvent?
I think it’s more likely that the Cubs were set up as a standalone company so that if the Tribune went bankrupt, the creditors wouldn’t be able to seize the Cubs. Now that the Cubs are in bankruptcy, the club’s creditors won’t be able to seize the Tribune, either.
The UFTA safe harbor is, of course, that the sales price IS at reasonably equivalent value (REV), and that safe harbor will be met easily, won’t it? The rumored sales price of $900M, a record price for a baseball club. Forbes valued the team last year at $642M. It’ll be a tough row to prove that the sales price is not at REV. If the sales price were less than REV, the bankruptcy trustee, who I think gets paid in part based on commission of recovered assets, would shoot down the deal in a second.
I think you’re wrong about that. Disgruntled creditors must object IN bankruptcy, not wait and file a separate suit later. If a Tribune Co. creditor thought that the Cubs were being sold at less than REV it must object in the present case, otherwise res judicata - the thing has been decided - applies.
That’s the key question, isn’t it? Are the Cubs a standalone company, and thus not at present subject to the bankruptcy court, or are they a Tribune Co subsidiary, and thus already part of Tribune Co.'s bankruptcy court case?
The Cubs are a wholly owned subsidiary of the Tribune. Also, the Cubs are not a part of the Tribune bankruptcy. A complete list of the debtor parties to the Tribune bankruptcy can be found Here.
Shouldn’t the Cubs be properly listed on the appropriate bankruptcy court schedule as a Tribune Co asset, and not as a debtor party? I imagine the schedule would look like this in part:
Assets:
Cash at Bank name …$X
WGN radio…$y
WGN TV…$Z
The Chicago Tribune…$A
The Chicago Cubs…$B
Wrigley Field …$C
Of course, if the buyer did not take the player contracts as part of the deal MLB and the MLBPA would shoot it down. Those aren’t really the issue because whether those are classified as liabilities or assets, they aren’t the ones that the proposed new Cubs only bankruptcy filing would do anything about. The buyer doesn’t want to take free and clear of those. Indeed, those are the whole point of the sale!
All a baseball team really has as assets are its player contracts, its customer/season ticket list, its radio/tv/internet contracts, its ballpark or lease to same, its franchise (ie its right to schedule MLB games and share in MLB revenues), its employee contracts, its minor league affiliate contracts, and its trademarks. It really isn’t that complicated.
I thought you were asking if they were one of the parties that filed for bankruptcy protection just by the nature of them being a subsidiary of the Tribune. The answer to that would of course be no.
You are correct in that they are an asset of the Tribune and a part of the bankruptcy in that respect. Here is a schedule listing the assets and liabilities of the Tribune. You will see that on page 22, Schedule B, they list the Cubs with a net book value of $20,500,000, which I believe is the amount that they were originally purchased for.
That is what I was asking. Your use of “of course” is what is confusing, because it isn’t intuitively obvious that if a parent corporation files for bankruptcy protection that its wholly owned subsidiary can carry on its business without automatically being part of the parent’s bankruptcy by virtue of the parent’s initial filing. That doesn’t strike me as being “of course”. It strikes me as being as if the whole hand filed for bankruptcy protection, but the index finger gets to continue to do its own thing. Are you telling me that if the parent files, the wholly owned subsidiaries have the option of filing or not on their own?
It’s an inherent part of the corporate parent/subsidiary structure if you think about in some detail. Each corporation, whether parent or subsidiary, is a self-contained business unit with limited liability, meaning that any debts of the corporation are not obligations of the corporation’s shareholders (with exceptions not relevant here). The way a parent owns a subsidiary is that it holds 100% of its stock. Because of this 100% ownership, the parent can elect a board of directors of the subsidiary and the directors elected by the parent can appoint officers, and the officers (there wholly at the behest of the parent) can run the business. This means that the parent controls the subsidiary, but they are still legally separate entities with the only linkage being the stock ownership.
Now consider a corporation that holds shares of a publicly traded corporation, say 1000 shares of IBM. If the corporation goes bankrupt, that won’t bring IBM into bankruptcy. Instead, the bankruptcy trustee may have to sell the shares of IBM to pay off the creditors.
The situation is really no different if a parent owns 100% of the shares of a subsidiary. The parent may elect to not have the subsidiary go into bankruptcy, but have the bankruptcy trustee (which in a chapter 11 is the company itself as “debtor-in-possession”) sell its 100% stock ownership of the subsidiary as a unified whole and use the proceeds to pay the parent’s creditors (or to reorganize under chapter 11). Alternatively, the trustee, as controlling parent of the subsidiary, could direct that the subsidiary sell its assets and after satisfying any liabilities of the subsidary, distribute the proceeds to the parent as a dividend, which will be used to pay the parent’s creditors.
There are tactical and strategic reasons why a corporation would elect to include some subsidiaries in a bankruptcy and exclude others, but (depending heavily on the circumstances) they have the option to do so.