Relevant Document:Agenda
At a hearing today Judge Christopher Lopez granted the Diamond Sports Group debtors’
motion to enforce the automatic stay against the NBA’s Phoenix Suns, directing the Suns to comply with the back-end rights process in the team’s expiring telecast rights agreement, or TRA, with debtor regional sports network Diamond Arizona. As part of the ruling, Judge Lopze voided the Suns’
new broadcasting deal with Gray Television and Kiswe Mobile to the extent it interferes with Diamond Arizona’s back-end rights.
The Suns, Gray and Kiswe argued in response to the motion that their new broadcast rights deal did not violate the stay because it is merely a binding term sheet and “agreement in principle” that is specifically conditioned on a resolution of the Suns’ dispute with Diamond Sports over the applicability of the back-end rights. However, Judge Lopez found that the Suns’ actions taken together, including an “all out media blitz” touting the benefits of the new deal, “painted a picture” of the team’s intent to impede Diamond Arizona’s rights under the expiring TRA in violation of the stay.
The judge nevertheless stopped short of finding that Gray and Kiswe violated the automatic stay. According to Judge Lopez, the debtors presented insufficient evidence to establish that the new broadcast partners attempted to interfere with Diamond Arizona’s back-end rights. The debtors have sued both Gray and Kiswe for tortious interference, but that action was not on today’s agenda.
Michael McConnell of Jones Day, counsel for Gray, asserted that Gray had at all times been “very careful” to respect Diamond Arizona’s back-end rights, and Frederick Schmidt Jr. of Cozen O’Connor, counsel for Kizwe, adopted McConnell’s argument.
William Phillips of Covington & Burling, counsel for the Suns, argued that the team’s behavior was at all times consistent with the TRA, pointing to the termination of Diamond Arizona’s exclusive negotiating rights, “frustration” with efforts to engage the debtors on a new deal and the conditionality of the Gray/Kiswe “term sheet.” Another attorney for the Suns asserted that not every nondebtor breach of an executory contract is a violation of the automatic stay.
Judge Lopez noted to Phillips that the document evidencing the new deal is labeled a “capital-A agreement” and not a “term sheet.” The judge further observed that although a later version of the new deal includes a condition precedent based on resolution of Diamond Arizona’s back-end rights, the first copy of the new deal terms provided to Diamond Arizona on April 19 did not include such a condition.
Brian Hermann of Paul Weiss, counsel for the debtors, seized on the absence of this condition in the initial terms as evidence the Suns intended to discourage Diamond Arizona from exercising its back-end rights. Hermann also called the back-end rights resolution condition in the new agreement a “sleight of hand” that does not obviate the Suns’ unjustifiable attempt to unilaterally “foreclose” on Diamond Arizona’s contractual right of first refusal.
Even if the Suns dispute that Diamond Arizona’s back-end rights apply, Hermann reasoned, Diamond Arizona has an “arguable” property interest in such rights that a creditor cannot unilaterally impede postpetition under section 362(a)(3) of the Bankruptcy Code and governing law from the U.S. Court of Appeals for the Fifth Circuit.
Hermann also compared the Suns’ attempt to “hide behind” the “eleventh-hour” condition precedent to a bank robber leaving a note that says, “If I was wrong taking the money, I’ll give it back,” and expecting to be acquitted of robbery.
In his ruling, Judge Lopez conceded that not every postpetition breach of an executory contract or public statement by a nondebtor rises to the level of a stay violation. However, the judge concluded that the Suns had gone too far, citing an April 28 press release in which the Suns touted the benefits of the new agreement and indicated they were going forward with Gray and Kiswe, adding only a “one-liner” at the end about resolution of Diamond Arizona’s back-end rights.
The Suns were saying one thing about the finality of the new agreement in court and another outside, Judge Lopez remarked.
Creditors should not “play around with the automatic stay” or “draft right up to the line,” Judge Lopez warned. The judge agreed with Hermann that parties in the Suns’ position should seek stay relief or a declaration from the bankruptcy court that the stay does not apply before even potentially violating the stay.
Judge Lopez also cautioned both the debtors and the Suns against any “unjustifiable” delays in following through on the back-end rights process, which will include the appointment of an appraiser to value the new deal with Gray and Kiswe.
According to Hermann, Diamond Arizona’s contractual right of first refusal to match the Gray/Kiswe terms is triggered so long as any material term of the Gray/Kiswe deal is less favorable to the Suns than the Suns’ final offer to Diamond Arizona. Hermann said the rights fees due the Suns under the new deal are lower than the fees proposed in the Suns’ last offer to Diamond Arizona, triggering the right of first refusal.
Phillips, speaking for the Suns, responded that the overall consideration for the Suns under the Gray/Kiswe deal is greater than the Suns’ last offer to Diamond Arizona.
Judge Lopez declined to resolve the dispute today. Instead, he directed the parties to work together consensually to resolve the issue as required by the Diamond Arizona TRA. “The right of the debtor to have a shot is what I’m preserving today,” Judge Lopez concluded.