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C. Taylor Ashworth, 010143
Alan A. Meda, 009213
STINSON MORRISON HECKER LLP
1850 North Central Avenue, Suite 2100
Phoenix, Arizona 85004
Telephone: (602) 279-1600
Facsimile: (602) 240-6925
[email protected]
[email protected]

J. Gregory Milmoe (admitted pro hac vice)
Shepard Goldfein (admitted pro hac vice)
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
4 Times Square
New York, New York 10036
Telephone: (212) 735-3000
Facsimile: (212) 735-2000
[email protected]
[email protected]

Anthony W. Clark (admitted pro hac vice)
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
One Rodney Square
Wilmington, Delaware 19899
Telephone: (302) 651-3000
Facsimile: (302) 651-3001
[email protected]

Attorneys for the National Hockey League

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ARIZONA

In re

DEWEY RANCH HOCKEY, LLC,

COYOTES HOLDINGS, LLC,

COYOTES HOCKEY, LLC, and

ARENA MANAGEMENT GROUP, LLC,

Debtors.

This filing applies to:

? All Debtors
? Specified Debtors

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Case No. 2:09-bk-09488-RTBP

(Jointly Administered)

Chapter 11

National Hockey League's Objection to
the Debtors' Request to Sell the Phoenix
Coyotes Under Sections 365 and 363 of the
Bankruptcy Code

Date:
Time:
Location: U.S. Bankruptcy Court

June 9, 2009
9:00 a.m.

230 N. First Ave, Courtroom 703
Phoenix, AZ 85003

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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT................................................................................................. 1

ARGUMENT............................................................................................................................. 4

I.

II.

THE DEBTORS ARE ATTEMPTING TO SELL RIGHTS THAT ARE
NOT PART OF THE ESTATE. .......................................................................... 4

SECTION 365 DOES NOT AUTHORIZE THE ASSUMPTION AND
ASSIGNMENT OF THE NHL CONTRACTS AS "MODIFIED" BY THE
APA.................................................................................................................... 7

A.

B.

The Debtors Do Not Seek To Assume, Assign And Sell All Contracts
That Make The Coyotes An NHL Franchise. ........................................... 7

The Debtors Do Not Intend To Cure The Default Caused By Breach
Of The Consent Agreement In Order To Properly Assume The
Consent Agreement. ................................................................................ 9

1.

2.

3.

The Debtors are unable to cure the default.................................... 9

The Debtors do not intend to provide monetary compensation
as required by section 365(b)(1)(B). ............................................10

The Debtors are unable to provide adequate assurance of
future performance under either section 365 or 363. ....................12

C.

The NHL Is Excused Under Section 365(c)(1) From Accepting
Performance Of NHL Contracts From Anyone Other Than The
Phoenix Coyotes.....................................................................................14

1.

2.

Corporate governance law excuses the NHL from accepting
performance. ...............................................................................14

Intellectual property law excuses the NHL from accepting
performance. ...............................................................................16

D.

The Debtors Cannot Provide Adequate Assurance Of Future
Performance Under Section 365(f)..........................................................17

III.

THE COURT SHOULD NOT EXERCISE ITS DISCRETION UNDER
SECTION 363 TO ORDER A FREE AND CLEAR SALE OF THE
COYOTES.........................................................................................................18

A.

There Is No Bona Fide Dispute Over The NHL's Interests. .....................18

1.

2.

The League's consent rights are lawful. .......................................19

There is no factual or legal basis for an "as applied" challenge
to the League's consent rights......................................................21

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(a)

(b)

(c)

The League has not "applied" its rules. ............................21

Delaying a potential relocation cannot create a bona
fide dispute under the antitrust laws. ................................26

The Debtors released any potential antitrust claim
relating to the League's consent rights..............................28

B.

Ordering A Free And Clear Sale Of A Professional Sports Franchise
Would Wreak Havoc In The Professional Sports Industry.......................31

CONCLUSION.........................................................................................................................32

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TABLE OF AUTHORITIES

Cases

Page(s)

Adaptive Power Solutions, LLC v. Hughes Missile System Co.,

141 F.3d 947 (9th Cir. 1998)..........................................................................................27

Adelphia Communications Corp. v. Rigas (In re Adelphia Communications Corp.),

No. 02-41729, 2004 WL 2186582 (S.D.N.Y. Sept. 27, 2004).........................................16

American Needle, Inc. v. National Football League, 538 F.3d 736 (7th Cir. 2008),

petition for cert. filed, 77 U.S.L.W. 3326 (U.S. Nov. 17, 2008) (No. 08-661).................29

Arnstein v. American Society of Composers, Authors & Publishers,

29 F. Supp. 388 (S.D.N.Y. 1939) ...................................................................................14

Avery Federal Savings & Loan Association v. Klayer (In re Klayer),

20 B.R. 270 (Bankr. W.D. Ky. 1981) .............................................................................. 5

Baseball at Trotwood, LLC v. Dayton Professional Baseball Club, LLC,

113 F. Supp. 2d 1164 (S.D. Ohio 1999) .........................................................................23

Board of Trade of Chicago v. Johnson, 264 U.S. 1 (1924) .....................................................6, 15

Bhan v. NMB Hospital Inc., 929 F.2d 1404 (9th Cir. 1991).......................................................27

In re Bon Ton Restaurant & Pastry Shop, Inc., 53 B.R. 789 (Bankr. N.D. Ill. 1985)...................12

Branagan v. Buckman, 122 N.Y.S. 610 (Sup. Ct. 1910).............................................................14

California v. Farmers Markets, Inc. (In re Farmers Markets, Inc.),

792 F.2d 1400 (9th Cir. 1986)......................................................................................... 5

Calvert v. Bongards Creameries (In re Schauer), 835 F.2d 1222 (8th Cir. 1987) ......................... 5

Carlisle Homes, Inc. v. Azzari (In re Carlisle Homes, Inc.),

103 B.R. 524 (Bankr. D.N.J. 1988) ................................................................................18

In re Cedar Chemical Corp., 294 B.R. 224 (Bankr. S.D.N.Y. 2003)...........................................16

Copperweld Corp v. Independence Tube Corp., 467 U.S. 752 (1984) ........................................29

Fishman v. Estate of Wirtz, 807 F.2d 520 (7th Cir. 1986) ....................................................20, 23

In re Fleming Cos., 499 F.3d 300 (3d Cir. 2007)........................................................................18

Gough v. Rossmoor Corp., 585 F.2d 381 (9th Cir. 1978)...........................................................27

Gramercy Equities Corp. v. Dumont, 531 N.E.2d 629 (N.Y. 1988)............................................15

Gumport v. Sterling Press (In re Transcon Lines), 58 F.3d 1432 (9th Cir. 1995)......................... 5

In re Hernandez, 285 B.R. 435 (Bankr. D. Ariz. 2002) ..............................................................17

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Hyde v. Woods, 94 U.S. 523 (1876) ......................................................................................6, 15

J.W. Fortune, Inc. v. McLean Square Associates, G.P. (In re J.W. Fortune, Inc.),

173 F.3d 424, 1999 WL 95529 (4th Cir. 1999)...............................................................10

Jandel v. Precision Colors, Inc., 19 B.R. 415 (Bankr. S.D. Ohio 1982) ......................................19

Justice v. National Collegiate Athletic Association, 577 F. Supp. 356 (D. Ariz. 1983)...............26

In re Kellstrom Industries, Inc., 282 B.R. 787 (Bankr. D. Del. 2002) .........................................13

Kelly v. Kosuga, 358 U.S. 516 (1959) .......................................................................................30

Kishi v. Greco (In re Greco), No. 0975-1-79-00484, 1980 Bankr. LEXIS 5461

(Bankr. D. Haw. Mar. 14, 1980).....................................................................................12

Los Angeles Memorial Coliseum Commission v. National Football League,

726 F.2d 1381 (9th Cir. 1984)..................................................................................20, 25

Los Angeles Memorial Coliseum Commission v. National Football League,

791 F.2d 1356 (9th Cir. 1986)..............................................................................7, 10, 20

Levin v. National Basketball Association, 385 F. Supp. 149 (S.D.N.Y. 1974)......................20, 23

Liberty Tool & Manufacturing v. Vortex Fishing System, Inc. (In re Vortex Fishing System,

Inc.), 277 F.3d 1057 (9th Cir. 2002)...............................................................................19

Madison Square Garden, L.P. v. National Hockey League, No. 07 CV 8455,

2008 WL 4547518 (S.D.N.Y. Oct. 10, 2008) ...........................................................28, 29

Mid-South Grizzlies v. National Football League, 550 F. Supp. 558 (E.D. Pa. 1982).................15

National Basketball Association v. SDC Basketball Club, Inc.,

815 F.2d 562 (9th Cir. 1987).......................................................................... 7, 20, 21, 25

N.C.P. Marketing Group, Inc. v. Blanks (In re N.C.P. Marketing Group, Inc.),

337 B.R. 230 (D. Nev. 2005) .........................................................................................17

National Football League v. Los Angeles Raiders, No. CV 95-5885 (GHK)

(C.D. Cal. Feb. 26, 1999)...............................................................................................27

In re Octagon Roofing, 123 B.R. 583 (Bankr. N.D. Ill. 1991) ....................................................19

Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.),

165 F.3d 747 (9th Cir. 1999)..........................................................................................17

Rice v. Shoney's Inc. (In re Dean), 174 B.R. 787 (Bankr. D. Ark. 1994)............................5, 6, 15

Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir. 1985)............................12

In re Sanders, 969 F.2d 591 (7th Cir. 1992) ................................................................................ 5

In re Schick, 235 B.R. 318 (Bankr. S.D.N.Y. 1999)...................................................................15

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St. Louis Convention & Visitors Commission v. National Football League,

154 F.3d 851 (8th Cir. 1998)..........................................................................................20

In re Taylor, 198 B.R. 142 (Bankr. D.S.C. 1996).......................................................................19

Texaco Inc. v. Dagher, 547 U.S. 1 (2006)............................................................................29, 30

In re Todd, 118 B.R. 432 (Bankr. D.S.C. 1989) .........................................................................15

United States v. Gerth, 991 F.2d 1428 (8th Cir. 1993) ................................................................ 8

Universal Studios, Inc. v. Viacom Inc., 705 A.2d 579 (Del. Ch. 1997).................................30, 31

VKK Corp. v. National Football League, 244 F.3d 114 (2d Cir. 2001) ................................28, 29

Viacom International, Inc. v. Tandem Products, Inc., 526 F.2d 593 (2d Cir. 1975) ....................30

Worthington v. General Motors Corp. (In re Claremont Acquisition Corp., Inc.),

113 F.3d 1029 (9th Cir. 1997)......................................................................................... 9

Statutes

11 U.S.C. § 361.........................................................................................................................13

11 U.S.C. § 363(e).....................................................................................................................13

11 U.S.C. § 365(a)...................................................................................................................... 8

11 U.S.C. § 365(b)(1)................................................................................................................. 9

11 U.S.C. § 365(b)(1)(B)...........................................................................................................10

11 U.S.C. § 365(b)(1)(C)...........................................................................................................12

11 U.S.C. § 365(c)(1) ................................................................................................................14

11 U.S.C. § 365(f)(1).................................................................................................................14

11 U.S.C. § 365(f)(2).................................................................................................................17

11 U.S.C. § 541(a)(1) ................................................................................................................. 5

N.Y. Partnership Law § 40 (McKinney 2005)............................................................................15

Miscellaneous

2 Phillip E. Areeda & Herbert Hovenkamp, Fundamentals of Antitrust 1085 (2002)..................23

6 Am. Jur. 2d Associations and Clubs § 17 (2009).....................................................................14

6A N.Y. Jur. 2d Associations and Clubs § 17 (2009) .................................................................14

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The National Hockey League ("NHL" or "League") hereby submits this Objection to the

Debtors' Request to Sell the Phoenix Coyotes under Sections 365 and 363 of the Bankruptcy Code
(the "Objection").1 In further support of this Objection, the NHL respectfully represents as follows:

PRELIMINARY STATEMENT

The case began with the Debtors rushing unnecessarily into bankruptcy with the hope that

the Bankruptcy Code would permit them to consummate a transaction – in blatant disregard of

long-established NHL rules – that they could not accomplish outside of bankruptcy. Specifically,

the Debtors proposed to transfer ownership of the Phoenix Coyotes ("Coyotes" or "Club") without

obtaining NHL consent, convey membership in the NHL without the prospective owner having to

abide by NHL rules and procedures, and relocate the Club without NHL consent and in disregard

of the property rights of the NHL and its member teams. The proposed transaction was intended to

favor the economic interests of the owner, Mr. Moyes, over the interests of certain creditors of the

Club who either would have been paid in full or, in the case of the City of Glendale, would suffer

no economic injury if the NHL rules had been followed. The NHL believes that the Debtors'

efforts fundamentally misconstrue relevant Bankruptcy Code provisions and the case law

interpreting them, and that it would be inappropriate for this Court to permit any transfer of

ownership or relocation that does not comply with the NHL rules and procedures.

For the time being, at the request of the Court, the parties have developed a protocol to

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accommodate an ongoing dispute regarding the governance of the Club. The NHL reserves all rights
regarding this issue. In support of this Objection, the NHL has filed concurrently herewith the Declaration
of Gary B. Bettman and the Declaration of Shepard Goldfein, and also relies on certain portions of the
Declaration of William L. Daly filed on May 13, 2009. The NHL also respectfully refers the Court to its
Memorandum of Points and Authorities in Support of National Hockey League's Motion for Determination
(I) of Authority to Manage the Business and Affairs of the Debtors, and (II) that William Daly is the
Representative of the Estates [dkt. no. 91]; Limited Objection of the National Hockey League to Motion of
the Debtors for Entry of an Order (A) Authorizing Conduct of an Auction of Coyotes Hockey, LLC's Assets;
(B) Establishing Procedures to be Employed in Connection with the Sale Including Approval of the
Termination Fee; and (C) Approving Form of Order and Manner of Notice of Conditional Cure Notice and
Solicitation Notice [dkt. no. 92]; Reply of The National Hockey League to (A) Debtors' Reply in Support of
their Motion to Approve Bid Procedures and Termination Fee, and (B) PSE Sports & Entertainment LP's
Response to Sale Procedures Objections [dkt. no. 123]; and Reply in Support of National Hockey League's
Motion for Determination (I) of Authority to Manage the Business and Affairs of the Debtors, and (II) that
William Daly is the Representative of the Estates [dkt. no. 124], previously filed on the authority and
relocation issues, which it incorporates by reference herein.

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First, under section 541 of the Bankruptcy Code, the "property" that the Debtors are seeking

to convey is a membership in the League. As discussed below, that membership carries with it

certain rights and obligations that, contrary to the Debtors' wish, cannot be expanded or modified

by the fact that the Debtors have filed for bankruptcy. The Debtors' estates do not include the right

to operate an NHL franchise in Hamilton, Ontario or indeed anywhere other than the Phoenix home

territory. No provision of the Bankruptcy Code permits the Debtors to sell what they do not own.

Second, what makes the Phoenix Coyotes an NHL franchise, as opposed to an unaffiliated

sports team, are its agreements with the League – most notably the NHL Constitution and By-Laws

(including specifically its agreement to be an NHL Member Club in the Phoenix home territory)

and the 2006 Consent Agreement that confirmed those rights and obligations (collectively, the

"NHL Contracts"). These are the agreements that, among other things, allow the Coyotes to call

themselves an NHL Club, to participate in scheduled games against other NHL teams, to employ

professional hockey players who are members of the NHL Players' Association, and to share in

national television and other League-generated revenues. Yet, incredibly, the Debtors are asking

this Court to allow the Debtors to sell and relocate the Phoenix Coyotes without assuming or

assigning these contracts. Specifically, under the Debtors' Revised Asset Purchase Agreement (the
"APA")2 with PSE Sports & Entertainment LP ("PSE"), the forced sale of the Coyotes is expressly
conditioned on the Court rejecting the NHL Constitution and By-Laws, including both the NHL's

consent rights over the transfer of ownership and the NHL's right under the NHL's By-Laws (and

as a matter of law) to a relocation fee for any move of the Club. If, however, the Court were to

allow the sale of the Coyotes without assigning the NHL Contracts, the assumed and assigned

assets would not even be an "NHL" hockey Club; at most, the proposed transaction would transfer

a collection of used hockey equipment – none of which could bear the NHL logo.

The APA and Amendments thereto are attached to the Motion of the Debtors for an Order Under

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Sections 105(a), 363, and 365 of the Bankruptcy Code (i) Authorizing Coyotes Hockey, LLC's Sale of
Substantially All of Its Assets, Free and Clear of Liens, Claims, and Encumbrances, Subject to Higher and
Better Offers, and (ii) Approving an Asset Purchase Agreement [dkt. no. 18] ("Sale Approval Motion"); and
the Second Declaration of Richard Rodier and Amendments to APA [dkt. no. 191].

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Third, the Debtors' attempt to assume and assign the NHL Contracts directly conflicts with

the terms of the APA itself. Under section 365 of the Bankruptcy Code, the Debtors cannot

"cherry-pick" those parts of the NHL Contracts they wish to assume, assign and sell. The APA

requires that the League consent provisions of the NHL Contracts be deemed null and void and that

there be no relocation or indemnity payments to the NHL or any other Member Clubs. Assuming

that the APA were to be reformed to accept all of the consent obligations under the NHL Contracts,

the issues of "cure" and adequate assurance would still need to be addressed. As discussed below,

apart from the question of whether the Debtors' non-monetary defaults could ever be cured, the size

of potential relocation fees and indemnities would dwarf the consideration offered under the APA

and leave creditors out in the cold.

Finally, in an effort to accomplish a transaction in bankruptcy that would be impossible

outside of bankruptcy, the Debtors have alleged that the NHL rules violate antitrust law and that

therefore there is a bona fide dispute under section 363(f) of the Bankruptcy Code. There is no

"bona fide dispute" under section 363(f) as to the NHL's legitimate interest in determining who

owns its Member Clubs and where their home territories will be located. The Debtors' assertion

that the NHL Constitution and By-Laws violate the antitrust law is directly contrary to controlling

Ninth Circuit authority. Moreover, any assertion that the NHL already has "applied" its rules and

procedures regarding the proposed transfer of ownership and relocation is specious; under the

Debtors' chosen schedule, the Debtors and PSE only filed their relocation application this week.

Instead, as this Court has observed, the Debtors are simply seeking an order for the assumption,

assignment and sale of the Coyotes expressly without NHL consent.

Honoring the NHL's consent rights will not harm the Coyotes' creditors. The NHL has

been paying the Club's obligations since November 2008 and is committed to continuing to fund

the Club in Phoenix on appropriate terms until a suitable local purchaser can be found. Indeed, in

the past week the NHL has received applications from four different potential purchasers of the

Coyotes in Phoenix. (Bettman Decl. ¶ 33.) If such a purchaser is not found after an appropriate

effort (an effort that was cut short by the Debtors' precipitous and unnecessary rush into Chapter

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11), the League will find a purchaser for another location in cooperation with this Court, and in

accordance with the League's transfer and relocation rules and procedures, that will maximize the

recovery for creditors. (Bettman Decl. ¶¶ 35-36.)

The transaction contemplated by the Debtors ignores the fact that the Debtors are members

of a complex, economically interdependent association of professional hockey clubs that have

carefully structured their membership, franchise locations, collective bargaining agreement, and

broad range of other collective decision-making initiatives to promote NHL hockey as a major

league sport and maintain and protect the value of the NHL and its Member Clubs. Attempting to

force a sale of the Coyotes without NHL consent has far-reaching implications not only for the

NHL, but also for all professional sports leagues. Every sports league is built on the fundamental

right of its members to choose for the venture the owners and franchise locations that will generate

and optimize overall interest in the sport from the perspective of fans, sponsors, advertisers and

other constituents. Thus, even if the Court were to entertain the Debtors' section 363 arguments,

the Court should not exercise its discretion to order, over the League's objection, a sale and

relocation of a professional sports franchise that seeks to maintain its membership in that League.

ARGUMENT

I.

THE DEBTORS ARE ATTEMPTING TO SELL RIGHTS THAT ARE NOT PART
OF THE ESTATE.
A threshold issue in this case is whether what the Debtors propose to sell under the APA is

actually part of their estates. As a factual matter, the APA makes clear that Mr. Balsillie's group is

not purchasing any interest of the Debtors that includes transfer of ownership restrictions,

relocation restrictions or related requirements for relocation and indemnity fees. Specifically,

section 2.2(a)(i) of the APA provides that the Debtors anticipate selling "[t]he Team's NHL

Franchise and Seller's membership interest in the NHL, as modified and assigned under the Sale

Approval Order." (Sale Approval Motion Ex. A at 8 (emphasis added).) In the Sale Approval

Motion, the Debtors seek an order granting them the right to transfer their contractual rights not as

they presently exist, but only after significant modification to include (i) the right to transfer the

Club without the consent of the League, (ii) the right to a "home territory" in Hamilton, Ontario,

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and (iii) the extinguishment of the contractual requirement to compensate the League for the value

of the Hamilton, Ontario "home territory." (See Sale Approval Motion at 11-12.)

Under section 541 of the Bankruptcy Code, however, a debtor's estate acquires as property

only "legal or equitable interests of the debtor in property as of the commencement of the case." 11

U.S.C. § 541(a)(1). "Because the estate may take no greater interest than that held by the debtor,

the estate takes the license subject to the restrictions imposed on the debtors by its transferor."

California v. Farmers Mkts., Inc. (In re Farmers Mkts., Inc.), 792 F.2d 1400, 1403 (9th Cir. 1986);

accord Gumport v. Sterling Press (In re Transcon Lines), 58 F.3d 1432, 1438 (9th Cir. 1995);

Avery Fed. Sav. & Loan Ass'n v. Klayer (In re Klayer), 20 B.R. 270, 272 (Bankr. W.D. Ky. 1981)

("The rule is elementary that the estate succeeds only to the title and rights in the property that the

debtor possessed."). Thus, the filing of the bankruptcy petition on May 5, 2009, did not change in

any way what "property" may be sold. For example, in Calvert v. Bongards Creameries (In re

Schauer), 835 F.2d 1222, 1224 (8th Cir. 1987), a trustee maintained that "[f]ederal bankruptcy

law . . . grants a trustee greater rights to dispose of property of the bankruptcy estate than the debtor

held." The Eighth Circuit expressly rejected that argument: "Although there are no cases directly

on point, numerous courts have asserted the general principle that the trustee takes only those rights

that the debtor had under state law." Id. at 1225; accord In re Sanders, 969 F.2d. 591, 593 (7th Cir.

1992).

The court applied this basic principle in a case dealing with transfer restrictions contained

in a joint venture agreement. Rice v. Shoney's Inc. (In re Dean), 174 B.R. 787, 790 (Bankr. D. Ark.

1994). Observing that the trustee possessed the same rights the pre-petition debtor had under the

agreement, Judge Scott dispensed with the argument that the interest in the joint venture could be

modified to eliminate the transfer restrictions:

[T]he trustee and intervenor, in effect, argue that property rights are
expanded simply by virtue of the fact that the property belongs to the
estate. There is no foundation in the Bankruptcy Code for such an
assertion. The estate succeeds only to that interest of the debtor. The
fact that the joint venture may be of lesser value to the estate than the
trustee would like does not expand the rights in the property.

Id. at 790 (alteration in original) (citation omitted).
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The Dean court further held that the parties were "confus[ing] the issues of what is property

of the estate with the bundle of rights associated with the property." Id. The estate acquires only

"the rights of the debtor, including restrictions on transfers and options of others to purchase." Id.

at 791 (emphasis added). Thus, the court concluded: "Based upon the transfer restrictions set forth

in the joint venture agreement, the joint venture interests may not be sold to a person or entity other

than according to those terms stated in the joint venture agreement." Id.; see also Bd. of Trade of

Chi. v. Johnson, 264 U.S. 1, 12, 13 (1924) (holding that a debtor's membership interest in the

Board of Trade did constitute property of the estate disposable by the trustee, but would remain

"subject to rules of the exchange," including the association's consent rights (emphasis added));

Hyde v. Woods, 94 U.S. 523, 525 (1876) (membership rules with respect to the transfer of seats on

the San Francisco Stock and Exchange Board, a voluntary association, are an "incident of the

property when it was created, and remain a part of it into whose hands soever it may come").

Here, under the NHL contracts, the Debtors own the right to operate a hockey club in the

Phoenix, Arizona "home territory" – nothing more. (See Daly Decl. Ex. A (Constitution and By-

Laws); Ex. E (2006 Consent Agreement) at ¶ 4 (Moyes Entities "represent, warrant and covenant to

the NHL that the acquisition of interests in the Franchise . . . is solely for the purpose of operating

the Franchise in its current location.").) While an owner may apply for transfer of ownership

(and/or relocation), the NHL's consent rights on those matters are part of the estate itself; hence,

any proposed sale without those restrictions directly contravenes section 541(a) of the Code.

The violation of section 541(a) is even more stark on the specific issue of relocation.

Separate and apart from the estate being defined in part by the NHL's consent rights, the Ninth

Circuit has made clear that the right to operate a franchise in Hamilton, Ontario is a franchise

opportunity owned exclusively by the League. Even if the NHL were to consent to a relocation,

the League's By-Laws specifically provide that such consent may be made subject to reasonable

and appropriate conditions, including payment to the League of a relocation fee to reflect the

goodwill developed by the League in the new location, and/or payment of an indemnification fee to

reflect the goodwill developed by neighboring Member Clubs in the new location. (Daly Decl. ¶¶

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15-16; Ex. D (By-Law 36.6 provides for relocation fees).) In other words, any value reflected in

cities that have the potential to host an NHL team belongs to the League and cannot be unilaterally

usurped by any single Member Club. The contractual rights of sports leagues to the corporate

opportunity in connection with potential franchise relocations has been expressly upheld by the

Ninth Circuit and other authorities. See L.A. Mem'l Coliseum Comm'n v. NFL ("Raiders II"), 791

F.2d 1356, 1371-73 (9th Cir. 1986) (league owns franchise opportunities for which league may

charge team in the event of relocation); NBA v. SDC Basketball Club, Inc., 815 F.2d 562, 568-59

(9th Cir. 1987) (same).

Indeed, in Raiders II, the Ninth Circuit concluded that even though the antitrust laws in that

case prevented the League from blocking the Raiders' move, the NFL could still charge the Raiders

a relocation fee for having usurped the opportunity that belonged to the League as a whole. The

Raiders were required to compensate the League for the difference in value between the usurped

Los Angeles franchise opportunity and the value of the Oakland opportunity returned to the league

by virtue of the team moving. The law of the Ninth Circuit is yet another separate and independent

reason why the Debtors do not have a legally cognizable property interest in operating the Club

outside of the Phoenix, Arizona area, have no property interest in the value of the Hamilton market,

and why, under section 541(a), the Court may not abrogate (as provided in the APA) the right to

charge a relocation fee to the Debtors and/or Mr. Balsillie in the event the team relocates.

II.

SECTION 365 DOES NOT AUTHORIZE THE ASSUMPTION AND ASSIGNMENT
OF THE NHL CONTRACTS AS "MODIFIED" BY THE APA.
A.

The Debtors Do Not Seek To Assume, Assign And Sell All Contracts That
Make The Coyotes An NHL Franchise.

Should the Debtors overcome their section 541(a) deficiency, they encounter the problem

of not assuming, assigning or selling the executory contracts that make the Coyotes an "NHL"

franchise. As discussed above, in the APA the Debtors anticipate selling "[t]he Team's NHL

Franchise and Seller's membership interest in the NHL, as modified and assigned under the Sale

Approval Order." (Sale Approval Motion Ex. A at 8 (emphasis added).) Thus, the Debtors do not

seek to transfer their contractual rights as they presently exist, but only after presuming significant

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modification by the Court that would abrogate the NHL's constitutional provisions for Board of

Governors' consent to sale and relocation of Member Clubs. Specifically, Schedule 2.2(a) of the

APA, does not include the NHL Constitution and By-Laws or the 2006 Consent Agreement as

Acquired Assets or Contracts. (Id. at Schedule 2.2(a).) Rather, the NHL Constitution and By-

Laws and the 2006 Consent Agreement are listed in Schedule 4.7 as Material Contracts that are

Excluded Assets in Schedule 2.3 that are not to be assumed and assigned. (Id. at Schedules 2.3 and
4.7.)3

The NHL Constitution and By-Laws and the 2006 Consent Agreement, however, are the

very documents that grant the Coyotes the right to participate in the National Hockey League as an

NHL Club. Without assuming these contracts under the APA – which is expressly conditioned on

the Court ordering the consent of the NHL Board of Governors "deemed" and prohibiting the

imposition of any relocation fee – the Debtors are attempting to sell, at best, the right to intrasquad

scrimmages among non-NHL players or exhibitions against non-NHL affiliated teams at Copps

Coliseum at the whim of Mr. Balsillie. If, however, the Debtors want to transfer the right to be an

NHL Member Club, the Debtors must assume and assign to any purchaser, among other things, the

NHL Constitution and By-Laws and the Consent Agreement that Mr. Moyes signed to obtain

membership in the League. In short, the obligations under these contracts, which the Debtors

attempt to avoid through rejection, are the very essence of the rights that the Debtors wish to sell.

PSE's attempted "side door" into the NHL is blocked by the Bankruptcy Code itself.

Bankruptcy Code section 365(a) provides that a trustee "may assume or reject any executory

contract or unexpired lease of the debtor." 11 U.S.C. § 365(a). Assumption of executory contracts

such as the Constitution and By-Laws, however, requires assumption in entirety "cum onere," or

subject to all burdens. U.S. v. Gerth, 991 F.2d 1428, 1432 (8th Cir. 1993) (section 365 and case

The incongruity in the Debtors' position regarding the NHL Constitution and By-Laws is

3
demonstrated by the fact that they amended the APA to add the NHL Collective Bargaining Agreement to
the list of contracts they intend to assume and assign. Yet, the CBA itself requires "the NHL, each Club,
and each player" to be bound by League rules, including expressly the NHL Constitution and By-Laws,
which the Debtors intend to reject. (See Goldfein Decl. Ex. 1, § 30.1.)

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law "establish[] that when assuming a contract, the debtor assumes all the benefits and burdens of

the contract" (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984))). The Constitution

and By-Laws require the NHL's consent for any ownership transfer or relocation of the Club, as

well as the payment of a relocation fee to the League and, if applicable, indemnity fees to affected

Clubs. (Bettman Decl. ¶¶ 15-30, 38-40.) By virtue of its entry into the APA with Mr. Balsillie, the

Debtors seek to assume and assign all of the benefits of membership in the NHL, while

impermissibly rejecting the obligations of that same membership.

B.

The Debtors Do Not Intend To Cure The Default Caused By Breach Of The
Consent Agreement In Order To Properly Assume The Consent Agreement.
It is equally clear that as a precursor to assignment under Bankruptcy Code section 365(f),

the Debtors must cure all defaults under the NHL Contracts, compensate the non-debtor party for

any pecuniary loss caused by the default and provide adequate assurance of future performance

under the agreements. 11 U.S.C. § 365(b)(1). Even if the Court were to deem the Debtors' motion

as a request to assume and assign the NHL Contracts, the APA forecloses that possibility.

1.

The Debtors are unable to cure the default.

A debtor "must cure all defaults, both monetary and nonmonetary, prior to the assumption

and assignment of an executory contract." Worthington v. Gen. Motors Corp. (In re Claremont

Acquisition Corp., Inc.), 113 F.3d 1029, 1033 (9th Cir. 1997) (construing 11 U.S.C. § 365(b)(1)).

In Claremont, the Ninth Circuit held that, where there are nonmonetary defaults that, by their

nature, are not curable, the executory contract cannot be assumed and assigned. Id. at 1034-35.

Here, the Debtors' defaults include, among other things, negotiating and agreeing to the APA

without the NHL's knowledge or consent, seeking to transfer ownership of the team without the

NHL's consent, and seeking to relocate the Club without the NHL's consent or payment of

appropriate relocation and indemnity fees. All of these acts breached the NHL Contracts and

constitute defaults that must be cured. Inasmuch as the Debtors are asking this Court to approve

the APA as is – including the express exclusion of the Constitution and By-Laws and the 2006

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Consent Agreement – these defaults are not curable.4 Accordingly, the Debtors are incapable of
assuming and assigning the Constitution and By-Laws and the Consent Agreement that provide for

NHL membership.

2.

The Debtors do not intend to provide monetary compensation as
required by section 365(b)(1)(B).

Under the APA, the proposed sale is conditioned on the Court ordering that the Debtors can

sell and relocate the Club without the consent of the League and without the payment of a

relocation fee to the NHL or indemnity payments to certain affected Clubs (likely, the Toronto

Maple Leafs and/or Buffalo Sabres). Bankruptcy Code section 365(b)(1)(B) mandates
compensation for any actual pecuniary loss arising from these defaults.5 11 U.S.C. § 365(b)(1)(B).
While section 365(b)(1)(A) speaks to the default itself, section 365(b)(1)(B) speaks to the

consequences of such default. J.W. Fortune, Inc. v. McLean Square Assocs., G.P. (In re J.W.

Fortune, Inc.), 173 F.3d 424, 1999 WL 95529, at *2 n.3 (4th. Cir. 1999) (unpublished table

decision). Even if the NHL hypothetically consented to a sale and relocation of the Coyotes or this

Court abrogated the NHL's consent rights, the Constitution and By-Laws (and related past practice)

as well as settled Ninth Circuit law would require a new owner to pay a relocation fee and,

depending on the location, an indemnity fee for the goodwill developed by any neighboring

members. See Raiders II, 791 F.2d at 1371-73 (even if antitrust laws allow team to move over

league's objection, team must still compensate league for value of the market). But since the

Debtors and Mr. Balsillie have conditioned the proposed sale on not paying such fees, they would

be unable to comply with section 365(b)(1)(A).

To date, the Debtors have not suggested that they plan to cure their current breaches of the

4
Constitution and By-Laws and the Consent Agreement. To the extent the Debtors may argue that they can
reject the Consent Agreement and still be the Phoenix Coyotes, that would vitiate the obligations the
Debtors agreed to perform in order to become a member of the League. Moreover, it says nothing about the
NHL Constitution and By-Laws, which without question must be agreed to in full by any and all members
of the NHL.

5
The negotiation and execution of the APA – both done without the NHL's knowledge or consent
and prior to the filing of the petition – themselves constitute defaults under the NHL Constitution and By-
Laws and the Consent Agreement. (See Daly Decl. Ex. E. at 6)

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The consequences of this particular default on the Debtors' creditors are quite significant.

As an initial matter, because a relocation opportunity is the property of the NHL rather than the

Debtors, any relocation fee amount would reduce any proceeds from the sale to Mr. Balsillie's

group. (The current version of the APA simply excludes these fees altogether.) The calculation of

an appropriate relocation fee here (and indemnity fees, if applicable) would be a complex matter

that would include such things as a calculation and determination of the difference in value to the

League between the Club's current and prospective locations. (See Bettman Decl. ¶¶ 37-39.) It is

noteworthy that the Debtors' own position is that the Phoenix marketplace is worth "zero" and that

any expansion opportunity in the NHL is worth at least [REDACTED]. (See Bettman Decl. ¶ 44.)

Further, after accounting for adjustments to the "Purchase Price" under the express provisions of

the APA, the amount of money that would actually be payable by PSE to the Debtors is likely to be

only approximately $165 million, substantially less than the $212.5 million PSE purports to
offer.6 (Bettman Decl. ¶¶ 42-43.) Accordingly, even under the Debtors' own assumptions, PSE is
paying [REDACTED] less than the Debtors' view of the value of the Hamilton opportunity – a

value that is likely much greater than [REDACTED]. This does not take into account the increase

in creditors' claims against the estate that will result from rejection of the Coyotes' contract with the

City of Glendale. Moreover, the amount actually payable by PSE will be reduced further (or

eliminated altogether) to the extent the Court confirms the League's right to charge appropriate

relocation and indemnity fees. As a practical matter, therefore, there would be no meaningful

recovery left for creditors from a forced relocation to Hamilton – not even secured creditors –

which obviously is why the Debtors and PSE expressly exclude the relocation fee and indemnity

payments from their APA. By contrast, in the absence of a relocation there would be no need for

any "cure" payments due to the NHL or the City of Glendale for a sale to an owner keeping the

These deductions include approximately $25 million relating to amounts already paid to the Debtors

6
by the NHL in the form of advances of League distributions and revenue sharing funds and $22.5 million
that would be payable to Mr. Gretzky as deferred compensation and future payments pursuant to his
employment agreement. (See Bettman Decl. ¶ 42.)

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Club in Glendale, and it is likely that all creditors other than Mr. Moyes would be better off

financially.

3.

The Debtors are unable to provide adequate assurance of future
performance under either section 365 or 363.

The Debtors also must provide adequate assurance of future performance in order to

assume the NHL Constitution and By-Laws and the 2006 Consent Agreement. See 11 U.S.C.

§ 365(b)(1)(C). Adequate assurance of performance is to be given a "practical pragmatic

construction based upon the facts and circumstances of each case." In re Bon Ton Rest. & Pastry

Shop, Inc., 53 B.R. 789, 803 (Bankr. N.D. Ill. 1985) (citing In re U.L. Radio Corp., 19 B.R. 537,

542 (Bankr. S.D.N.Y. 1982)); see also Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d

1303, 1309 (5th Cir. 1985) (same). Thus, courts consider the factual circumstances surrounding

the debtor or the debtor's assignee.

Critically, in addition to the relocation and indemnity payments discussed above, adequate

assurance requires proof of non-monetary performance – i.e., complying with the NHL's

Constitution and By-Laws and the 2006 Consent Agreement. For example, in Kishi v. Greco (In re

Greco), No. 0975-1-79-00484, 1980 Bankr. LEXIS 5461, at *30-31 (Bankr. D. Haw. Mar. 14,

1980), the court refused to approve the assumption of a master lease where the debtor's sublease

agreement with a sublessor directly conflicted with those of the master lease. Here, the same

reasoning applies: neither the Debtors nor the proposed buyer can provide adequate assurance of

future performance of the Constitution and By-Laws and the Consent Agreement because the APA

to which they have agreed directly conflicts with these contracts. Indeed, if anything, the Debtors

have provided the NHL with adequate assurance of their future non-performance of the NHL
Contracts.7

7
relating to the assignee's obligations. See infra pp. 17-18.

For the same reason, the proposed buyer cannot assure future performance under section 365(f)

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Likewise, in the face of a section 363(f) request for a "free and clear" sale of the Club,8 the
Debtors cannot provide adequate protection to the NHL's interests as required by section 363(e) of

the Bankruptcy Code. Section 363(e) requires the Court to adequately protect the NHL's interest:

Notwithstanding any other provision of this section, at any time, on
request of an entity that has an interest in property used, sold, or
leased, or proposed to be used, sold or leased, by the trustee, the
court, with or without a hearing, shall prohibit or condition such use,
sale, or lease as is necessary to provide adequate protection of such
interest.

11 U.S.C. § 363(e). Bankruptcy Code section 363(e) exists to protect those very interests subject

to section 363(f). Under Bankruptcy Code section 361, when adequate protection is required to be

provided to an interest holder under section 363, such adequate protection may be provided by,

among other things, cash payments, a replacement lien or such other relief "as will result in the

realization by such entity of the indubitable equivalent of such entity's interest in such property."

11 U.S.C. § 361. See generally In re Kellstrom Indus., Inc., 282 B.R. 787, 794 (Bankr. D. Del.

2002) (discussing interplay between sections 363(f), 363(e) and 361).

In a typical sale scenario, cash payments and liens would protect the non-debtor party's

interests in property of the estate. Here, however, the NHL cannot be financially compensated for

deprivation of the fundamental right to decide Club ownership and location. Nor can the NHL be

adequately protected by attachment of its interests to sale proceeds or by any other monetary

compensation, and there is no alternative remedy to realize the "indubitable equivalent" of its

interests. Frankly stated, the NHL is interested in promoting fan interest in the game of NHL

hockey through the choice of good business partners and stable franchises. Indeed, no level of

relocation fees or indemnity payments could compensate for the chaos and harm that would ensue

to the game of NHL hockey if bankruptcy courts could force the sale of Clubs to any person and

permit Clubs to be relocated to any location. Allowing the sale in the manner proposed leaves the

NHL without adequate protection or remedy for the Debtors' destruction of its rights in direct

contravention of Bankruptcy Code section 363(e).

8

The other defects in the Debtors' section 363(f) arguments are discussed below. See infra pp. 18-31.

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C.

The NHL Is Excused Under Section 365(c)(1) From Accepting Performance Of
NHL Contracts From Anyone Other Than The Phoenix Coyotes.

Even if the Court were able to ignore the Debtors' express violation of section 365(b), the

Debtors' ability to assign a contract is still subject to, among other things, the limitations imposed

by Bankruptcy Code section 365(c). See 11 U.S.C. § 365(f)(1). Under section 365(c)(1), a debtor

may not assume or assign an executory contract if:

.

.

.

(A) applicable law excuses a party, other than the debtor, to such
contract
rendering
performance to an entity other than the debtor or the debtor in
possession, whether or not such contract . . . prohibits or restricts
assignment of rights or delegation of duties; and

from accepting performance from or

(B) such party does not consent to such assignment . . . .

11 U.S.C. § 365(c)(1). Because applicable law excuses the NHL from accepting performance from

someone other than the Debtors, the Debtors cannot assume the Constitution and By-Laws and the

2006 Consent Agreement.

1.

Corporate governance law excuses the NHL from accepting
performance.

The NHL is a joint venture organized as an unincorporated association with its headquarters

in New York, New York. It has long been the case that an unincorporated association has the "sole

power to say who shall belong and who shall not." Arnstein v. Am. Soc'y of Composers, Authors

& Publishers, 29 F. Supp. 388, 393 (S.D.N.Y. 1939) (voluntary unincorporated association has

right to refuse plaintiff's attempt to join association); see also Branagan v. Buckman, 122 N.Y.S.

610, 612-13 (Sup. Ct. 1910) (as a matter of common law, an unincorporated association has right

not to accept the purchaser of a mem