Although every professional sports league has experienced financial hardships as a result of the COVID-19 pandemic, the XFL may have suffered the worst.
The XFL, which was in the middle of its inaugural season, was forced to cancel the rest of its season as positive COVID-19 cases continued to increase throughout the nation. Shortly after suspension of play, the XFL’s parent company, Alpha Entertainment LLC, filed for Chapter 11 bankruptcy in federal bankruptcy court.
With Alpha Entertainment filing for bankruptcy, many believed the XFL would cut its losses and never return. Nonetheless, the XFL appears to be returning in the near future. A group of investors, which includes Dwayne “the Rock” Johnson, submitted a bid to purchase the XFL for $15 million. This sale did not go unchallenged by creditors, but ultimately, the federal bankruptcy court approved the transaction, and the deal has since closed.
Chapter 11 bankruptcy is generally utilized by corporations, limited liability companies and partnerships that are experiencing detrimental financial distress and require significant restructuring to protect themselves from their creditors and vice versa. Thus, it is logical that a limited liability company with an estimated $10 million to $50 million in assets and liabilities as well as being the owner of a brand new professional football league filed for Chapter 11 bankruptcy shortly after a pandemic forced the league to come to a screeching halt.
Moreover, it is equally unsurprising that the XFL filed for bankruptcy as it lost almost all of its revenue streams while also having an estimated 1,000-5,000 creditors. Of these creditors, the largest 25 unsecured claims range from $215,000 to $1.6 million.
Chapter 11 bankruptcy provides a variety of options for a failing business, which includes the sale of a portion or all of an entity’s assets to maximize the value of the bankruptcy estate. On April 21, Alpha Entertainment filed a lengthy motion seeking approval for the sale of the XFL. Within the motion, Alpha Entertainment stated, “after considering all available strategic options, [Alpha Entertainment] and its professional advisors determined the best course to preserve and maximize the value of [Alpha Entertainment’s] estate is through a chapter 11 sale process.”
The sale of the XFL makes financial sense. Despite being less than a year old, the XFL was gaining real traction in the professional sports sector. With multiple major media outlets broadcasting XFL games each week, millions of interested people tuned in, and many quickly became supporters of the new football league. However, because of its age, the only significantly valuable assets of the XFL is the intellectual property rights to the XFL as well as any good faith that resulted from previous dealings regarding broadcasting, marketing, and stadium leases. Thus, it makes financial sense that the XFL will sell off its assets to satisfy obligations to creditors and start anew.
Despite this lucrative opportunity to become the new owner of an up-and-coming professional football league, the XFL received only one qualified bid at $15 million. Although the unsecured creditors did not object to a sale, they promptly filed a motion objecting to this sale.
The unsecured creditors argued in their motion that the $15 million bid did not satisfy the sound business purpose for the sale nor is the sale in the best interest of the estate. Because Alpha Entertainment has a fiduciary duty to satisfy these two requirements, a finding in the negative would likely result in the court rejecting the sale. Regarding the former, the sound business test requires there to be (1) a sound business purpose for the sale; (2) a fair sale price; (3) adequate and reasonable notice; and (4) good faith on behalf of the purchaser. In re Summit Global Logistics, Inc. et al., No. 08-11566, 2008 WL 819934 at *9 (Bankr. D. N.J., March 26, 2008).
Although the unsecured creditors provided several arguments, their objection can be summarized as follows: they believe the sale does not place the bankruptcy estate in a better position then it is currently in. To support this conclusion, the unsecured creditors argue that the lack of timing caused there to only be one qualified bid, and Alpha Entertainment failed to provide valuations for assets they intend to sell at the $15 million price.
To combat these criticisms, a managing director for the investment banking firm handling the XFL sale provided critical details of what transpired up to the single qualified bid. This timeline, which began at the end of May and ended only July 31, included the firm contacting more than 200 potential bidders, of which 35 continued the process by signing confidentiality agreements to inspect confidential data belonging to the XFL. Nonetheless, these numbers quickly dwindled as only two bids were submitted by the deadline. Shortly thereafter, it was determined that one of the submitted bids did not meet the qualifications, and therefore, there was only the lone $15 million bid. To further support the sale, XFL’s COO Jeff Pollack also provided an affidavit to the court explaining that he believed the bidding process was fair and conducted correctly, and will ultimately lead to the return of the XFL.
After considering the extensive evidence provided, the bankruptcy court ultimately approved of the transaction on Aug. 7. Thus, with the closing of the deal occurring last month, the investment group led by Dwayne “The Rock” Johnson will now pay $15 million for the XFL as well as assume liabilities of up to $9.2 million for contracts that need to be cured.
Given the prompt objection to the sale, it is expected that this approval will further diminish any return these unsecured creditors were hoping to get through this bankruptcy case. However, this is a risk known to a creditor when he or she extends credit without securing the debt with collateral.
Nonetheless, it appears that the XFL will attempt to reestablish itself in the near future. Although this Chapter 11 bankruptcy case likely has not gone as hoped for most of these creditors, there are many XFL fans excited for the now expected return of the football league. While this bankruptcy sale is a significant step forward to bring back the league, this is just a first step of many to make the XFL financially stable and operable again.