“This isn’t some no-name. This is Vince McMahon, maybe the most successful person in sports promotion. The guy’s brilliant, and he’s got money. I definitely thought I would get paid.”
—A sports business professional who worked for the XFL and is one of thousands of creditors demanding payment
In the wake of Vince McMahon’s Alpha Entertainment reaching an agreement to sell the XFL for $15 million, creditors are left wondering if they’ll see any of the money. As first reported by Sportico’s Scott Soshnick, a group that includes former WWE star Dwayne “The Rock’’ Johnson and RedBird Capital CEO Gerry Cardinale will buy the team, pending approval by U.S. Bankruptcy Judge Laurie Selber Silverstein.
“I’ll be lucky to get pennies on the dollar,” a sports business professional who operates a small company tells Sportico. The source was granted anonymity given the ongoing status of their legal claims against Alpha. As an unsecured creditor in Alpha’s chapter 11 bankruptcy, the source lacks any collateral in Alpha’s properties or assets. It also means they’ll be among the last in line to collect any proceeds from the sale.
The XFL, the professional maintains, owes them tens of thousands of dollars for services already rendered. Although they knew that new sports leagues tend to fail, this creditor assumed that a venture led by McMahon, a billionaire, would ensure that bills are paid and paid on time.
“I’ve been in the industry for decades, and I honestly never thought something like this would happen,” they said, referring specifically to the prospect of never being paid by a McMahon-backed venture.
The professional says they spoke with a few attorneys about the XFL’s bankruptcy, and each said don’t expect much in the way of recovery.
“That’s just how bankruptcies in America work,” the creditor was grimly informed. Even though McMahon is the chairman and controlling owner of Alpha, Alpha can use the Chapter 11 reorganization process to prevent creditors from taking any legal action and to extinguish various debts.
So, are creditors out of luck with the pending sale?
Not entirely. Within hours of Alpha’s filing a notice of a canceled auction and successful bidder on Monday, attorneys representing unsecured creditors filed a 14-page objection in federal court. Depending on Judge Silverstein’s review, the objection could delay the pending sale or require that it be reworked.
The objection levels a series of criticisms against Alpha. One area of critique relates to timing, or lack thereof. The committee representing the interests of unsecured creditors asserts that it only first learned of Johnson and Cardinale’s plan on the evening of July 30. This was right before bids for an auction, which had been scheduled to take place on August 3, were due. Alpha then canceled the auction on grounds that only one qualified bid was received by the deadline, and it belonged to Johnson and Cardinale. In short, the process, they argue, seemed rushed.
Another source of criticism is uncertainty about what exactly is being sold. The unsecured creditors suspect that Alpha failed its duty under bankruptcy law to negotiate sale terms “that are most favorably to the estate and do not unduly prejudice its creditors.”
At issue is a proposed asset purchase agreement (APA), a sales document that specifies and values company assets. The unsecured creditors insist that the APA “seeks to strip the estate of valuable assets for no consideration.” Stated more bluntly, they worry that Johnson and Cardinale’s group would obtain valuable assets effectively at no cost. If true, money that could go to creditors would instead remain with Johnson and Cardinale.
The unsecured creditors build this argument by claiming that Alpha neglected to provide valuations of certain items. Among them are potential legal claims Alpha could have against so-called “statutory insiders,” which include Alpha officers and executives. Such causes of action, the unsecured creditors maintain, “are traditionally a valuable source of recovery for unsecured creditors” and belong in the bankruptcy process, not in the hands of new ownership.
Along those lines, the unsecured creditors raise questions about “millions of dollars in payments . . . questionable loan transactions within the days and weeks leading up to the bankruptcy and questionable actions and decisions made by certain insiders of Alpha.” In a revealing footnote, the objection declares that Alpha may have legal claims against McMahon—Alpha’s chairman and controlling owner—but that Alpha allegedly hasn’t “performed an analysis of or valued such claims.”
The unsecured creditors worry that these potential claims will essentially be forfeited if the proposed sale is approved. They demand that Alpha remove causes of action against insiders from the definition of purchased assets and also disclose the economic value and identity of assets that would be part of the sale in much more detail. Unless these and other steps are taken, the creditors warn they’ll be “unduly prejudiced by the contemplated sale.”
The objections will be a focal point at a hearing scheduled for Friday in Wilmington, Del. Judge Silverstein will consider whether the pending sale complies with bankruptcy law and adequately addresses the interests of creditors.
One factor advantaging Alpha—and as acknowledged by creditors in their objection—is that, as the debtor, Alpha is entitled to deference in seeking approval of the proposed sale. A related factor is that the relevant legal standard for review is not especially difficult to meet. That standard is the business purpose test, which requires there be a sensible reason for the sale and a fair price for it.
Harvard Law School Professor Mark Roe, an expert in bankruptcy law, highlighted these factors in an interview. The business purpose test, Roe said, is “usually an easy standard to satisfy as the sales’ proponents just have to give a plausible justification.” He surmises that for this sale, “it could have been XFL has been languishing and a new owner like Dwayne Johnson can give it a boost of publicity.”
Where Roe sees Alpha potentially running into more trouble is “the structure of the auction and the relationships.”
“Even if there’s a business purpose,” Roe notes, “the court should be structuring an auction that’s fair and likely to bring forward the best price.” Roe believes the court will attempt to determine if insiders downplayed asset value. In that instance, “the bidding documents would be defective.”
Roe also draws attention to the creditors’ concern about the sale potentially releasing the insiders of causes of action—“that,” Roe said, “would be another issue separate from whether there was a sound business purpose.”
None of this means the sale won’t happen or that the creditors don’t wish to see Johnson’s group land the XFL. In fact, the objection indicates that the unsecured creditors’ committee “generally supports” the sale. But the sale might require adjustments, and adjustments would take time. A deal expected to close on or around August 21 might not happen so quickly.
Unfortunately for unsecured creditors, adjustments won’t substantially alter their predicament in trying to collect what they’re owed.
“I’m not expecting much,” the professional concedes.