Law360, New York (October 18, 2013, 8:49 PM EDT) -- The Houston Astros have a tough road ahead as they attempt not only to toss the involuntary bankruptcy Comcast affiliates recently brought against a Houston television network they share, but also to convince a court that the affiliates are improperly trying to take control of the team’s broadcast rights.
The affiliates slapped Houston Regional Sports Network LP — which is jointly owned by the Comcast affiliates, the Astros and the Houston Rockets and is licensed to air the teams’ games — with an involuntary Chapter 11 petition in September, saying it had failed to make payments on certain debts following a stalemate in contract negotiations over carriage rights between the network, Comcast and the Astros.
The baseball team, which holds a 46 percent stake in the network, is now pushing the bankruptcy court to throw out the petition, claiming the Comcast affiliates haven't adequately shown that HRSN has routinely failed to make debt payments and that they placed it into Chapter 11 in bad faith. The matter of whether the network has been paying its bills or not will likely be the key factor in the court’s decision, but the bad-faith accusation carries a heftier penalty if the court finds it to be true.
"It’s a powerful charge to throw out there, and there are cases that have found litigants to have filed in bad faith ... but I would say that most of the time that bad faith is alleged, it’s alleged unsuccessfully,” Matthew Gold of Kleinberg Kaplan Wolff & Cohen PC said.
The Astros and the Rockets formed HRSN in 2003 to monetize the teams’ media rights by granting HRSN a license to feature games as a part of its regional sports programming in exchange for the payment of media rights fees.
The Astros are accusing minority shareholders Houston SportsNet Finance LLC, Comcast Sports Management Services LLC, National Digital Television Center LLC and Comcast SportsNet California LLC of launching the bankruptcy in an effort to strip the ball club of its media broadcast rights. The team says the affiliates are trying to force it to sign underpriced broadcast distribution agreements under the threat of eliminating its stake in the network through a reorganization that could allow one of the affiliates to acquire all HRSN’s assets.
The petition was filed Sept. 27 after discussions between the parties over carriage agreements fell apart and, according to the petitioning creditors, HRSN stopped making payments on loans and bills.
The Astros say the petition was filed three days before they could exercise a contractual option to terminate their media rights agreement with HRSN and search for better offers and that the affiliates made the move to gain an advantage over the team in the dispute.
If a court does find that an involuntary petition has been filed in bad faith, it can hit the petitioning creditors with heavy sanctions. It’s a rare finding, according to bankruptcy experts.
"The bad-faith argument is a very fact-specific inquiry, and the court’s decision on bad faith will be driven by the particular facts and circumstances surrounding the filing in question,” Alan Halperin of Halperin Battaglia Raicht LLP said.
It’s difficult to establish bad faith without a smoking gun of some sort unless the accused party confesses, according to Gold. Most of the time, courts will not find a petitioning creditor in bad faith if it exercised its rights under the U.S. Bankruptcy Code to force a debtor into bankruptcy in the midst of an impasse over a business matter, he added.
The Bankruptcy Code allows judges to punish bad-faith petitioners with attorneys' fees and costs and damages proximately caused by the filing, according to Joe Wielebinski of Munsch Hardt Kopf & Harr PC, who represented Alex Rodriguez as the largest unsecured creditor in the Texas Rangers’ bankruptcy as well as the plan administrator under the team’s confirmed reorganization plan.
The potential for the bad-faith finding and potential ramifications for the Comcast affiliates adds extra intrigue to the HRSN case, which had already piqued the interest of the bankruptcy community and general public thanks to the head-to-head business dispute, he said.
“This case looks like a law school exam for a bankruptcy course on the issue of involuntary petitions and corporate governance,” Wielebinski said.
On one hand, the contract fight is a clear-cut issue between two sophisticated parties with respect to the plain terms of their agreements, which doesn’t normally result in an involuntary bankruptcy petition. On the other, the Bankruptcy Code does provide creditors with the right to resolve business disputes by forcing a debtor into bankruptcy.
The judge could decide that such a spat doesn’t warrant an involuntary bankruptcy filing if only a certain number of financial obligations have gone unpaid, experts say. The Bankruptcy Code is not explicit in how many payments an entity must have missed in order for creditors to have standing to place it in bankruptcy, which has resulted in different rulings from judges, Gold said.
“If you have a situation where some debts being paid and not others, there is a possibility that the judge could find that the petitioners have not met their burden,” he said.
The affiliates say HRSN owes them more than $101.3 million in loans, fees and services, but the Astros say the petitioning creditors have not and will not be able to prove that the network hasn’t been paying its debts.
The Astros’ contention that using bankruptcy to force their hand in the carriage agreement feud is improper may not be sufficient to dismiss the case if the network has in fact fallen drastically behind on its bills.
"There’s nothing in the statute that says that having business disputes is a bad reason for an entity go into bankruptcy,” Gold said. “Many bankruptcies arise from some business dispute or other."
By: Maria Chutchian; additional reporting by Jeremy Heallen and Kelly Knaub; editing by Elizabeth Bowen and Philip Shea.