Texas Rangers: Lenders Strike Out in Challenge to Financial Advisors’ Professional Fees

by Cadwalader, Wickersham & Taft LLP

[authors: Alicia B. Davis, Thomas Curtin]

On September 25, 2012, Judge D. Michael Lynn for the United States Bankruptcy Court of the Northern District of Texas held that a “tail provision” for professional fees rendered prepetition survived – and was not cut off by – the debtor’s bankruptcy filing. In re Texas Rangers Baseball Partners, Case No. 10-43400-DML, 2012 WL 4464550 (Bankr. N.D. Tex. Sept. 25, 2012).


Texas Rangers Baseball Partners, is a general partnership that owns and operates the Texas Rangers, a member of the Major League Baseball. Partners was 99 % owned by Rangers Equity Holdings, which was an indirect subsidiary of HSG Sports Group. Since 1998, when HSG acquired the Texas Rangers, the team had been unprofitable and had been kept afloat by advances by HSG to cover its cash flow shortfalls.

Eventually, HSG hired Perella Weinberg Partners, Merrill Lynch and Raine Advisors, LLC to serve as financial advisors while HSG sought an investor. After it became clear that HSG’s problems could not be resolved by an investor, HSG entered into an engagement agreement with Raine to find potential buyers of the Rangers and to oversee a sales process. As a result of these duties, Raine was to receive a transaction fee which would have totaled $5 million had the sale been consummated prior to the commencement of Partners’ chapter 11 cases. The engagement agreement also contained a tail provision, which stipulated that Raine was entitled to $5 million if the Rangers were sold within twelve months after the termination of the engagement letter.

During this time, with the help of Raine, HSG initiated a process to sell the Rangers to Rangers Baseball Express LLC (“Express”).

Partners was unable to close the sale of the Rangers to Express prepetition. On September 25, 2009, shortly before the petition date, Partners entered into a replacement engagement letter with Raine pursuant to which Raine was to act as financial advisor in connection with the sale of the team. Under the replacement engagement letter, Raine would receive a $2.5 million transaction fee. Furthermore, the replacement engagement letter contained a tail provision, whereby Raine would be entitled to receive the transaction fee if a “Rangers Transaction” (the sale) was consummated within 12 months of the execution of new engagement letter.

In the meantime, Texas Rangers Baseball Partners borrowed approximately $20 million to satisfy its daily cash flow needs. HSG defaulted on this loan in March 2009. On May 23, 2010, a day before Partners commenced its chapter 11 proceedings, Partners and Express entered into an Asset Purchase Agreement, pursuant to which Partners agreed to sell the team to Express. The sale to Express closed on August 12, 2010 – the day Partners’ plan of reorganization became effective.

Subsequently, Raine, relying on the tail provision in the replacement engagement letter, filed a proof of claim seeking the $2.5 million transaction fee. The plan administrator and JPMorgan Chase Bank (the first lien agent) objected to Raine’s claims.

The Decision

The Court ultimately allowed Raine’s claim in its entirety, basing its decision on, among other things, its finding that the tail provision was enforceable notwithstanding Partners’ bankruptcy.

First, the Court addressed whether Raine would have been entitled payment under the tail provision outside of bankruptcy. The Court determined that under New York law (the law that governed the original and replacement engagement letters), a court must construe a contract so as to “give effect to the intention of the parties as expressed in” the language of the contract. Here, the Court found that the broad language used to define a “Rangers Transaction” would encompass any transaction involving the sale of the Rangers. Moreover, the Court noted that the tail provision did not contain any further preconditions or restrictions on Raine’s entitlement to the transaction fee. Thus, relying on the language of the replacement engagement letter the Court held that any sale of the Rangers within twelve months of termination of the replacement engagement agreement would give rise to Raine’s entitlement to the $2.5 million transaction fee, regardless of whether the sale resulted from Raine’s services.

The Court then turned to whether the tail provision survived the rejection of the replacement engagement letter in the bankruptcy case. In determining the effect of the rejection of the replacement engagement letter, under bankruptcy law, the Court had to treat the agreement as breached. Accordingly, the Court reasoned that, in a non-bankruptcy setting, following a breach of the replacement engagement letter, Raine would be able to rely on the tail provision to preserve its claim.

Nevertheless, the Court grappled with a key issue: whether the filing of the bankruptcy case cuts off the tail provision even if the claim would have survived in a non-bankruptcy setting. The plan administrator and the first lien agent argued that the bankruptcy case cut off the tail provision and cited to In re Oneida, Ltd., 400 B.R. 384, 389 (Bankr. S.D.N.Y. 2009), where the bankruptcy court disallowed a prepetition financial advisor’s claim, which, like Raine’s claim, was based on a tail provision.

The Court rejected this argument and concluded that filing for bankruptcy does not cut off a tail. The Court noted that the bankruptcy court in Oneida did not hold that a bankruptcy case cuts off a tail provision; rather, that decision was based on the fact that the transaction contemplated by the contract had already taken place before the bankruptcy, and thus, full performance had already been rendered by the advisor under the contract.

The Court pointed to a case from the Bankruptcy Court for the District of Maryland, as more factually analogous and persuasive to the case at hand. In that case, the bankruptcy court held that bankruptcy proceedings do not cut off or affect a tail provision because the tail provision in that case was predicated on a sale that did not occur until months after the petition date. See In re Nat’l Energy & Gas Transmission, Inc., 2006 WL 4594947 (Bankr. D. Md. Aud. 28, 2006). Here, as in Nat’l Energy, the tail ran until the sale was consummated, which did not occur until the effective date of the plan of reorganization. Accordingly, the Court determined that the tail provision ran through the bankruptcy proceeding until the sale was consummated and, therefore, Raine should be able to claim damages as it would in the event of a breach outside of bankruptcy.

Finally, the Court rejected the objectors’ claims that the engagement agreement was a fraudulent transfer. Among other things, the objectors raised concern about the simultaneous termination of the original engagement letter and the execution of the new engagement letter on the eve of bankruptcy, when Raine had purportedly completed its work. The objectors further contended that Partners incurred obligations under the replacement engagement letter without receiving any consideration. The Court found that the chronology was not worrisome because Partners was already liable under the original engagement agreement and, moreover, Partners received consideration for entering into the replacement engagement because the termination fee was significantly reduced.

In the end, the Court concluded that Raine was entitled payment in full amount of its general unsecured claims with interest because it would have been entitled to the entire transaction fee absent Partners’ bankruptcy.


The Texas Rangers decision provides greater protection to the claims of professionals and clarifies that a prepetition tail provision survives a bankruptcy filing. Where, as here, a tail provision is predicated on the consummation of a sale that does not occur until after the petition date, a court is likely to allow a financial advisor’s claim that is based on that tail provision.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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