Document 39

Case 4:14-cv-00304 Document 39 Filed in TXSD on 02/24/14 Page 1 of 61
IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: HOUSTON REGIONAL SPORTS NETWORK, L.P. Debtor. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
Chapter 11 Case No. 4:13-bk-35998
HOUSTON ASTROS, LLC, et al., Appellants, -againstHOUSTON REGIONAL SPORTS NETWORK, L.P., et al., Appellees.
Case No. 4:14-cv-304
BRIEF OF APPELLANTS
TABLE OF CONTENTS Page INTRODUCTION ...........................................................................................................................1 STATEMENT OF JURISDICTION................................................................................................4 STATEMENT OF THE ISSUES.....................................................................................................6 STANDARD OF REVIEW .............................................................................................................6 STATEMENT OF THE CASE AND FACTS ................................................................................7 I. THE NETWORK.................................................................................................................7 A. B. C. II. The Networks Formation........................................................................................7 The Networks Governance Structure .....................................................................7 The Networks Media Rights Agreement With The Astros ....................................9
THE PARTNERS DIFFERING INTERESTS IN THE NETWORK ..............................10 A. B. C. The Astros Need The Equity In The Network .......................................................10 The Rockets Primary Interest Is the Media Rights Fees........................................11 Comcast Has Still Different Interests In The Network..........................................11
III. IV. V. VI.
COMCAST PURSUES AFFILIATION AGREEMENTS BUT NONE RESULT IN A PROFITABLE NETWORK .....................................................................................12 THE NETWORK FAILS TO PAY THE ASTROS MEDIA RIGHTS FEES .................13 FOUR COMCAST AFFILIATES FILE AN INVOLUNTARY PETITION....................14 THE PROCEEDINGS IN THE BANKRUPTCY COURT .............................................15 A. B. C. The Astros Moved To Dismiss The Involuntary Petition And Comcast Moved For The Appointment Of A Trustee ..........................................................15 The Astros And Rockets Pursued A Path For The Network But Were Unsuccessful, While Comcast Sought The Appointment Of An Examiner ..........17 The Bankruptcy Court Entered An Order For Relief.............................................17
ARGUMENT.................................................................................................................................19
ii
I.
THE INVOLUNTARY PETITION MUST BE DISMISSED BECAUSE NO REASONABLE LIKELIHOOD OF REHABILITATION EXISTS AS A MATTER OF LAW...........................................................................................................19 A. The Bankruptcy Court Cannot Force The General Partners Directors To Accept Fiduciary Obligations That Have Been Validly Disclaimed .....................21 1. 2. The General Partner, Its Directors, And The Network Validly Disclaimed Any Fiduciary Duties As A Matter Of Delaware Law ...........21 The Bankruptcy Code Does Not Authorize Overriding Those Valid Disclaimers ................................................................................................23 a. b. State-Law Duties Generally Govern In Bankruptcy......................23 The Bankruptcy Code Does Not Impose Fiduciary Duties On The Director Of An Entity That Has Validly Disclaimed Such Duties.................................................................25
3.
The Bankruptcy Court Cannot Impose Fiduciary Duties, Rather Than Appoint A Trustee, To Avoid Triggering The Astros Termination Rights ....................................................................................29
B.
The Media Rights Agreement Is Not Assumable By A Trustee Or Assignable In Bankruptcy......................................................................................30 1. 2. The Media Rights Agreement Is Protected By 11 U.S.C. 365(c)(1) and (e)(2).................................................................................31 The Astros Did Not Consent To The Assignment Of The Media Rights Agreement In Bankruptcy ..............................................................34
C.
There Is No Reasonable Likelihood Of Any Profitable Plan In Bankruptcy And The Astros Will Reasonably Withhold Consent From An Unprofitable Plan ...................................................................................................35 An Assumption Of The Media Rights Agreement By A Debtor-InPossession With Fiduciary Duties Would Trigger The Astros Termination Rights .....................................................................................................................37
D.
II.
THE INVOLUNTARY PETITION MUST BE DISMISSED BECAUSE IT WAS FILED IN BAD FAITH.....................................................................................................40 A. B. Comcast Orchestrated The Involuntary Petition In Bad Faith...............................40 The Rockets And Landlords Joinders Do Not Cure Bad Faith By The Comcast Petitioning Creditors. ..............................................................................44
iii
CONCLUSION..............................................................................................................................46
iv
TABLE OF AUTHORITIES Page(s) Cases Altria Group, Inc. v. Good, 555 U.S. 70 (2008)............................................................................................................ 25 Basin Elec. Power Corp. v. Midwest Processing Co., 769 F.2d 483 (8th Cir. 1985) ............................................................................................ 45 Baxter Pharm. Prods., Inc. v. ESI Lederle Inc., 1999 WL 160148 (Del. Ch. Mar. 11, 1999)...................................................................... 39 Brennans Inc. v. Dickie Brennan & Co., 376 F.3d 356 (5th Cir. 2004) ............................................................................................ 31 Butner v. United States, 440 U.S. 48 (1979)...................................................................................................... 23, 24 CFTC v. Weintraub, 471 U.S. 343 (1985).......................................................................................................... 27 Cole v. City of Dallas, 314 F.3d 730 (5th Cir. 2002) .............................................................................................. 6 Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 WL 338219 (Del. Ch. Jan 29, 2010)........................................................................ 33 In re 1031 Tax Group, LLC, 2007 WL 2085384 (Bankr. S.D.N.Y. July 17, 2007) ....................................................... 26 In re ABQ-MCB Joint Venture, 153 B.R. 338 (Bankr. D.N.M. 1993) ................................................................................ 24 In re Adelphia Commcns Corp., 2004 WL 2186582 (S.D.N.Y. Sept. 27, 2004).................................................................. 37 In re Alta Title Co., 55 B.R. 133 (Bankr. D. Utah 1985) .................................................................................. 45 In re Ampal-American Israel Corp., 2013 WL 1400346 (Bankr. S.D.N.Y. Apr. 5, 2013)......................................................... 26 In re Antelope Techs., Inc., 431 F. Appx 272 (5th Cir. 2011) ..................................................................................... 43
In re ASARCO, L.L.C., 650 F.3d 593 (5th Cir. 2011) .............................................................................................. 4 In re Beacon Reef Ltd. Pship, 43 B.R. 644 (Bankr. S.D. Fla. 1984)................................................................................. 24 In re Braten, 74 B.R. 1021 (Bankr. S.D.N.Y. 1987).............................................................................. 45 In re Brazos Emergency Physicians Assn, P.A., 471 F. Appx 393 (5th Cir. 2012) ..................................................................................... 43 In re Cardinal Indus., 116 B.R. 964 (Bankr. S.D. Ohio 1990)....................................................................... 29, 40 In re Catron, 158 B.R. 624 (Bankr. E.D. Va. 1992), affd, 158 B.R. 629 (E.D. Va. 1993), affd 25 F.3d 1038 (4th Cir. 1994) ........................ 29 In re Centennial Ins. Assoc., Inc., 119 B.R. 543 (Bankr. W.D. Mich. 1990).................................................................... 45, 46 In re Crown Sportswear, Inc., 575 F.2d 991 (1st Cir. 1978)............................................................................................. 45 In re Davis, 170 F.3d 475 (5th Cir. 1999) ...................................................................................... 25, 26 In re Eberhart Moving & Storage, Ltd., 120 B.R. 121 (Bankr. D.N.D. 1990) ................................................................................. 45 In re Fax Station, Inc., 118 B.R. 176 (Bankr. D.R.I. 1990)................................................................................... 24 In re Flugence, 738 F.3d 126 (5th Cir. 2013) .............................................................................................. 6 In re Footstar, Inc., 323 B.R. 566 (Bankr. S.D.N.Y. 2005)........................................................................ 29, 40 In re Global Ship, Systems, LLC, 391 B.R. 193 (Bankr. S.D. Ga. 2007) ......................................................................... 42, 43 In re Green County Hospital, 835 F.2d 589 (5th Cir. 1988) .............................................................................................. 5 In re Green Hills Dev. Co., 2014 WL 380386 (5th Cir. Feb. 3, 2014) ................................................................... 27, 45 vi
In re Harms, 10 B.R. 817 (Bankr. D. Colo. 1981) ........................................................................... 29, 40 In re Heard Family Trucking, Inc., 41 F.3d 1027 (5th Cir. 1995) .............................................................................................. 4 In re Herberman, 122 B.R. 273 (Bankr. W.D. Tex. 1990)............................................................................ 26 In re Humble Place Joint Venture, 936 F.2d 814 (5th Cir. 1991) .............................................................................................. 6 In re Jacobsen, 609 F.3d 647 (5th Cir. 2010) .............................................................................................. 6 In re Kazi Foods of Mich., Inc., 473 B.R. 887 (Bankr. E.D. Mich. 2011) ........................................................................... 32 In re Kelvin Pub., Inc., 72 F.3d 129, 1995 WL 734481 (6th Cir. Dec. 11, 1995).................................................. 23 In re Kilroy, 2008 WL 780692 (Bankr. S.D. Tex. Mar. 24, 2008)........................................................ 21 In re Kingston Square Associates, 214 B.R. 713 (Bankr. S.D.N.Y. 1997).............................................................................. 44 In re Kizzee-Jordan, 626 F.3d 239 (5th Cir. 2010) .............................................................................................. 4 In re Lil Things, Inc., 220 B.R. 583 (Bankr. N.D. Tex. 1998)............................................................................. 33 In re Manor Place Dev. Assocs., L.P., 144 B.R. 679 (Bankr. D.N.J. 1992) ...................................................................... 18, 28, 40 In re Martin, 117 B.R. 243 (Bankr. N.D. Tex. 1990)............................................................................. 34 In re Mazzocone, 183 B.R. 402 (Bankr. E.D. Pa. 1995), affd, 200 B.R. 568 (E.D. Pa. 1996).................................................................................. 24 In re Mirant Corp., 440 F.3d 238 (5th Cir. 2006) ............................................................................................ 29 In re Mylotte, David & Fitzpatrick, 2007 WL 2033812 (Bankr. E.D. Pa. July 12, 2007)......................................................... 45 vii
In re N.C.P. Mktg. Grp., Inc., 337 B.R. 230 (D. Nev. 2005), affd, 279 F. Appx 561 (9th Cir. 2008)............................................................................ 32 In re Nizny, 175 B.R. 934 (Bankr. S.D. Ohio 1994)............................................................................. 29 In re Norriss Bros. Lumber Co., 133 B.R. 599 (N.D. Tex. 1991)......................................................................................... 45 In re OConnor, 258 F.3d 392 (5th Cir. 2001) ...................................................................................... 29, 40 In re Phillips, 844 F.2d 230 (5th Cir. 1988) .............................................................................................. 5 In re Priestley, 93 B.R. 253 (Bankr. D.N.M. 1988) .................................................................................. 29 In re Rite-Cap, 1 B.R. 740 (Bankr. D. R.I. 1979)...................................................................................... 45 In re Schick, 235 B.R. 318 (Bankr. S.D.N.Y. 1999).............................................................................. 29 In re Shead, 2008 WL 1995373 (S.D. Tex. May 6, 2008) .............................................................. 24, 30 In re Southmark Corp., 163 F.3d 925 (5th Cir. 1999) ............................................................................................ 27 In re Sovereign Group 1984-21 Ltd., 88 B.R. 325 (D. Colo. 1988)................................................................................. 26, 27, 28 In re Sunset Developers, 69 B.R. 710 (Bankr. D. Idaho 1987)................................................................................. 29 In re Travelot Co., 286 B.R. 447 (Bankr. S.D. Ga. 2002) ............................................................................... 32 In re Volkswagen of America, Inc., 545 F.3d 304 (5th Cir. 2008) .............................................................................................. 6 In re Walden, 781 F.2d 1121 (5th Cir. 1986) .......................................................................................... 45 In re Watson, 884 F.2d 879 (5th Cir. 1989) .............................................................................................. 4 viii
In re Wellington Vision, Inc., 364 B.R. 129 (S.D. Fla. 2007) .......................................................................................... 32 In re XMH Corp., 647 F.3d 690 (7th Cir. 2011) ............................................................................................ 32 Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008) ............................................................................................ 27 Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96 (3d Cir. 1986)................................................................................................ 39 Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), affd 45 A.2d 148 (Del. Super. Ct. 2012).......................................................................... 39 Matter of Win-Sum Sports, Inc., 14 B.R. 389 (Bankr. D. Conn. 1981) ................................................................................ 24 Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 WL 1348438 (Del. Ch. Apr. 8, 2011) ...................................................................... 38 Miller v. Glenn Miller Prods., Inc., 454 F.3d 975 (9th Cir. 2006) ............................................................................................ 32 New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995).......................................................................................................... 25 Production Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772 (Del. Ch. 2004)........................................................................................... 23 Santa Fe Indus. v. Green, 430 U.S. 462 (1977).................................................................................................... 21, 25 Sheilas Shine Prods., Inc. v. Shiela Shine, Inc., 486 F.2d 114 (5th Cir. 1973) ............................................................................................ 32 Simmons v. Sabine River Auth. La., 732 F.3d 469 (5th Cir. 2013), pet. for cert. filed, Jan. 7, 2014 ......................................................................................... 25 Smith v. AET, Ltd., 2007 WL 1644060 (S.D. Tex. June 4, 2007) ...................................................................... 5 Star Cellular Tel. Co. v. Baton Rouge CGSA, Inc., 19 Del. J. Corp. L. 875 (Del. Ch. 1993), affd, 647 A.2d 382 (Del. 1994).................................................................................. 38, 39
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Stern v. Marshall, 131 S. Ct. 2594 (2011)...................................................................................................... 23 Tenneco Auto Inc. v. El Paso Corp., 2002 WL 453930 (Del. Ch. Mar. 20, 2002)...................................................................... 38 Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007).......................................................................................................... 23 TTT Hope, Inc. v. Hill, 2008 WL 4155465 (S.D. Tex. Sept. 2, 2008) ............................................................. 24, 37 Twin Bridges Ltd. Pship v. Draper, 2007 WL 2744609 (Del. Ch. Sept. 14, 2007) ................................................................... 27 Wolf v. Weinstein, 372 U.S. 633 (1963).................................................................................................... 27, 28 Statutes 11 U.S.C. 1104........................................................................................................................... 26 11 U.S.C. 1112........................................................................................................... 2, 15, 19, 31 11 U.S.C. 1129........................................................................................................................... 19 11 U.S.C. 303............................................................................................................................. 46 11 U.S.C. 365...................................................................................................................... passim 28 U.S.C. 1334............................................................................................................................. 4 28 U.S.C. 157............................................................................................................................... 4 28 U.S.C. 158........................................................................................................................... 4, 5 6 Del. Code 17-1101 ...................................................................................................... 21, 25, 27 Other Authorities 3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition 18:43 (4th ed. 2013) ..................................................................................................................... 32, 33 Christina Settimi, Baseballs Biggest Cable Deals, Forbes, Mar. 21, 2012, available at, http://www.forbes.com/sites/christinasettimi/2012/03/21/baseballs-biggest-cabledeals/ ................................................................................................................................. 10
Christina Settimi, The NBAs Richest Local Television Deals, Forbes, Jan. 22, 2014, available at, http://www.forbes.com/sites/christinasettimi/2014/01/22/the-nbasrichest-local-television-deals/ ........................................................................................... 11 M. Steele (Del. Chief Justice), Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221 (2009)............................................................................................................ 22, 28 Restatement (Second) of Contracts 214..................................................................................... 39 Rules Fed. R. Bankr. P. 8002.................................................................................................................... 4 Fed. R. Bankr. P. 8003.................................................................................................................... 5
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INTRODUCTION This involuntary-bankruptcy appeal is about whether the Bankruptcy Code silently preempts state laws that allow partners to contractually organize their affairs and establish what fiduciary duties they owe. At the heart of the dispute are the Astros valuable media rights rights that are critical to the future of the team on and off the field. The Astros ability to succeed depends not only on how the team is portrayed and how its trademarks are used, but also its ability to obtain a profitable revenue stream from its media rights and use that revenue to field a competitive team. Given the significance of its media rights to its entire operation, when the Astros entered into the Network partnership with Comcast and the Rockets, the Astros were careful to protect its ability to ensure that those media rights were used to the Astros benefit. Specifically, the partnerships governing documents give the Astros consent rights over any changes affecting the Media Rights Agreement with the Network. The documents also prevent the partners from filing a petition for bankruptcy without unanimous agreement. And the governing documents make clear that each partner-appointed director to the Networks general partner is entitled to act in the partners best interestswithout owing fiduciary duties to the partnership or the partners. Such disclaimers for limited partnerships and LLCs are well-
established and valid under Delaware law, in recognition of the freedom-of-contract underpinnings for those types of business entities, and those disclaimers were an essential part of the agreement in which the Astros licensed its media rights to the Network for 20 years. Comcast was well-aware of these limitations when it entered the partnership. Now, with the Network proving unprofitable, Comcast wants to re-write the deal it agreed to and has illegitimately invoked the bankruptcy process in a last-ditch effort to tie the Astros hands. In essence, it wants to keep the benefits of the valuable Media Rights Agreement, while stripping the Astros of its bargained-for right to control its media rights.
Recognizing that it was contractually prohibited from taking the Network into bankruptcy, Comcast colluded with its affiliates to file the Involuntary Petition on the eve of the Astros exercising its contractual right to terminate the Media Rights Agreement because the Network failed to make its media-rights payments. The Astros, in turn, argued that the
Involuntary Petition must be dismissed because it was not brought in good faith and, independent of that, there was not a reasonable likelihood of a successful reorganization because all paths forward would trigger the Astros right under the Bankruptcy Code to terminate the Media Rights Agreement. 11 U.S.C. 1112(b)(4)(A), 365(e). That should have been the end of this case. The bankruptcy court, however, rejected the Astros arguments andimportantly for this appealfound that a bankruptcy is not futile because the General Partners directors have fiduciary duties to the Estate, apparently based on an implied federal preemption theory that overrides the valid disclaimers in the governing documents. The bankruptcy court posited that once the directors are forced to act in the
Networks interests, rather than the partners individual interests, that will lead to a planeven if it is unprofitable, even if it is profoundly detrimental to the Astros. The bankruptcy court imposed these fiduciary duties onto the General Partners directors even though no party raised such a theory and the issue was never briefed. It did so in lieu of appointing a Trustee. Appointing a Trustee would have triggered the Astros right to terminate the Media Rights Agreement with the Network. This is because the Media Rights Agreement is a protected asset under the Bankruptcy Code. As a personal services contract, as well as a trademark license, the Bankruptcy Code gives the Astros the right to terminate rather than permit any of the assignmentsto a Trustee, to some other entity that displaced the Networks General Partner, or ultimately to a new ownerthat a bankruptcy would
lead to.
Termination of the Media Rights Agreement would render the bankruptcy futile,
because it is admittedly the Networks most important asset. The bankruptcy courts preemption theory, thus, tries to box in the Astros: The franchise is unable to exercise its termination rights (because no trustee is forced upon the partnership), but at the same time the Astros cannot meaningfully exercise its consent rights (because the Astrosappointed director is forced to act against the Astros interests, upon pain of personal liability). The flaws in that logic are legion. First, the bankruptcy courts decision is premised on an inchoate preemption theory that no other court has ever articulated, much less adopted. Under its theory, just because the partnership has been forced into bankruptcy, unwritten federal fiduciary duties override valid fiduciary-duty disclaimers and the Astros bargained-for right to act in its own interests. But the Bankruptcy Code says nothing of the sort. The remedy for the partnerships fiduciary-duty disclaimers, to the extent one is required, is the appointment of a trustee. The bankruptcy courts effort to avoid that result, to prevent the Astros from exercising its right under the Bankruptcy Code to terminate the Media Rights Agreement, turns bankruptcy law on its head. Because no fiduciary duties can be imposed upon the directors, and that was the only basis for the bankruptcy courts decision that proceeding would not be futile, the case must be dismissed. Second, even if the bankruptcy court could impose fiduciary duties on the Astrosappointed director, that so fundamentally changes the nature of the partnership as to trigger the Astros termination rights. It simply makes no sense to say that the bankruptcy court can force the partnership to act contrary to its governing documents and in the same breath assert that has no effect on the Astros ability to protect its media rights. Precisely because it would force a fundamental change in the governance of the partnership, the Astros necessarily have the right to
terminate, thus rendering this involuntary bankruptcy futile. Finally, the Involuntary Petition should be dismissed because it was brought in bad faith. When a partner colludes with its affiliates to circumvent contractual restrictions and thwart another partners exercise of its valid, contractual rights, that is the epitome of bad faith. It is no answer to say the petitioners were seeking to preserve value in the debtor. That was simply a means to an endsettling a partnership dispute. Comcasts attempt to end-run its contractual obligations cannot be permitted. Nor does the addition of other parties post-petition cure that defect, and the Court should not encourage a file-first, find-proper-petitioner-later strategy. In sum, the Involuntary Petition should be dismissed as a matter of law. STATEMENT OF JURISDICTION This is an appeal from the United States Bankruptcy Court for the Southern District of Texas (Isgur, J.). The bankruptcy court had jurisdiction over this case under 28 U.S.C. 157 and 1334. That court entered an Order for Relief granting the involuntary bankruptcy petition filed against the Network and issued an oral order denying the Astros Motion to Dismiss the Involuntary Petition on February 4, 2014. The bankruptcy court subsequently supplemented those orders with a written opinion on February 12, 2014. The Astros timely filed a notice of appeal on February 7, 2014, and timely filed an amended notice of appeal on February 14, 2014. See Fed. R. Bankr. P. 8002(a). This Court has appellate jurisdiction under 28 U.S.C. 158(a). The appealed orders are final under the practical, less technical view of the finality requirement that applies in the bankruptcy context. In re Kizzee-Jordan, 626 F.3d 239, 242 (5th Cir. 2010); see In re ASARCO, L.L.C., 650 F.3d 593, 599 (5th Cir. 2011). Under that more flexible view, an order is final if it ends a discrete judicial unit in the larger case, In re Heard Family Trucking, Inc., 41 F.3d 1027, 1029 (5th Cir. 1995), or directly affect[s] the disposition of the estates assets, In re Watson, 884 F.2d 879, 880 (5th Cir. 1989). 4
The appealed orders will directly affect the disposition of the Networks assets. The bankruptcy courts strong[] belie[f] that the directors of the Networks General Partner have fiduciary responsibilities that it expects the directors to honor, was the linchpin of the courts analysis. Whether or not the directors of the General Partner actually have fiduciary duties will, as more fully explained below, directly affect how those directors administer and potentially dispose of the Networks assets during bankruptcy. The appealed orders, moreover, dispose of a discrete judicial unit by concluding the portion of the case that determines whether the Network can properly be thrust into involuntary bankruptcy at all. Both the fiduciary duty issue and the involuntary nature of this case thus distinguish it from In re Green County Hospital, 835 F.2d 589, 595 (5th Cir. 1988), and In re Phillips, 844 F.2d 230, 235 (5th Cir. 1988). Even if the appealed orders were non-final, this Court would have discretion to review them on an interlocutory basis. See 28 U.S.C. 158(a)(2); Fed. R. Bankr. P. 8003(c) (allowing district courts to treat notice of appeal as request for leave to file interlocutory appeal). This appeal satisfies the standard for leave to file an interlocutory appeal. Whether a bankruptcy reorganization of the Network is futile turns on whether the directors of the Networks General Partner owe fiduciary duties in bankruptcy that, under Delaware law, were validly disclaimed. That is a controlling issue of law where there is substantial ground for difference of opinion. Smith v. AET, Ltd., 2007 WL 1644060, at *5 (S.D. Tex. June 4, 2007) (internal quotations & citation omitted). The inchoate preemption analysis underlying the bankruptcy courts imposition of fiduciary duties conflicts with Supreme Court precedent and the decisions of other bankruptcy courts. Review of this issue now would also materially advance the ultimate termination of the litigation by disposing of a reorganization that is destined to fail rather than delaying the decision for months while the assets of the estate are expended litigating
these involuntary bankruptcy proceedings and the directors are forced to decide issues while a cloud hangs over the validity of the involuntary bankruptcy proceedings. Id. STATEMENT OF THE ISSUES 1. Whether the bankruptcy court erred by holding that the Network has a reasonable
likelihood of successful rehabilitation in bankruptcy based on the courts conclusion that the directors of the Networks General Partner owe fiduciary duties to the Network, even though those duties were validly disclaimed under state law. 2. Whether, even if the directors do owe fiduciary duties, the bankruptcy court erred
by holding that the Network has a reasonable likelihood of successful rehabilitation in bankruptcy because the imposition of those duties is such a fundamental change to the Networks governance that it triggers the Astros right to terminate the Media Rights Agreement. 3. Whether the bankruptcy court erred by holding that the Involuntary Petition was
filed in good faith and whether subsequent joinders can cure that initial bad faith. STANDARD OF REVIEW This court reviews for an abuse of discretion the bankruptcy courts decision whether to dismiss a petition because it was filed in bad faith or because it is futile. See In re Humble Place Joint Venture, 936 F.2d 814, 816-17 (5th Cir. 1991). A bankruptcy court by definition abuses its discretion when it makes an error of law, In re Flugence, 738 F.3d 126, 129 (5th Cir. 2013) (internal quotations & citation omitted), when it relies on clearly erroneous factual findings, or misapplies the law to the facts, In re Volkswagen of America, Inc., 545 F.3d 304, 310 (5th Cir. 2008) (en banc) (internal quotations & citation omitted). Issues of statutory interpretation are questions of law reviewed de novo, In re Jacobsen, 609 F.3d 647, 652 (5th Cir. 2010) (internal quotations, citation & alteration omitted), as is a bankruptcy courts rulings on preemption, see Cole v. City of Dallas, 314 F.3d 730, 732 (5th Cir. 2002). 6
STATEMENT OF THE CASE AND FACTS I. THE NETWORK A. The Networks Formation
In 2003, the Astros and Rockets formed Houston Regional Sports Network, L.P. (the Network), a Delaware limited partnership, to broadcast the teams games and Houston professional sports programming on a single cable channel.1 On October 29, 2010, the Astros and the Rockets agreed to admit Comcast, the largest cable company in the Houston metropolitan area, as a third limited partner in the Network.2 The Networks Limited Partnership Agreement (the LP Agreement) appoints Houston Regional Sports Network, LLC (the General Partner) as the Networks sole general partner. See Feb. 12, 2014 Mem. Op. [Dkt. 238] at 2.3 The General Partner is also owned by the Astros, the Rockets and Comcast, and is managed by a board of directors comprised of one Astros director, one Rockets director, and two Comcast directors. See id. The Astros, directly and indirectly through their interest in the Networks General Partner, hold the largest equity stake in the Network (46.5%), followed by the Rockets (31%), and then Comcast (22.5%). See LP Agreement Schedule A; GP Operating Agreement Schedule A. The General Partner is not in bankruptcy, only the Network. B. The Networks Governance Structure
The Networks governance structure is set forth in a series of Transaction Documents

1
The Astros refers to Houston Astros, LLC and its affiliates and predecessors including McLane Company, LLC f/k/a Houston McLane Company, Inc. d/b/a the Houston Astros. The Rockets refers to Rockets Partner, L.P., JTA Sports, Inc., Rocket Ball, Ltd., and Clutch City Entertainment.
2
Comcast refers to Comcast Corporation and its direct and indirect wholly-owned and partially-owned subsidiaries including but not limited to Houston SportsNet Holdings, LLC (Comcast Owner), Comcast Sports Management Services, LLC (Comcast Services), Comcast Cable Communications, LLC (Comcast Cable), Houston SportsNet Finance, LLC (Comcast Lender), National Digital Television Center, LLC (Comcast Media), and Comcast SportsNet California, LLC (Comcast California).
3
Docket references are to the case below, Chapter 11 Case No. 13-35998 (Bankr. S.D. Tex.).
from October 2010, when Comcast joined the partnership.4 The LP Agreement sets forth the rights and responsibilities of the Networks three limited partners and its General Partner. The LP Agreement disclaims any fiduciary duties that the limited partners, the General Partner, and the directors of the General Partner owe to the Network, and expressly permits the partners to act in their own self-interest: [N]o Partner or any of its Affiliates or any of their respective officers, directors, employees, agents, members, Associates or other representatives shall as a result of this Agreement or such status owe any fiduciary duty to the Network, any Affiliate of the Network, any other Partner or any Affiliate of any other Partner. [I]n taking any action, making any decision or exercising any discretion with respect to the Network and its Subsidiaries, each Partner shall be entitled to consider such interest and factors as it desires, including its own interests and those of its Affiliates, and shall have no duty or obligation as a result of this Agreement or such status to give any consideration to the interests of or factors affecting the Network, any Partner or any other Person . LP Agreement 13.2(a); see also id. 4.3. The governance of the General Partner is set forth in the GP Operating Agreement. It too contains a broad disclaimer of any fiduciary duties owed by the limited partners and their appointed directors, and expressly permits the partners to act in their own self-interest. See GP Operating Agreement 12.2(a). The GP Operating Agreement also contains numerous provisions requiring the unanimous consent of all directors before the General Partner can take certain enumerated actions. See id. 5.10. In particular, the directors must unanimously approve any modification
4
The Transaction Documents include: (1) the Second Amended and Restated Agreement of Limited Partnership of Houston Regional Sports Network, L.P. (JX 3, the LP Agreement); (2) the Second Amended and Restated Limited Liability Company Agreement of Houston Regional Sports Network, LLC (JX 2, the GP Operating Agreement); (3) the Comcast Network Service Agreement by and between Comcast Services and the Network (JX 5, the Comcast Management Services Agreement); (4) the Comcast Sportsnet (Houston) Affiliation Agreement by and between Comcast Cable and the Network (JX 6, the Comcast Affiliation Agreement); (5) the Amended and Restated Media Rights License Agreement by and between Houston McClane Company, LLC and the Network (JX 10), the Media Rights Agreement); and (6) the Credit Agreement by and between Comcast Lender and the Network (JX 7), the Guarantee and Security Agreement by and between Comcast Lender and the General Partner (JX 8), and the Security Agreement by and between Comcast Lender and the Network (JX 9) (collectively, the Comcast Credit Agreement).
to the Media Rights Agreement, the LP Agreement, and the GP Operating Agreement; any affiliation agreement between the Network and a distributor; any transactions that would change the ownership structure or management of the Network; and a voluntary bankruptcy of the Network. See id. 5.10, Schedule C(1), (2), (4), (8), (10), (11), (13), (19), (24) and (27). The fiduciary duty disclaimers and the unanimous consent provisions were important terms of the transaction that admitted Comcast to the partnership. Without the unanimous consent provisions, the Comcast and Rockets directors, voting together, could impair the Astros interest in the Network or seize control of its valuable media rightsby causing the Network to enter unprofitable affiliation agreements, modifying or assigning the Media Rights Agreement, or filing for bankruptcy. These unanimous consent provisions would be stripped of their value without the fiduciary duty disclaimers, because the Astros director otherwise would be forced to approve transactions, modifications, or affiliation agreements that harmed the Astros interest and risked the teams ability to protect its media rights, if they were in the Networks interest. C. The Networks Media Rights Agreement With The Astros
The Network and the Astros entered into a Media Rights Agreement that granted the Network an exclusive license to feature the Astros games as part of the Networks regional sports programming, in exchange for paying media rights fees to the Astros. See Media Rights Agreement. A Major League Baseball teams media rights fees are vital to the teams success. See 10/28 Tr. [Dkt. 140] at 94:20-96:4, 99:2-19, 100:19-101:2, 106:21-107:1. Because media rights fees are the primary source of revenue for a team, a favorable media-rights deal can fund the payroll necessary to acquire and retain the best players and coaches. Id. By contrast, an undervalued media rights deal can suppress a teams payroll for 20 years (the typical length of such deals), jeopardizing the teams long-term success. Id. A teams ability to determine the network to which it licenses its media rights is critically 9
important. Like the Media Rights Agreement here, such licenses grant networks unparalleled access to a teams players and facilities. See Media Rights Agreement; see also 10/28 Tr. at 172:10-173:1 (testifying that a teams telecast partner is going to have access to [the teams] clubhouse. all of [its] facilities . [and] on a plane with the team during the season). A teams fans perceive such networks as an alter ego of the team and they view the two as interchangeable. Id. at 170:1-18. The connection between a network and teamlike the Network and Astros hereis really very much of a marriage and therefore requires a relationship of trust and confidence. Id. at 170:25-171:7, 174:21-175:16. Because of the importance of the media rights, the Media Rights Agreement provides additional protections for the Astros. If the Network fails to make a media rights payment, the Astros have the right to terminate the agreement upon written notice unless the default is cured within 60 days. See id. 12.3(D). The Astros also have the right to terminate the Media Rights Agreement if the Network becomes insolvent or files for bankruptcy, if the Network makes an assignment for the benefit of its creditors, or if a trustee is appointed for [the] Network. Media Rights Agreement 12.5(C). II. THE PARTNERS DIFFERING INTERESTS IN THE NETWORK A. The Astros Need The Equity In The Network
The Astros economic interests in the Network are very different from those of the Rockets and Comcast. The Astros receive approximately $55 million in annual media rights fees from the Network. Those fees fall well below the media rights fees of other MLB teams, particularly those in the Astros division. The Texas Rangers and Anaheim Angels, for example, receive annual rights fees of $80 million and $95 million, respectively. See Christina Settimi, Baseballs Biggest Cable Deals, Forbes, Mar. 21, 2012, available at, http://www.forbes.com/ sites/christinasettimi/2012/03/21/baseballs-biggest-cable-deals/. As a result, the Astros need to 10
reap substantial value from the equity interest in the Network in order to fund a payroll commensurate with the competition. B. The Rockets Primary Interest Is the Media Rights Fees
By contrast, the Rockets primary economic interest in the Network is in maintaining the annual media rights fees of approximately $45 million that the team receives from the Network. Those media rights fees are in the top five of all NBA teams. See Christina Settimi, The NBAs Richest Local Television Deals, Forbes, Jan. 22, 2014 (available at http://www.forbes.com/sites/ christinasettimi/2014/01/22/the-nbas-richest-local-television-deals/). Thus, as long as the
Rockets continue to receive those media rights fees from the Network, the Rockets will have the annual revenue to afford the best basketball players and to field a competitive team. C. Comcast Has Still Different Interests In The Network
Comcast has multiple economic interests in this Network. 10/28 Tr. at 437:12-14. Comcast is not only a partner in the Network and a member of the General Partner. It also carries the Network on its cable system, acts as a lender to the Network, and provides management and financial services to the Network. More specifically: Comcast Cable, a subsidiary of Comcast Corporation and an affiliate of Comcast Owner, carries the Network on its cable system in exchange for monthly rates pursuant to an affiliation agreement with the Network. See JX 6; Mem. Op. at 2. The Comcast Affiliation Agreement also contains a most favored nations (MFN) clause, ensuring that Comcast Cable pays the lowest rate that any other provider pays. Id. Comcast Lender, a subsidiary of Comcast Corporation and an affiliate of Comcast Owner, provided the Network with a $100 million term loan pursuant to the Comcast Credit Agreement. See JX 7; Mem. Op. at 7. Interest is due and payable in arrears on the last day of each calendar quarter, and the aggregate principal balance will be due in 2017. Id. at 7-8. Comcast Lender has no direct lien on the Astros media rights. Comcast Services, a subsidiary of Comcast Corporation and an affiliate of Comcast Owner, provides management oversight, financial services and other support to the Network pursuant to the Comcast Management Services Agreement. 10/29/13 Tr. [Dkt. 142] at 24:9-25:2. In exchange, the Network pays Comcast Services $5 million a year for those services. 10/28 Tr. at 439:9-17, 441:9-11. 11
Because of their different economic positions, the partners interests in the Network are not aligned. Comcast and the Rockets stand to benefit from any additional affiliation
agreements. Even affiliation agreements that would result in an unprofitable Network would fund Comcast Lenders debt service and pay Comcast Services management feeat rates that would reduce the rates paid by Comcast Cable to the Network by virtue of its MFNand fund the media rights fees that are sufficient for the Rockets. Unlike the Astros, then, both Comcast and the Rockets are willing to accept affiliation agreements that would impair the partners equity interest in the Network. However, the Astros interests were protected by the the
partnership agreements unanimous consent provisions and fiduciary duty disclaimers. III. COMCAST PURSUES AFFILIATION AGREEMENTS BUT NONE RESULT IN A PROFITABLE NETWORK The Comcast Affiliation Agreement alone was insufficient to result in a profitable Network. On behalf of the Network, Comcast began to pursue affiliation agreements with other providers in early 2012. See 10/29 Tr. at 74:7-15. Despite nearly 18 months of effort, however, the proposals identified by Comcast would not have led to a profitable Network. Mem. Op. at 18. The best proposalindeed, the only one that Comcast actually recommended the partners approvewas submitted by DirecTV in April 2013, but even that proposal would not have resulted in a profitable Network. 10/28 Tr. at 329:9-21; 10/29 Tr. at 95:24-96:5. Comcast projected the Networks cash flow for ten years based on the DirecTV proposal and an assumption of additional affiliation agreements with other providersthose that Comcast deemed more likely than not to carry the Networkat the same rates. 10/28 Tr. at 330:7-332:13, 447:10-20; JX 14. Under Comcasts projections, the Network would be unprofitable every year for the next ten years. Its operating cash flowwhich does not include debt service or capital 12
expenditureswould be negative every year, by more than $200 million over ten years; and its free cash flowits profitwould result in a loss of approximately $285 million over ten years. 10/28 Tr. at 333:21-25, 334:21-335:4, 400:12-24, 404:13-16; JX 14. Before the Astros could respond to the DirecTV proposal, Comcast sought to restructure the terms of the partnership and undermine the governance protections to which the partners had agreed. In addition to recommending that the partners approve DirecTVs offer, Comcast
proposed two governance changes that would have stripped the Astros consent rights. 10/28 Tr. at 336:11-337:25, 338:5-340:3, 452:3-453:17; JX 15. First, Comcast proposed that affiliation agreements with other providers that contained the same rates as the DirecTV proposal would not have to be approved by the Networks partnersmeaning, as Comcast concedes, that the Network would [ha]ve been able to enter into Affiliation Agreements on the same terms that DirecTV offered without any board oversight. 10/28 Tr. at 339:24-340:3; see id. at 453:22454:13; JX 15. Second, Comcast proposed that only two partnersnot all threewould have to approve affiliation agreements with rates below the DirecTV rates. 10/28 Tr. at 340:4-19; JX 15. That proposal would have meant that Comcast and the Rockets could force the Network to enter affiliation agreements, over the Astros objection, that left it woefully unprofitable. See 10/28 Tr. at 341:5-345:15; Astros 25. As the bankruptcy court found, the record is unambiguous that Comcast was not able to achieve th[e] goal of making the Network profitable. 2/4 Tr. [Dkt. 213] at 170:1-3. Despite nearly 18 months of effort, Comcasts proposals would not have led to a profitable Network. Mem. Op. at 18. Comcast w[as] presenting rotten business deals to the Astros, 2/4 Tr. at 79:29, and they were appropriately rejected by the Astros, Mem. Op. at 18. IV. THE NETWORK FAILS TO PAY THE ASTROS MEDIA RIGHTS FEES The Network failed to pay the media rights fee to the Astros on July 31, 2013, and the 13
Astros promptly sent the Network a default notice. See JX 21. The Network missed a second media rights fee payment to the Astros at the end of August. The Astros sent a second default notice to the Network on September 3, 2013, and noted that the Network had 60 days to cure its defaults, or the Astros would have the right to terminate its Media Rights Agreement on September 30, 2013. See JX 27; Media Rights Agreement 12.3(D). On August 5, 2013, principals of each partner met to discuss a resolution to their inability to generate revenue for the Network. During that meeting, Comcast offered to buy out the Astros 46.5% equity interest in the Network for more than $185 million, based on an implied enterprise value of $500 million for the Network. See Dkt. 227-3 at 49:20-53:24.5 The
Rocketswho had a contractual consent right to approve or veto the Astros sale of their equityrequested the same deal from Comcast, but it declined. See id. at 54:9-21, 55:20-56:21. V. FOUR COMCAST AFFILIATES FILE AN INVOLUNTARY PETITION By mid-September, the partners were unable to identify a profitable path for the Network or a business resolution. Yet, Comcast was unwilling to let the Astros terminate the Media Rights Agreement on September 30. Four Comcast executives therefore devised a strategy to file the Network for bankruptcy. 10/28 Tr. at 324:21-326:9, 434:6-435:10. Because the partners had to unanimously consent to voluntarily file the Network for bankruptcy, those Comcast executives orchestrated the filing of an involuntary petition for bankruptcy by four affiliates of Comcast Owner. Mem. Op. at 16; see 10/28 Tr. at 312:9-11, 322:2-12, 434:2-435:10. On September 27, the last business day before the Astros right to terminate the Media Rights Agreement accrued, the four affiliates of Comcast OwnerComcast Lender, Comcast Services, Comcast California, and Comcast Media (collectively, the Comcast Petitioning
The deposition designations at Dkt. 227-3 were admitted into evidence at the February 4, 2014 hearing. See 2/4 Tr. at 6:7-9:2.
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Creditors)filed the Involuntary Petition. See Dkt. 1. Comcasts witnesses have admitted that the only reason that the Involuntary Petitions were filed on September 27th was to prevent the Astros from terminating its Media Rights Agreement with the Network on September 30. 10/28 Tr. at 326:17-21, 435:14-25. As the bankruptcy court found, Comcasts behavior was
collusive and theres no question from a factual point of view that Comcast [O]wner called the other Comcast entities and instituted the involuntary petition. 2/4 Tr. at 168:3-7. In addition: None of the Comcast Petitioning Creditors would have filed the Involuntary Petition but for Comcasts direction to do so. See 10/28 Tr. at 432:4-7, 434:6-10; see also id. at 267:20-25, 272:16-21, 276:5-9, 322:5-8, 324:13-18; 10/29 Tr. at 18:24-19:1. None of the Comcast Petitioning Creditors had outstanding amounts due and owing from the Network at the time of filing on September 27. See Mem. Op. 7-10. None of the four declarants for the Comcast Petitioning Creditors sought the approval of the management or directors for the entity that actually filed the Involuntary Petition. See 10/28 Tr. at 276:10-17, 320:1-322:1, 433:1-10; 10/29 Tr. at 19:2-20:1. Three of the four declarants are officers of Comcast Ownerthe partner contractually prohibited from voluntarily filing the Network for bankruptcy without the consent of all partnersand two are Comcasts Owners appointed directors of the General Partner. See 10/28 Tr. at 311:7-312:11, 433:15-434:5; 10/29 Tr. at 12:10-23.
VI.
THE PROCEEDINGS IN THE BANKRUPTCY COURT A. The Astros Moved To Dismiss The Involuntary Petition And Comcast Moved For The Appointment Of A Trustee
The Astros moved to dismiss the Involuntary Petition on three grounds. See Dkt. 64. First, there is no reasonable likelihood of rehabilitation for the Network, as required by 11 U.S.C. 1112(b)(4)(A), because all paths would allow the Astros to terminate its Media Rights Agreement, which Comcast has admitted is indispensable to any successful reorganization. Second, the Involuntary Petition was filed in bad faith. Finally, the requirements of Bankruptcy Code 303 were not satisfied. Separately, Comcast sought the appointment of a trusteean independent fiduciary whose obligation is only to the estateto oversee an auction because
15
Comcast Lender planned to make a bid to acquire either the Network (under a plan of reorganization) or substantially all of its assets. Dkt. 3 7, 8, 41. The Astros opposed Comcasts motion. See Dkt. 91. The Court held a two-day evidentiary hearing in October. After the Astros and Comcast made opening statements, the Rockets and the Networks landlord indicated they were joining the Involuntary Petition as petitioning creditors. See 10/28 Tr. at 84:25-85:9, 89:5-15. Ten witnesses then testified at the hearing, including Jim Crane, the Astros principal owner. The bankruptcy court questioned Mr. Crane about the Networks potential profitability, asking whether the Network could make money if Mr. Crane was in charge of the management and operating from a clean slate with only the Networks equipment the Astros media rights contract and the Rockets media rights contractand without the partners veto[] rights. Id. at 146:8-148:6; see also id. at 148:7-158:11. Mr. Crane testified that under those circumstances, [y]es, it can make moneyand he could possibly deliver such a profitable business planbut that depends heavily on what the other affiliate agreements look like and the Astros havent worked on that because weve been working with the cards weve been dealt. Id. at 146:13-16, 147:13, 154:12-17. When asked how long would it take to come up with a broad business plan that would make this business work, Mr. Crane testified that, within 30 days he would have a very good feel of what could be done. Id. at 155:9-156:7. Based on that testimony, the bankruptcy court requested that the partners agree to an order that authorize[d] Mr. Crane to do what he told [the court] he thinks he can do which is to figure out a business plan for solving this that isnt going to be burdened by preexisting agreements. Id. at 479:12-480:16. After the partners agreed to that proposal, the bankruptcy court entered an Order Regarding Third Party Negotiations, designating the Astros as the lead
16
negotiator for the Network to investigate and negotiate the terms of carriage agreements, debt or equity investments, and other matters pertaining to the formulation of a business plan for the future of the Network. Dkt. 137. The pending motions were held in abeyance during these efforts. B. The Astros And Rockets Pursued A Path For The Network But Were Unsuccessful, While Comcast Sought The Appointment Of An Examiner
The Astros led those efforts for six weeks, until December 12, 2013, when the Rockets took over as lead negotiator. See Dkt. 171. Like the Astros, the Rockets contacted multiple potential counterparties. See Dkt. 182. Although the Astros and Rockets canvassed the market for more than three months, they were unable to identify a profitable path for the Network. See 2/4 Tr. at 10:2-11:11. Meanwhile, after the Astros had demonstrated in their pleadings that the appointment of a trustee would trigger the Astros right to terminate its Media Rights Agreement, Comcast asked the bankruptcy court to hold its motion to appoint a trustee in abeyance and instead to appoint an examiner with expanded powersincluding the power to conduct an auction. Dkt. 188 at 1, 11, 18. C. The Bankruptcy Court Entered An Order For Relief
The bankruptcy court heard closing arguments on the pending motions on February 4, 2014. During that hearing, the bankruptcy court suggested that Comcast read some handwriting on the wall and waive its request for a trustee or examiner. 2/4 Tr. at 110:2-6. Comcast did so and agreed to hold its motions in abeyance. See id. at 145:18-25. The bankruptcy court then granted an Order for Relief, putting the Network into bankruptcy and denying the Astros Motion to Dismiss. See Dkt. 210; Mem. Op. In doing so, the bankruptcy court rejected the Astros argument that there is no reasonable likelihood of reorganization for the Network. The linchpin of that conclusion was the bankruptcy courts 17
determinationbased on no briefing or argument from any of the partiesthat the directors of the Networks General Partner became duty-bound to meet fiduciary responsibilities to the Network, and because those fiduciary duties do exist, the case is not futile. Mem. Op. at 20 & n.3. Although the bankruptcy court stated that it is not reaching a final conclusion on this matter until and unless an alleged breach of the duty occurs, its finding that bankruptcy is not futile hinges on its conclusion that the directors have fiduciary duties to the Estate. Id. at 20 n.3, 24. In reaching that conclusion, the bankruptcy court did not address the Astros authority on point. Dkts. 225, 228, 229, 232. Instead, the bankruptcy court opined that the lead case cited by the Astros fails to provide any meaningful support for the Astros proposition referring to a case that the Astros did not even cite on the issue. Compare Mem. Op. at 22-23 (discussing In re Manor Place Dev. Assocs., L.P., 144 B.R. 679 (Bankr. D.N.J. 1992)) with Dkts. 228 and 232 (never once citing In re Manor Place). The bankruptcy court also rejected the Astros bad faith argument. Conceding that the factual issue [was] a close one, the bankruptcy court nonetheless found that the Comcast affiliates did not act in bad faith in filing the Involuntary Petition because they did so to preserv[e] value and rehabilitat[e] the Network. Mem. Op. at 15-16. The bankruptcy court also concluded that as a matter of law, the subsequent joinders by the landlord and the Rockets are not tainted by any bad faith of the original petitioning creditors despite the split of authority on the issue. Id. at 14. The Astros filed a timely notice of appeal on February 7 and filed an amended notice of appeal on February 12. Dkts. 217, 243. Since the notice of appeal was filed, the Rockets have confirmed that, even in bankruptcy, there is no profitable path available for the Network. In a letter to the debtors counsel, the Rockets have acknowledged that a Comcast purchase of the
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Networkwhich wipes out the partners equity interest and disproportionately harms the Astros given the size and importance of its equity stake is currently the only viable restructuring option for the Network. 2/10/14 Letter Gover to Beckman (Ex. 1) at 2. ARGUMENT I. THE INVOLUNTARY PETITION MUST BE DISMISSED BECAUSE NO REASONABLE LIKELIHOOD OF REHABILITATION EXISTS AS A MATTER OF LAW The required reasonable likelihood of rehabilitation in bankruptcy does not exist, and the bankruptcy court should have dismissed this case rather than thrusting the Network into an involuntary bankruptcy that is destined to fail. 11 U.S.C. 1112(b)(4)(A); see also 11 U.S.C. 1129(a)(11) (precluding confirmation of a plan if it is likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor of any successor to the debtor under the plan). There is simply no evidence that a path will emerge in bankruptcy that will result in a profitable Network. To the contrary, Comcast had more than 18 months to identify affiliation agreements that would result in a profitable Network. Every agreement it presented would not have led to a profitable network, and those proposals were appropriately rejected by the Astros. Mem. Op. at 18; see also 2/4 Tr. at 170:1-3 (The Evidentiary Record, to be clear, is unambiguous that Comcast was not able to achieve th[e] goal of making the Network profitable.). At the bankruptcy courts request, the Astros and Rockets further pursued such agreements for more than three months, starting October 29, 2013, but they too were unable to identify a profitable path for the Network. See Mem. Op. at 4. And every potential path forward suggested by Comcast since filing the Involuntary Petitionfrom appointing a trustee to auction the Network and its assets, to appointing an examiner with expanded powers to oversee a sale of the partners equity interests in the Networkhas been equally futile. The bankruptcy court nonetheless held a Chapter 11 reorganization would not be futile. 19
Its sole basis for that conclusion was its strong[] belie[f] that the General Partners directors have fiduciary responsibilities to the Network and its creditors if it is forced into bankruptcy despite the explicit disclaimer of any such duties in the Networks partnership agreement precisely to protect each partners individual interestsand that because the Astros-appointed director would have such fiduciary duties, he would be unable to withhold consent for a plan that maximized value for the Network, even though it was unprofitable and harmful to the Astros. See Mem. Op. at 20 n.3. Comcast and the other petitioning creditors had never raised this novel theory, and the bankruptcy court thrust the Network into bankruptcy based on its purportedly preliminary conclusion that the directors owed fiduciary duties, without any briefing from the parties on the issue. Id. The bankruptcy courts unprecedented ruling is wrong as a matter of law. Fiduciary disclaimers that are valid under state law remain valid in bankruptcy. The statutory remedy under the Bankruptcy Codethe appointment of a trusteewould have immediately triggered the Astros contractual right to terminate the Media Rights Agreement under 11 U.S.C. 365(c)(1) and (e)(2). But even a well-intentioned desire to sidestep the Bankruptcy Codes special protections for the trademark license and personal services contract embedded in the Media Rights Agreement cannot justify vitiating state law and thrusting upon the directors of the General Partner validly disclaimed fiduciary duties under threat of personal liability. Once the bankruptcy courts fundamental legal error is corrected, there is no doubt that any attempt to reorganize the Network in bankruptcy is destined to faila reality repeatedly acknowledged. See Mem. Op. at 1 (Because the futility argument is based on a theory that a director appointed by the Astros has no fiduciary duty to the Estate, the futility argument also fails.), id. at 20 ([W]hen the four directors act in unison to implement their fiduciary
20
responsibilities, [the] history [of unprofitable business plans] is unlikely to be repeated.), id. at 20 n.3 (If [fiduciary duties] exist, the case is not futile.). In any event, even if the bankruptcy court could somehow impose fiduciary duties on the directors, that would be such a fundamental change to the Networks governanceone which eliminates the ability of the Astros-appointed director to protect the team and its valuable media rightsthat it too would trigger the Astros termination rights. There is no path forward that will allow the Network to survive and the Involuntary Petition must be dismissed. A. The Bankruptcy Court Cannot Force The General Partners Directors To Accept Fiduciary Obligations That Have Been Validly Disclaimed 1. The General Partner, Its Directors, And The Network Validly Disclaimed Any Fiduciary Duties As A Matter Of Delaware Law
Partnerships, LLCs, and corporations are all creatures of state law, and investors commit their funds to the general partners, officers, and directors of such entities on the understanding that ... state law will govern the internal affairs of the business. Santa Fe Indus. v. Green, 430 U.S. 462, 479 (1977) (internal quotations & citation omitted). It is well established under Delaware lawthe relevant state law herethat a partnership agreement may alter or even eliminate traditional fiduciary duties. 6 Del. Code 17-1101(d) (To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner the partners or other persons duties may be expanded or restricted or eliminated by provisions in the partnership agreement.)6; see In re Kilroy, 2008 WL 780692, at *6 (Bankr. S.D. Tex. Mar. 24, 2008). The Networks LP Agreement relies on that provision and expressly disclaims any fiduciary duties of the General Partner and its directors: [N]o Partner or any of its Affiliates or any of their respective officers, directors, employees, agents, members, Associates or other representatives shall as a result of this Agreement or such
6
Emphasis added unless otherwise noted.
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status owe any fiduciary duty to the Network, any Affiliate of the Network, any other Partner or any Affiliate of any other Partner. [I]n taking any action, making any decision or exercising any discretion with respect to the Network and its Subsidiaries, each Partner shall be entitled to consider such interest and factors as it desires, including its own interests and those of its Affiliates, and shall have no duty or obligation as a result of this Agreement or such status to give any consideration to the interests of or factors affecting the Network, any Partner or any other Person . LP Agreement 13.2 (also waiving any breach of fiduciary duty claim by a partner, its affiliates, and its representatives), see id. 18.1 (selecting Delaware as the governing law); see also GP Agreement 12.2(a). Indeed, the governing documents make clear that none of the partners appointed representatives to the General Partner owe any fiduciary dutieseither to the Network, the General Partner, or each other. See GP Agreement 12.2(a); LP Agreement 13.2(a). Such disclaimers are not only valid under Delaware law, they are critical to freedom of contract, allowing partners and members to pool their resources while, at the same, time protecting their own interests. See generally M. Steele (Del. Chief Justice), Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 222-24 (2009). That ex ante disclaimer makes perfect sense from the Astros business perspective. The Astros never would have assigned its media rightsthe teams most valuable assetfor the next 20 years to an enterprise in which the Astros appointed director had any obligation other than to maximize the long-term value of those rights to the Astros. That disclaimer was known to at least six of the seven petitioning creditors, each of whom is an affiliate of Comcast or the Rockets. Those creditors thus knew they were extending credit to an entity whose partners and managers owed no fiduciary duties to the entity, its equity holders, or anyone else affiliated with the entity, and are tasked with the knowledge that, even in insolvency, Delaware law does not allow creditors to inherit greater rights against a business entity than its equity holders possessed. 22
See, e.g., Production Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772, 794-95 (Del. Ch. 2004). 2. The Bankruptcy Code Does Not Authorize Overriding Those Valid Disclaimers a. State-Law Duties Generally Govern In Bankruptcy
Comcast and the other petitioning creditors cannot claw back validly-disclaimed statelaw protections now. The disclaimers in the Networks governing documents remain valid in bankruptcy. See In re Kelvin Pub., Inc., 72 F.3d 129, 1995 WL 734481, at *6 (6th Cir. Dec. 11, 1995) (holding that, even in bankruptcy, state law determines the basic relationship between creditor and debtor, fiduciary and beneficiary). As the Supreme Court held in Butner v. United States, 440 U.S. 48, 49 (1979), bankruptcy court[s] should take whatever steps are necessary to ensure that [a creditor] is afforded in federal bankruptcy court the same protections he would have under state law had no bankruptcy ensued. See also Stern v. Marshall, 131 S. Ct. 2594, 2616 (2011) ([T]here is no reason why [ ] interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.) (internal quotations & citation omitted); Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 451 (2007) (same). That well-established principle prevent[s] a party from receiving a windfall merely by reason of the happenstance of bankruptcy. quotations & citation omitted). A windfall to Comcast and the Rockets is precisely what would result here if the Astrosappointed director is now required to exercise validly disclaimed fiduciary duties to benefit the Network rather than the Astros. The Astros negotiated for the right to have that director act solely in the best interests of the team and, thus, preserve the value of the Astros media rights. Because no profitable plan of reorganization exists, however, a director acting as a fiduciary to the Network would be required to accept plans that sacrifice the value of the Astros media rights 23 Butner, 440 U.S. at 55 (internal
and the future success of the team on and off the field to maximize recoveries for the other creditors. See TTT Hope, Inc. v. Hill, 2008 WL 4155465, at *11 (S.D. Tex. Sept. 2, 2008). That is exactly what the valid disclaimers were designed to avoid. The bankruptcy process is not intended to allow the partners to circumvent the limitations in the Networks governing documents. As this Court has recognized, [b]ankruptcy law is not implicated in a two-party dispute, particularly when the parties are partners; state laws address those claims. In re Shead, 2008 WL 1995373, at *3 (S.D. Tex. May 6, 2008) (citing In re Mazzocone, 183 B.R. 402, 419 (Bankr. E.D. Pa. 1995), affd, 200 B.R. 568 (E.D. Pa. 1996)). Indeed, courts routinely dismiss involuntary petitions in cases such as this, where the dispute is principally between partners over governance of the partnership. See In re Beacon Reef Ltd. Pship, 43 B.R. 644, 646-47 (Bankr. S.D. Fla. 1984) (abstaining from an involuntary petition in dispute between the general partners and the sole limited partner); In re ABQ-MCB Joint Venture, 153 B.R. 338, 341 (Bankr. D.N.M. 1993) (dismissing a bankruptcy case because the debtor was seeking to use this bankruptcy proceeding to resolve its intra-partnership disputes); cf. In re Fax Station, Inc., 118 B.R. 176, 178 (Bankr. D.R.I. 1990) (dismissing a case that was an attempt to use the bankruptcy court as an alternate approach to state court procedures to resolve an intra-company management and stockholder problem) (quoting Matter of Win-Sum Sports, Inc., 14 B.R. 389, 394 (Bankr. D. Conn. 1981)). To the extent the partners have a complaint about the Astros exercise of their consent rights with respect to the Media Rights Agreement, their issues arise from statenot federallaw. The only exception to Butners general rule that state law determines property rights and the scope of creditor protections in bankruptcy is when an express congressional command or some federal interest requires a different result. 440 U.S. at 55; see Santa Fe Indus., 430 U.S.
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at 479 (holding that state law will govern the internal affairs of a business except where federal law expressly requires certain responsibilities). In other words, state laws such as 6 Del. Code 17-1101 continue to apply in bankruptcy unless preempted. As set forth below, the statelaw disclaimers of fiduciary duties by a debtors General Partner and its directors are not preempted by the Bankruptcy Code. b. The Bankruptcy Code Does Not Impose Fiduciary Duties On The Director Of An Entity That Has Validly Disclaimed Such Duties
Preemption, in bankruptcy no less than any other area of law, is heavily disfavored. See In re Davis, 170 F.3d 475, 482 (5th Cir. 1999) (en banc). All preemption analysis starts from the assumption that Congress did not intend to supplant state law unless that was the clear and manifest purpose of Congress, an assumption that applies with particular force in areassuch as corporate governancetraditionally regulated by the States. Altria Group, Inc. v. Good, 555 U.S. 70, 77 (2008) (internal quotations & citation omitted); see New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654-55 (1995). Nothing in the Bankruptcy Code indicates a clear and manifest purpose to preempt state laws that permit partnerships and their affiliates to disclaim fiduciary obligations. Comcast and the bankruptcy court could not identify any provision of the Bankruptcy Code that expressly displaces such laws. See 2/4 Tr. at 106:8-15. None exists. Perhaps more fundamentally, 6 Del. Code 17-1101 and similar state-law provisions permitting parties to disclaim fiduciary duties do not frustrate the purposes and objectives of Congress. Simmons v. Sabine River Auth. La., 732 F.3d 469, 473-74 (5th Cir. 2013) (internal quotations & citation omitted), pet. for cert. filed, Jan. 7, 2014. The bankruptcy court disagreed because it believed honoring such state-law governance provisions would mean the Estate has no fiduciary. Mem. Op. at 22. But that is not the case. Congress provided a mechanism to 25
ensure that a fiduciary is always available to administer the estate without preempting state law: the power in all cases to appoint a trustee to administer the estate. See 11 U.S.C. 1104(a). Indeed, faced with similar situations, other bankruptcy courts have recognized that bankruptcy law does not intrude into the corporate governance of a debtor-in-possession because the remedy for any such disputes is to appoint a trustee. In In re 1031 Tax Group, LLC, for example, the court ruled that [t]he Supremacy Clause is not an independent source of positive law on corporate governance and instead [t]he Bankruptcy Code leaves state corporate governance law largely untouched, the primary exception being the power to order the appointment of a chapter 11 trustee pursuant to 1104. 2007 WL 2085384, at *3 n.4 (Bankr. S.D.N.Y. July 17, 2007). In In re Ampal-American Israel Corp., the court similarly ruled that bankruptcy courts should not take sides in corporate governance disputes because when such disputes spill over into areas that affect the debtors ability to manage its affairs or conduct its business, the Bankruptcy Code provides a clear remedy: appoint a chapter 11 trustee. 2013 WL 1400346, at *5 (Bankr. S.D.N.Y. Apr. 5, 2013); see also In re Sovereign Group 198421 Ltd., 88 B.R. 325, 329 (D. Colo. 1988) ([T]he Bankruptcy Code is not intended to be used as a tool to restructure onerous partnership agreements.). In addition to avoiding the serious federalism concerns posed by preempting a state corporate governance law, see In re Davis, 170 F.3d at 482, appointing a trustee is a significantly less coercive solution than the bankruptcy courts approach. The bankruptcy court in fact offered no explanation why a debtor, its General Partner, or the directors of the General Partner should be forced to fulfill fiduciary obligations they validly disclaimed, especially where the debtor is an involuntary one. See In re Herberman, 122 B.R. 273, 284 (Bankr. W.D. Tex. 1990) (noting an involuntary debtor would rightfully argue that one cannot be compelled to serve in a
26
fiduciary capacity against ones will); cf In re Green Hills Dev. Co., 2014 WL 380386, at *2 (5th Cir. Feb. 3, 2014) (noting Congress has previously recognized that involuntary bankruptcy is a particularly severe remedy).7 No persuasive explanation exists. Instead, the bankruptcy court ignored the Astros authority and reflexively quoted three cases addressing the fiduciary responsibilities of corporate directors in bankruptcyCFTC v. Weintraub, 471 U.S. 343 (1985), Wolf v. Weinstein, 372 U.S. 633 (1963), and In re Southmark Corp., 163 F.3d 925 (5th Cir. 1999)without acknowledging the significant differences between a corporation and a partnership. See In re Sovereign, 88 B.R. at 329; Twin Bridges Ltd. Pship v. Draper, 2007 WL 2744609, at *19 (Del. Ch. Sept. 14, 2007) (holding the conceptual underpinnings of the corporation law and Delawares [alternative entity] law are different). As an initial matter, these cases merely recite the general proposition that a debtor-in-possession generally has the responsibilities of (and therefore the fiduciary duties of) a trustee. They do not purport to address the situation presented here, where all relevant parties, including the debtor, had validly disclaimed such fiduciary duties. Nor could they have. Corporations and their directors generally cannot disclaim fiduciary duties, while Delaware limited partnerships and LLCs, and their affiliates, can. See 6 Del. Code 17-1101. Thus, when Wolf and Weintraub stated the debtors directors bear essentially the same fiduciary obligation to creditors and shareholders as would the trustee for a debtor out of possession, there was no preemption analysis behind those statements at all. Weintraub, 471 U.S. at 355; see Wolf, 372 U.S. at 649; see also In re Southmark, 163 F.3d at 931. Those cases had no reason to consider whether the
Compounding the unfair coercion here is the bankruptcy courts refusal to conclusively decide whether the director appointed by the Astros actually has a fiduciary duty until and unless an alleged breach of the duty occurs. Mem. Op. at 20 n.3. This puts the director to an untenable Hobsons Choice between purported fiduciary duties to the Network (which the bankruptcy court insists that the director must have, but simultaneously disclaims deciding)at risk of personal liabilityor obligations to the Astrosat risk of undermining the Astros legitimate interests in a special, protected asset (the Media Rights Agreement). Cf. Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 256 (5th Cir. 2008) (refusing to impose a fiduciary duty that would expose a fiduciary to a similar untenable choice).
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Bankruptcy Code would nonetheless force those directors to accept duties that they had validly disclaimed. To the extent Wolf, Weintraub, and Southmark are relevant at all, Wolf supports the idea that if creditors need the protection of a fiduciary duty that the debtor-in-possession has validly disclaimed, the proper remedy is to appoint a trustee, not to override the disclaimers. See Wolf, 372 U.S. at 651 (holding that if a debtor-in-possession declines to carry out the fiduciary responsibilities of a trustee, then the court may at any time replace them with an appointed trustee). The bankruptcy courts reliance on cases about the fiduciary responsibilities of a corporations directors reflects a deeper failure to recognize that [a] partnership is a special entity under the law, different from a corporation. In re Sovereign, 88 B.R. at 329.
Partnerships, unlike a corporation, are contractual relationships based upon personal trust and confidence. In re Manor Place Dev. Assocs., L.P., 144 B.R. 679, 686 (Bankr. D.N.J. 1992); see generally Steele, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. at 222-24 & n.1. As other courts have recognized, the bankruptcy process should accordingly make accommodations such as honoring fiduciary-duty disclaimersto honor and preserve the special nature and character of partnerships. In re Sovereign, 88 B.R. at 329 ([T]his Court is unaware of any provision in the Bankruptcy Code that would supersede Colorado law governing the restructuring of partnership agreements.). The special nature of partnerships is reflected in the Bankruptcy Code as well. Sections 1123(a)(5) and (6), for example, permit a reorganization plan to amend a corporate charter, but do not authorize similar amendments to a partnership agreement. See id. at 327-28. The root of the bankruptcy courts errors was thus in running roughshod over the critical distinctions between partnerships and corporations.
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3.
The Bankruptcy Court Cannot Impose Fiduciary Duties, Rather Than Appoint A Trustee, To Avoid Triggering The Astros Termination Rights
In truth, the bankruptcy court resorted to an inchoate preemption analysis to assert that the Astros-appointed director had fiduciary duties, rather than appoint a trustee as Comcast originally requested for a simple, but impermissible reason: to avoid triggering the Astros right to terminate the Media Rights Agreement. Because the Astros Media Rights Agreement is a trademark license and a personal services contract, the Bankruptcy Code provides special protection to the Astros interests in that agreement. See 11 U.S.C. 365(c)(1). It cannot be assumed by a trustee absent the Astros consent. See In re Mirant Corp., 440 F.3d 238, 248 (5th Cir. 2006) (holding 365(c)(1) is triggered if the nondebtor party will in fact be asked to accept performance from or render performance to a partyincluding the trusteeother than the party with whom it originally contracted) (emphasis added); In re OConnor, 258 F.3d 392, 394, 402 (5th Cir. 2001) (holding a trustee could not assume a partnership agreement because a trustee is a different entity than the debtor); In re Footstar, Inc., 323 B.R. 566, 573 (Bankr. S.D.N.Y. 2005).8 Here, both the Bankruptcy Code and the partners agreements serve the same goal: the
protection of a class of assets that the parties recognized were particularly sensitive precisely because they go to the heart of a partners goodwill. The Astros consent rights, exercised by its
Like the Fifth Circuit, numerous bankruptcy courts have also held a debtors partnership interest cannot be assigned in bankruptcy, much less a protected asset like the Media Rights Agreement, thereby precluding appointment of a trustee. See, e.g., In re Schick, 235 B.R. 318, 325 (Bankr. S.D.N.Y. 1999) (finding 365(c)(1) prevents assignment of partnership interest unless other partners agree to admit assignee as substitute limited partner); In re Nizny, 175 B.R. 934, 939 (Bankr. S.D. Ohio 1994) (stating partnership interest would not be assignable to a separate third party under 365(c)(1) ); In re Catron, 158 B.R. 624, 627 (Bankr. E.D. Va. 1992) (denying assumption of a general partnership interest and noting the agreement or contract governing the partnership is essentially a contract for personal services, which renders it also nondelegable and nonassumable), affd, 158 B.R. 629 (E.D. Va. 1993), affd 25 F.3d 1038 (4th Cir. 1994); In re Cardinal Indus., 116 B.R. 964, 979 (Bankr. S.D. Ohio 1990) (holding that limited partnership agreement was not assignable under 365(c)(1)); In re Priestley, 93 B.R. 253, 260 (Bankr. D.N.M. 1988) (finding that debtors rights to manage partnership were nonassignable under 365(c)(1) ); In re Sunset Developers, 69 B.R. 710, 713 (Bankr. D. Idaho 1987) (same); In re Harms, 10 B.R. 817, 821-22 (Bankr. D. Colo. 1981) (finding 365(c)(1) prevented a trustee from assuming position of general partner).
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appointed director, give it a measure of control over how it is portrayed and how its marks are used by the Network, which by contract is given unparalleled access to the Astros and its players. Those protections disappear when a trustee is appointed, which is why the Bankruptcy Code itself gives the Astros a right to terminate under those circumstances. The decision below asserts an unwritten, inchoate federal-law interest in imposing fiduciary duties on the debtor itself (as opposed to a trustee) in an effort to avoid triggering the Astros express rights under the Bankruptcy Code. That makes no sense. A court cannot cast aside state law, and thrust upon the directors validly disclaimed fiduciary duties under threat of personal liability to evade the special protections Congress itself gave the Media Rights Agreement in 11 U.S.C. 365(c)(1) and (e)(2). As in In re Shead, the real dispute here is over control of the partnerships most valuable assetthe Media Rights Agreement. See 2008 WL 1995373, at *3. The attempt to frustrate the Astros from exercising either their consent or termination rights by imposing validly disclaimed duties on the General Partners directors themselves rather than appointing a trustee is simply not what the bankruptcy process is for. There is no preemption, and the Astros-appointed director cannot have fiduciary duties imposed upon him by forcing the Network into an involuntary bankruptcy. Since the imposition of such duties was the only basis for the bankruptcy courts conclusion that there was a reasonable likelihood of rehabilitation in bankruptcy, the Involuntary Petition must be dismissed. B. The Media Rights Agreement Is Not Assumable By A Trustee Or Assignable In Bankruptcy
Comcast argued below that a trustee could be appointed, and the Media Rights Agreement ultimately assigned, without triggering the Astros termination rights. The
bankruptcy court disagreed, suggesting that Comcast withdraw its motions for appointment of a trustee or an examiner with enhanced powers (which was effectively the same thing), precisely 30
because such an act would trigger the Astros termination rights. See 2/4 Tr. at 110:2-6. Thus, if the Court agrees with the Astros that fiduciary duties cannot be imposed on the debtor, its General Partner, or the General Partners directors, then there is no reasonable likelihood of rehabilitation in bankruptcy, and the case must be dismissed. 11 U.S.C. 1112(b)(4)(A). Indeed, Comcasts arguments as to why the Astros have no termination rights under 11 U.S.C. 365(c)(1) and (e) are unavailing and provide no basis for affirming the involuntary bankruptcy. Both trademark and contract law excuse the Astros from accepting performance under the Media Rights Agreement from an assignee, and thus 11 U.S.C. 365(c)(1) and (e) are clearly applicable. Agreement. Nor have the Astros consented to assignment of the Media Rights
The Astros termination rights, thus, preclude a reasonable likelihood of
rehabilitation in bankruptcy. 1. The Media Rights Agreement Is Protected By 11 U.S.C. 365(c)(1) and (e)(2)
By its terms, the Media Rights Agreement is a trademark license that, in exchange for a media-rights fee, grants the Network extensive rights to use the Astros trademarked name, symbol, seal, emblem, logo, and insignia. Media Rights Agreement 5.5(A); see Brennans Inc. v. Dickie Brennan & Co., 376 F.3d 356, 364 (5th Cir. 2004) (defining a trademark license as the right to use another partys mark ... generally in exchange for a royalty or other payment). The license includes the right to display the mark throughout game telecasts, to use the mark to promote the Network and its advertisers, and to call the Network the Astros Network. Media Rights Agreement 5.5(A). It also grants the Network the right to create original
programminglike Astros Bases Loaded, Pregame Live, and Postgame Livethat trade on the Astros name and goodwill. Id. 5.3; Astros 80. None of those rights is transferrable under trademark law. [T]he universal rule is that 31
trademark licenses are not assignable in the absence of a clause expressly authorizing assignment. In re XMH Corp., 647 F.3d 690, 695 (7th Cir. 2011) (Posner, J.); Miller v. Glenn Miller Prods., Inc., 454 F.3d 975, 988 (9th Cir. 2006) (per curiam); 3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition 18:43 (4th ed. 2013) ([T]he licensees right to use the licensed mark is personal and cannot be sold or assigned to another.). Recognizing that trademark licenses are not assignable absent consent from the marks owner, bankruptcy courts routinely deny the assignment of trademark licenses. See, e.g., In re Kazi Foods of Mich., Inc., 473 B.R. 887, 889 (Bankr. E.D. Mich. 2011); In re Wellington Vision, Inc., 364 B.R. 129, 136-37 (S.D. Fla. 2007); In re N.C.P. Mktg. Grp., Inc., 337 B.R. 230, 236 (D. Nev. 2005), affd, 279 F. Appx 561 (9th Cir. 2008); In re Travelot Co., 286 B.R. 447, 455 (Bankr. S.D. Ga. 2002). Sections 365(c)(1) and (e)(2) similarly bar the assignment of the trademark license in the Media Rights Agreement. Comcast previously argued for an exception to the universal rule here, asserting that the Media Rights Agreement provides specific guidelines for using the Astros trademarks. Dkt 94 at 24. But that makes no sense and is entirely unsupported by law. Indeed, such an exception would swallow the rule. Because a trademark owner has a duty to exercise control and
supervision over the licensees use of the mark, most trademark licenses include usage guidelines. Sheilas Shine Prods., Inc. v. Shiela Shine, Inc., 486 F.2d 114, 123-24 (5th Cir. 1973); Miller, 454 F.3d at 992. Usage guidelines and the prohibition on licensing marks in fact serve a common purposeto protect the good will, quality, and value of its product. In re N.C.P. Mktg. Grp., Inc., 337 B.R. at 236. One of the reasons for restricting assignments is to give a trademark owner the opportunity to pass on the abilities of new potential licensees to follow contractual usage guidelines and to otherwise protect the value of the mark. 3 McCarthy
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on Trademarks and Unfair Competition 18:43. Contract law also prohibits the assignment of the Media Rights Agreement. Under Delaware lawthe law the parties agreed would govern the Media Rights Agreement, see Media Rights Agreement 13.2contracts for personal services may not be assigned absent consent. See Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 WL 338219, at *11 (Del. Ch. Jan 29, 2010). The MLB Constitution recognizes that media rights are a special category of service and requires a vote of a majority of the MLB teams to approve any license of a teams media rights to a third party. See Astros 81 Art. V, Sec. 2(a)(5). As MLB has explained, [o]ne of the principal means by which the Astrosand MLBs other member Clubsreach their fan bases is through the exploitation of their media rights. Dkt. 123 5.9 Under the Media Rights Agreement, both the Astros and the Network bargained for services that depend on the character, reputation, taste, skill, or discretion of the party that is to render performance. In re Lil Things, Inc., 220 B.R. 583, 590 (Bankr. N.D. Tex. 1998) (internal quotations & citation omitted); 10/28 Tr. at 170:25-171:7. The Network bargained for the right to televise an elite level of local baseball that, as the only Major League Baseball team in Houston, only the Astros can provide. The Astros in turn view their partnership with the Network as the single most important relationship that [it] has in its local market. Id. at 167:910; see id. at 170:6-18. From the Astros perspective, that relationship is really very much of a marriage. Id. at 175:13-16. Fans view the Network as an alter ego of the team, id. at 167:613, and the Network is given a degree of access to Astros personnel, facilities, and aircraft that no one else has. Id. at 172:10-173:1, 173:13-174:6; Media Rights Agreement 5.3, 5.6, 6.3,
9
MLB also recognizes that the Media Rights Agreement includes a non-assignable trademark license. MLB has the responsibility to approve the use of Club trademarks by a third party, and did so here in approving the Media Rights Agreement. Id. 3. MLB approved the Astros Media Rights Agreement with the understanding that the use of these trademarks could not be assigned to a third party without first obtaining both the consent of the Club and, as required by the MLB rules and regulations, the approval of the League. Id. 5.
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11.2. Because the Networks employees are with the team in the locker room, on its private plane, and at the team hotel throughout the 162-game season, ensuring the Astros manager and players are comfortable that they can trust the Network is one of the key issues for the team. 10/28 Tr. at 173:2-12 (testifying that trust is absolutely essential for you to be able to put the product that you want on the field); see In re Martin, 117 B.R. 243, 249 (Bankr. N.D. Tex. 1990) (defining a personal services contract as one entered into based on personal credit, confidence, and trust). The authority to simply re-assign the broadcast face of the Astros with extensive access to the team is not something the teamor any Major League Baseball franchisewould accept. See 10/28 Tr. at 167:22-168:12. 2. The Astros Did Not Consent To The Assignment Of The Media Rights Agreement In Bankruptcy
Comcast also argued below that the Media Rights Agreement expressly contemplate[s] assumption or assignment of the agreement in bankruptcy, thereby waiving the Astros rights under 11 U.S.C. 365(c) and (e). The agreement does no such thing. Section 12.5 of the Media Rights Agreement grants the Astros the unilateral right to terminate the agreement if the Network files for bankruptcy, if it makes an assignment for the benefit of its creditors, or if a custodian or trustee is appointed for [the] Network. Media Rights Agreement 12.5(C). Under that section, [f]or the avoidance of doubt, neither a trustee nor any assignee in bankruptcy proceedings shall have any right to continue this [Media Rights] Agreement or in any way use the rights granted under this Agreement if the Astros exercise their termination rights. Id. Section 13.8(A) of the Media Rights Agreement is not to the contrary. That provision allows the Network to assign the Media Rights Agreement to a purchaser of all or substantially all of the assets of the Network without the Astros consent. 34 Media Rights Agreement
13.8(A).
But the appointment of a trustee is not a purchase of the Networks assets.
Regardless, in addition to its consent rights in the GP Operating Agreement, Section 12.5(C) of the Media Rights Agreement gives the Astros automatic termination rights in the event of an assignment. To say that at the same time it negotiated Section 12.5(C), the Astros
simultaneously waived its rights in agreeing to Section 13.8(A), makes no sense. The Media Rights Agreement clearly contemplates that an assignment in bankruptcy cannot occur without the Astros consent. See Media Rights Agreement 12.5(C). C. There Is No Reasonable Likelihood Of Any Profitable Plan In Bankruptcy And The Astros Will Reasonably Withhold Consent From An Unprofitable Plan
In light of the foregoing, there is no reasonable likelihood of rehabilitation in bankruptcy. The Astros unanimous consent is required and, because fiduciary duties cannot be imposed on the Astros-appointed director, such consent will reasonably be withheldno remotely profitable plan has ever been proposed, and there is no suggestion of one forthcoming. Nonetheless, the bankruptcy court asserted that a bankruptcy might not be futile because, regardless of whether the directors had fiduciary duties to the Network, the Astros would not withhold consent from a profitable plan of reorganization. See Mem. Op. at 19. The problem, however, is that there is no evidence whatsoever of such a plan, and tellingly the bankruptcy courts opinion identifies none. That is with good reason. All of the evidence in the record and two years of effort by the partnersconfirms that a profitable plan is not reasonably likely to emerge. Comcast pursued affiliation agreements from early 2012 until it filed the Involuntary Petition in September 2013but, as the bankruptcy court found, it could not identify a path that would have led to a profitable Network. Id. at 18. Indeed, the best proposal Comcast generated would have resulted in the Network losing more than $200 million over ten years. 10/28 Tr. at 333:10-25, 400:12-24; JX 14. After the Involuntary Petition was filed, the Astros 35
and Rockets took turns searching for plans that would have resulted in a profitable Network, but they too were unable to find such a solution. There is simply no evidence in the record that the Network can be profitable. In concluding that a bankruptcy of the Network is not futile because the Astros would not necessarily withhold consent, the bankruptcy court relies on a single statement from the Astros Mr. Crane at the October hearingbut that statement is taken out of context and, in any event, was made before the Astros and Rockets investigated whether a profitable path existed. Specifically, the bankruptcy court asserts, without citation, that Astros owner, Jim Crane, believed that the business could be profitable, and that Mr. Crane testified that the Network could be run profitably. Mem. Op. at 18, 20. But that is not what Mr. Crane said. Rather, Mr. Cranes testimony was in response to a hypothetical from the bankruptcy court that assumed a reorganized Network with no liabilities and with the consent rights of the Astros, the Rockets, and Comcast jettisoned. See 10/28 Tr. at 146:8-158:11. The bankruptcy court had asked Mr. Crane about the potential for the Network to make money if Mr. Crane was in charge of the management and operating from a clean slate with only the Networks equipment the Astros media rights contract and the Rockets media rights contractand without the partners veto[] rights. Mr. Crane opined that, under that counter-factual scenario, [y]es, it can make moneybut that depends heavily on what the other affiliate agreements look like and the Astros havent worked on that because weve been working with the cards weve been dealt. Id. at 146:8-148:5, 154:12-17. Moreover, the Network is not negotiating from such a clean slate in bankruptcy. Eliminating those consent rights would require modifying the General Partners operating agreement, not the partnership agreement for the Network. But the
bankruptcy court has no authority to rewrite an agreement between third-party non-debtors, see,
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e.g., In re Adelphia Commcns Corp., 2004 WL 2186582, at *12 (S.D.N.Y. Sept. 27, 2004), and the Astros-appointed director would not consent to eliminating those rights, unless a fiduciary duty to the Networks creditors trumped his duties to represent the interest of the Astros. Thus, the counter-factual world assumed by the bankruptcy court depends on imposing fiduciary duties that were validly disclaimed. In any event, there is no evidence that a profitable plan of reorganization is likely, thus there is no reasonable likelihood of a successful reorganization. As such, the Involuntary Petition must be dismissed as futile. D. An Assumption Of The Media Rights Agreement By A Debtor-In-Possession With Fiduciary Duties Would Trigger The Astros Termination Rights
Even if the bankruptcy court had authority to force the Network into bankruptcy without a trustee by imposing disclaimed fiduciary responsibilities on the Astros-appointed director, that would work a fundamental change to the Network partnership itself. Under those circumstances, the Network could not assume the agreement under 11 U.S.C. 365(c)(1), and any attempted assumption by the Network would allow the Astros to terminate the Media Rights Agreement under 11 U.S.C. 365(e)(2). The ability of the Astros-appointed director to exercise his consent rights solely for the benefit of the team is central to the Networks governance. That vanishes if the director now owes a fiduciary duty to maximize creditor recoveries even if that means sacrificing the value or integrity of the Astros media rights. See TTT Hope, Inc., 2008 WL 4155465, at *11. In substance, then, the imposition of fiduciary duties would eviscerate the Astros carefully negotiated consent rightsrendering those carefully negotiated contractual protections a dead letterand change the Network into a different entity than the one the Astros agreed could exercise its media rights. That is even more vividly illustrated if, to avoid putting its director to 37
choose between competing interests created by the bankruptcy courts decision, the Astros are forced to leave vacant their seat on the General Partners board. See Mem. Op. at 23. The Astros never contemplated assigning their media rights to a Network in which the teams voice in key governance issues is silenced. Delaware courts enforcing contractual anti-assignment provisions have found that when a sufficiently fundamental change occurs to an entity, the parties may enforce anti-assignment clauses even if no formal assignment has occurred. Delaware courts have recognized, for example, that a change in control accompanied by change[s] in business practices or policies that altered the parties bargain in any significant way may violate an anti-assignment clause. See Star Cellular Tel. Co. v. Baton Rouge CGSA, Inc., 19 Del. J. Corp. L. 875, 892 (Del. Ch. 1993), affd, 647 A.2d 382 (Del. 1994); Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 WL 1348438, at *12-13 (Del. Ch. Apr. 8, 2011) (holding a change in control may have violated an anti-assignment provision because the plaintiffs alleged significant post-merger changes in personnel and policies). Delaware courts, thus, have held that a change in control may violate an anti-assignment provision if (1) performance by the original contracting party is a material premise of the contract and (2) the transfer creates [an] unreasonable risk for the other contracting parties. Star Cellular, 19 Del. J. Corp. L. at 890; see Tenneco Auto Inc. v. El Paso Corp., 2002 WL 453930 (Del. Ch. Mar. 20, 2002). Both conditions are satisfied here, and 11 U.S.C. 365(e)(2) would similarly allow the Astros to enforce their right to terminate. See Media Rights Agreement 12.5(C). Because the Media Rights Agreement is both a trademark license and a personal services contract, performance by the original contracting partythe Networkis a material term of the agreement. See 10/28 Tr. at 167:6-175:16. The key assumption underlying the Media Rights
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Agreement was that the Astros could protect the integrity of the trademarks and media rights through its directors consent rights over the General Partners actions as sole general partner of the Network. See Kroblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 107 (3d Cir. 1986) (holding agreements executed at the same time dealing with the same subject matter should be construed together and interpreted as a whole); Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072, 1120 & n.192 (Del. Ch. 2012) (applying similar rule despite the two week time difference between [the agreements] effective dates), affd 45 A.2d 148 (Del. Super. Ct. 2012); Restatement (Second) of Contracts 214 (other, contemporaneous agreements should inform the meaning of and intention behind contractual provisions). Undermining that protection creates the risk to the Astros that its highly personal rights could be used in ways outside its control. Indeed, the entire purpose of imposing previously disclaimed fiduciary duties is to significantly change the Networks corporate governance from what the parties agreed to when they entered into the Media Rights Agreementa change the Astros never would have agreed to. See Mem. Op. at 20. But Delaware cases recognize that change[s] in business practices or policies that will alter[] the parties bargain in a[] significant way trigger anti-assignment rights. Star Cellular, 19 Del. J. Corp. L. at 892; Baxter Pharm. Prods., Inc. v. ESI Lederle Inc., 1999 WL 160148, at *5 (Del. Ch. Mar. 11, 1999) (finding stock sale did not violate antiassignment provision only because, after stock purchase, the company maintains the same corporate policies). Eviscerating the Astros contractual consent rights is unquestionably a significant change to the parties bargain. The concerns underlying Delawares state-law anti-assignment rules are analogous to the requirements of 11 U.S.C. 365(c)(1) and (e)(2), and courts already look to state law when
39
determining whether an assignment excuses performance of an executory contract. See, e.g., In re OConnor, 258 F.3d at 402; In re Footstar, Inc., 323 B.R. at 573; In re Manor Place, 144 B.R. at 685 (holding that replacing a debtor general partner with a Management Committee would violate 365(c)(1) because the Management Committee is [not] the functional equivalent of the Debtor so that there is no material change in the identity of the person rendering performance under the contract); In re Cardinal, 116 B.R. at 982 (similar); In re Harms, 10 B.R. at 821. Because Delaware law would treat such a foundational change as an assignment, it follows that under 11 U.S.C. 365(e)(2), the Astros would be allowed to terminate. Fundamentally changing the duties of the director selected by the Astros to represent the teams interests is such a significant change that it amounts to an impermissible assignment of an executory contract. The bankruptcy courts attempt to effectively nullify the Astros contractual consent rights by imposing disclaimed fiduciary duties will thus only trigger the Astros right to terminate the Media Rights Agreement, and the Network would thus emerge from bankruptcy without the media rights critical to [a] successful reorganization. Dkt. 94 at 21. II. THE INVOLUNTARY PETITION MUST BE DISMISSED BECAUSE IT WAS FILED IN BAD FAITH. The bankruptcy court also erred when it concluded that the Comcast Petitioning Creditors did not act in bad faith as a matter of fact and that the subsequent joinders by the Rockets and landlord were not tainted by the original bad faith filing as a matter of law. A. Comcast Orchestrated The Involuntary Petition In Bad Faith.
The bankruptcy court found that theres no question from a factual point of view that Comcast [O]wner called the other Comcast entities and instituted the involuntary petition and this behavior was collusive. 2/4 Tr. at 168:3-7; see Mem. Op. at 15-16. Nevertheless, while conceding that the factual issue [was] a close one, the bankruptcy court held that Comcast did 40
not act in bad faith in filing the Involuntary Petition because it sought to preserv[e] value and rehabilitat[e] the Network. Id. at 15-16; see 2/4 Tr. at 169:1-6. The Astros recognize this Courts observation that Comcasts involuntary bankruptcy filing may not constitute bad faith, as the partners simply have a business dispute. But the Astros respectfully assert that the
bankruptcy courts finding that Comcast collu[ded] with the Comcast Petitioning Creditors to orchestrate the filing of the Involuntary Petition in order to gain a tactical advantage in that business disputecoupled with the decision in In re Global Ship, a case remarkably similar to this case and a decision the bankruptcy court did not discussdemonstrate that Comcast acted in bad faith. The bankruptcy court abused its discretion in concluding otherwise. To succeed, the Network needed to enter into affiliation agreements in addition to the Comcast Affiliation Agreement. Comcast was the partner in charge of pursuing those
agreements, but the proposals that it presented would not have led to a profitable network. Mem. Op. at 18. The best proposalthe DirecTV proposal, the only one that Comcast
recommended for approvalwould have resulted in more than $200 million in losses for the Network over ten years, even assuming that the Network would have been able to enter additional affiliation agreements at the same rates as the DirecTV proposal. 10/28 Tr. at 333:2125, 334:21-335:4, 400:12-24, 404:13-16; JX 14. As the bankruptcy court found, Comcast w[as] presenting rotten business deals to the directors. 2/4 Tr. at 79:2-9. Comcast, however, was in favor of additional affiliation agreementseven if they would result in an unprofitable Networkbecause that would generate sufficient revenue to cover debt service on the Comcast loan. Thus, Comcast proposed that the partners accept the DirecTV proposal, eliminate the consent requirement for affiliation agreements with the same terms as the DirecTV proposal, and remove the unanimity requirement for affiliation agreements with even
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worse terms, and lower rates, than the DirecTV proposal. See 10/28 Tr. at 336:11-340:19; JX 15. That proposal, even under Comcasts most favorable projection, was woefully
unprofitable. See 10/28 Tr. at 341:5-345:15, 347:20-348:9; Astros 25. As the bankruptcy court found, the Astros appropriately rejected Comcasts proposals. Mem. Op. at 18. The partners were thus unable to identify a solution that would result in a profitable Network or one that was agreeable to all partners by mid-September. By that time, the Network had failed to make two media rights payments to the Astros, and the Astros had the right to terminate the Media Rights Agreement on September 30. Comcast wanted to prevent the Astros from terminating the Media Rights Agreementbecause that would leave Comcast unable to recoup on its loanbut could not voluntarily file the Network for bankruptcy without the partners unanimous consent. See GP Operating Agreement 5.10, Schedule C(19). Thus, Comcast Owner sought to do indirectlycollusivelywhat it was contractually prohibited from doing directlyfiling the Network for bankruptcyand it did so to gain an advantage in a dispute with the Astros. Comcast collu[ded] with four other Comcast affiliates, circumvented the contractual prohibition on a bankruptcy filing without unanimous consent, and orchestrated an involuntary bankruptcy of the Network on September 27 to stay the Astros termination right. 10/28 Tr. at 312:9-11, 322:2-12, 434:2-435:10. Comcasts collusive attempt to override the Astros contractual rights for its own economic gain is precisely the type of bad faith that led the court to dismiss an involuntary petition in In re Global Ship, Systems, LLC, 391 B.R. 193 (Bankr. S.D. Ga. 2007). Global Ship was the alleged debtor in that case. An equity holder in Global Ship, Drawbridge, was also the major lender to Global Ship. Global Ship defaulted on that loan, and Drawbridge issued a notice of foreclosure. Id. at 197. Like here, Global Ships operating agreement prohibited Global Ship
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from commencing a Voluntary Bankruptcy without obtaining the consent of Drawbridge, as an equity holder. Id. at 199. Unable to file a voluntary bankruptcy petition without Drawbridges consent, Global Ship, through its CEO, solicited, encouraged or perhaps urged three other creditors of Global Ship to file an involuntary petition against itin order to prevent Drawbridge from foreclosing on the loan. Id. After Drawbridge moved to dismiss, the court dismissed the involuntary petition because the involuntary case [wa]s a pure subterfuge for a voluntary petition and Global Ships conductthe ruse of soliciting an involuntary case to circumvent[] the rights of Drawbridgeconstituted bad faith. Id. at 203-204; see In re Brazos Emergency Physicians Assn, P.A., 471 F. Appx 393, 394 (5th Cir. 2012) (per curiam) (affirming dismissal of Chapter 11 petition filed to gain advantage in business dispute); In re Antelope Techs., Inc., 431 F. Appx 272, 274-75 (5th Cir. 2011) (per curiam) (same). So too here. As in Global Ship, Comcast was contractually prohibited from voluntarily filing the Network for bankruptcy without the Astros consent. To circumvent that provision, and for the admitted purpose of preventing the Astros from terminating the Media Rights Agreement, Comcast directed four affiliates to file the Involuntary Petition against the Networkeven though none had any amounts due and owing from the Network as of the Petition Date. See Mem. Op. 7-10; 10/28 Tr. at 267:20-25, 272:16-21, 276:5-9, 322:5-8, 324:1318, 432:4-7, 434:6-10; 10/29 Tr. at 18:24-19:1. Whether Comcast filed the Involuntary Petition for the purposes of preserving value and rehabilitating the Network, as the bankruptcy court found, Mem. Op. at 15-16, was secondary to its principal objective: to prevent the Astros from terminating the Media Rights Agreement and thus to give Comcast a tactical advantage in the partners business dispute. Worse, the primary benefactors of the Networks involuntary
bankruptcy are Comcast and the Rockets, the very two partners that agreed to the Astros
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contractual right to terminate the Media Rights Agreement and to the unanimous consent provisions. The bankruptcy court did not address Global Ship in its opinion. The bankruptcy court instead cited In re Kingston Square Associates, 214 B.R. 713 (Bankr. S.D.N.Y. 1997), Mem. Op. at 16, but that case is inapposite. In Kingston Square, the petitioning creditors included
unaffiliated third-party creditors, not wholly-owned subsidiaries acting at the direction of a parent corporation seeking to gain an edge in an intra-partnership dispute. Further, the contract documents herethe partnership agreements and the Media Rights Agreementwere designed precisely so that the Astros media rights could not be controlled by the other partners without the Astros consenta critical fact not present in Kingston Square. Finally, unlike in Kingston Square, this proposed bankruptcy would serve no legitimate purpose because there is no reasonable likelihood that the Network can be successfully reorganized. See Section I. Comcast orchestrated the Involuntary Petition in bad faith, and the bankruptcy court abused its discretion in concluding otherwise. B. The Rockets And Landlords Joinders Do Not Cure Bad Faith By The Comcast Petitioning Creditors.
The bankruptcy court next erred in concluding that as a matter of law, the joinders by the Rockets and the landlord are not tainted with any allegations against the Comcast entities. Mem. Op. at 14. In reaching that decision, the bankruptcy court relied on a decision from the D.C. Circuitwhich it claimed is the only Circuit Court to have ruled on the issueand two bankruptcy court opinions. See id. The bankruptcy court, however, ignored a decision from the Eighth Circuit and the only decision from this jurisdiction to address the issue. Those two decisionsand the weight of authorityhold that joinders by additional creditors do not cure a petition that was originally filed in bad faith. See Basin Elec. Power 44
Corp. v. Midwest Processing Co., 769 F.2d 483, 486-87 (8th Cir. 1985); In re Norriss Bros. Lumber Co., 133 B.R. 599, 608 (N.D. Tex. 1991); see also In re Mylotte, David & Fitzpatrick, 2007 WL 2033812, at *8 (Bankr. E.D. Pa. July 12, 2007); In re Eberhart Moving & Storage, Ltd., 120 B.R. 121, 122 (Bankr. D.N.D. 1990); In re Centennial Ins. Assoc., Inc., 119 B.R. 543, 546 (Bankr. W.D. Mich. 1990); In re Braten, 74 B.R. 1021, 1022 (Bankr. S.D.N.Y. 1987); In re Alta Title Co., 55 B.R. 133, 137 (Bankr. D. Utah 1985); In re Rite-Cap, 1 B.R. 740, 741 (Bankr. D. R.I. 1979); In re Crown Sportswear, Inc., 575 F.2d 991, 993 (1st Cir. 1978). [C]ourts have consistently held that an essential prerequisite for allowing joinder of additional creditors to cure a defective petition is that the original petition was filed in good faith. In re Alta Title, 55 B.R. at 137. As the Eighth Circuit noted, the three creditor requirement is not a meaningless formality. Basin, 769 F.2d at 486. An involuntary bankruptcy is a particularly severe
remedy, and it should not be permitted in the face of bad faith. See In re Green Hills Dev., 2014 WL 380386, at *2; In re Centennial, 119 B.R. at 546. To allow an involuntary petition to proceed otherwise would be judicially irresponsible and would set a dangerous precedent. In re Centennial, 119 B.R. at 546. While dismissing an involuntary petition despite good faith
joinders would appear to punish innocent creditors, the policy of discouraging bad faith filings is paramount. Id. at 547; accord In re Mylotte, 2007 WL 2033812, at *8 (The rationale is that public policy prohibits entertaining any case commenced upon a petitioners conduct which amounts to fraud upon the court.). The decision in In re Centennial Insurance Associates, Inc., 119 B.R. 543 (Bankr. W.D. Mich. 1990), is particularly instructive. In that case, three unrelated third-party creditors of Centennial filed an involuntary bankruptcy petition, and the debtor filed a motion to dismiss. Id.
45
at 543. One creditor had a claim that was the subject of a bona fide dispute and therefore had acted in bad faith in filing the involuntary bankruptcy petition. Id. at 544. Like here, the bankruptcy court then considered whether a good faith joinder by a fourth creditor pursuant to 11 U.S.C. 303(c) purged the taint of [the original petitioning creditors] bad faith, in order to allow the involuntary petition to proceed. Id. The bankruptcy court held that bad faith filings of involuntary petitions are not to be permitted and dismissed the petition despite the good faith joinder. Id. at 546-47. The only decision from this jurisdiction on the issue adopted the Centennial courts reasoning and similarly held that joinders by other creditors do not purge the taint of the original creditors bad faith in filing. In re Norriss, 133 B.R. at 608. The subsequent joinders by the Rockets and the landlord do not cure the bad faith of the Comcast Petitioning Creditors. The Involuntary Petition should have been dismissed as a result. CONCLUSION For the foregoing reasons, this Court should reverse the bankruptcy courts conclusion that (1) the directors of the Networks General Partner owe fiduciary duties to the estate; (2) the Network has a realistic probability of successful rehabilitation in bankruptcy; and (3) the Involuntary Petition was filed in bad faith and the joinders do not cure that initial bad faith.
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Dated: February 24, 2014 Harry A. Perrin Duston K. McFaul VINSON & ELKINS LLP 1001 Fannin Suite 2500 Houston, Texas 77002 Telephone: (713) 758-2548 Facsimile: (713) 615-5016 hperrin@velaw.com dmcfaul@velaw.com /s/ Paul M. Basta Paul M. Basta, P.C. (pro hac vice) David S. Meyer (pro hac vice pending) KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 paul.basta@kirkland.com david.meyer@kirkland.com Jeffrey S. Powell (pro hac vice) John C. OQuinn (pro hac vice) Judson D. Brown (pro hac vice) KIRKLAND & ELLIS LLP 655 Fifteenth Street, N.W. Washington, D.C. 20005 Telephone: (202) 879-5000 Facsimile: (202) 879-5200 jeff.powell@kirkland.com john.oquinn@kirkland.com judson.brown@kirkland.com Counsel for Houston Astros, LLC, Astros HRSN GP Holdings LLC and Astros HRSN LP Holdings LLC
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CERTIFICATE OF SERVICE I hereby certify that a true and accurate copy of the foregoing Brief of Appellants was filed electronically on this 24th day of February 2014. The filing will be sent to the following parties, and can be accessed via the Courts electronic filing system: Charles A. Beckham, Jr. Henry Flores HAYNES AND BOONE, LLP 1221 McKinney, Suite 2100 Houston, TX 77010 Telephone: (713) 547-2000 Facsimile: (713) 547-2600 charles.beckham@haynesboone.com henry.flores@haynesboone.com Counsel for Debtor and Debtor-in-Possession Houston Regional Sports Network, LP. Howard M. Shapiro Craig Goldblatt WILMER CUTLER PICKERING HALE & DORR LLP 1875 Pennsylvania Ave., N.W. Washington, D.C. 20006 Telephone: (202) 663-6000 Facsimile: (202) 663-6363 howard.shapiro@wilmerhale.com craig.goldblatt@wilmerhale.com Nancy Lynne Holley Office of the US Trustee 515 Rusk St, Suite 3516 Houston, TX 77002 Telephone: (713) 718-4650 nancy.holley@usdoj.gov
U.S. Trustee
Timothy Graulich Dana M. Seshens Arthur J. Burke DAVIS POLK &WARDWELL LLP 450 Lexington Avenue New York, New York 10017 Telephone: (212) 450-4000 Facsimile: (212) 701-5352 timothy.graulich@davispolk.com dana.seshens@davispolk.com arthur.burke@davispolk.com Counsel for Petitioning Creditors Houston SportsNet Finance, LLC, Comcast Sports Management Services, LLC, National Digital Television Center, LLC, and Comcast SportsNet California, LLC
Counsel for Petitioning Creditors Houston SportsNet Finance, LLC, Comcast Sports Management Services, LLC, National Digital Television Center, LLC, and Comcast SportsNet California, LLC
George W. Shuster, Jr. Sanket J. Bulsara WILMER CUTLER PICKERING HALE & DORR LLP 7 World Trade Center 250 Greenwich Street New York, New York 10007 Telephone: (212) 230-8800 Facsimile: (212) 230-8888 george.shuster@wilmerhale.com sanket.bulsara@wilmerhale.com Counsel for Petitioning Creditors Houston SportsNet Finance, LLC, Comcast Sports Management Services, LLC, National Digital Television Center, LLC, and Comcast SportsNet California, LLC Douglas K. Mayer WACHTELL LIPTON, ROSEN & KATZ 51 West 52nd Street, New York, New York 10019 Telephone: (212) 403-1000 Facsimile: (212) 403-2000 DKMayer@wlrk.com Counsel for Petitioning Creditor Rocket Ball Ltd. and Clutch City Alan S. Gover Ian J. Silverbrand WHITE & CASE LLP 1155 Avenue of the Americas New York, New York 10036-2787 Telephone: (212) 819-8200 Facsimile: (212) 354-8113 agover@whitecase.com isilverbrand@whitecase.com Counsel for Rockets Partner, L.P., JTA Sports, Inc., Counsel for Petitioning Creditors Rocket Ball, Ltd., and Clutch City Sports & Entertainment, L.P.
Vincent P. Slusher Andrew B Zollinger Eliot Burriss DLA PIPER 1717 Main Street, Suite 4600 Dallas, Texas 75201-4629 Telephone: (214) 743-4500 Facsimile: (972) 813-6267 vince.slusher@dlapiper.com andrew.zollinger@dlapiper.com eli.burriss@dlapiper.com Counsel for Petitioning Creditors Houston SportsNet Finance, LLC, Comcast Sports Management Services, LLC, National Digital Television Center, LLC, and Comcast SportsNet California, LLC Marcy E. Kurtz BRACEWELL & GIULIANI LLP 711 Louisiana St., Suite 2300 Houston, Texas 77002 Telephone: (713) 223-2300 Facsimile: (713) 221-1212 marcy.kurtz@bgllp.com Counsel for Petitioning Creditor HP Fannin Properties, LP Roberto J. Kampfner, Esq. WHITE & CASE LLP 633 West Fifth Street, Suite 1900 Los Angeles, CA 90071-2007 Telephone: (213) 620-7729 Facsimile: (213) 452-2329 rkampfner@whitecase.com
Counsel for Rockets Partner, L.P., JTA Sports, Inc., Counsel for Petitioning Creditors Rocket Ball, Ltd., and Clutch City Sports & Entertainment, L.P.
Richard Warren Mithoff, Esq. Sherie Potts Beckman, Esq. MITHOFF LAW One Allen Center Penthouse 500 Dallas Street Houston, Texas 770002-4800 Telephone: (713) 654-1122 Facsimile: (713) 739-8085 rmithoff@mithofflaw.com sbeckman@mithofflaw.com Counsel for Houston Rockets
Timothy A. Davidson II Paul M. Davis ANDREWS KURTH LLP 600 Travis, Suite 4200 Houston, Texas 77002 Telephone: (713) 220-4200 Facsimile: (713) 220-4285 taddavidson@andrewskurth.com pauldavis@andrewskurth.com
Counsel for the Office of the Commissioner of Baseball Christopher J. Panos CRAIG AND MACAULEY, PC Federal Reserve Plaza 600 Atlantic Avenue Boston, MA 02210 Telephone: (617) 367-9500 Facsimile: (617) 742-1788 panos@craigmacauley.com Counsel for Creditor Game Creek Video, LLC
Michael D. Warner COLE, SCHOTZ, MEISEL, FORMAN & LEONARD, P.A. 301 Commerce Street, Suite 1700 Fort Worth, TX 76102 Telephone: (817) 810-5250 Facsimile: (817) 810-5255 mwarner@coleschotz.com Counsel for Creditor Game Creek Video, LLC Shari L. Heyen David R. Eastlake GREENBERG TRAURIG, LLP 1000 Louisiana, Suite 1700 Houston, Texas 77002 Telephone: (713) 374-3500 Telecopier: (713) 374-3505 HeyenS@gtlaw.com EastlakeD@gtlaw.com Counsel for Dynamo Soccer, LLC
/s/ Judson D. Brown

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Chapter 11 Case No. 4:13-bk-35998

Case No. 4:14-cv-304

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III. IV. V. VI.

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The Networks governance structure is set forth in a series of Transaction Documents

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Emphasis added unless otherwise noted.

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The Astros termination rights, thus, preclude a reasonable likelihood of

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But the appointment of a trustee is not a purchase of the Networks assets.

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