COVID-19: Un-Lucky For the XFL

22 May 2020 Publication
Authors: Michael J. Small Kristina M. Fernandez Mabrie

The COVID-19 pandemic interrupted sports and live entertainment around the world and triggered a surge of financial restructurings.  While sale processes in bankruptcy court are usually an effective and efficient way to “rationalize assets,” sports business thrives at the intersection of reason and emotion.  Enter the XFL, under its formal name, Alpha Entertainment LLC, to chapter 11 in the United States Bankruptcy Court for the District of Delaware (No. 20-10940-LSS). 

The league had just begun playing and televising games when live stadium events became prohibited.  The early case filings hint at a potential game plan whereby an entity that would be controlled by Vince McMahon (let’s call it “XX FL”) would own the assets of the XFL or the stock of a reorganized XFL, with the prior obligations of the league being left behind, other than those assumed by choice of XX FL.  The play formation reads that way, based on the following positioning:  The DIP financing gives Vince McMahon an inside line on the target, with a split back (the investment banker) providing a safety valve option if the post-snap flow dictates.  XFL has kept some of its asset details, and some of its contracts and obligations obscured, by delaying the filing of its schedules of assets and liabilities, and its statements of financial affairs, to a date beyond the point at which XX FL may already wrap up the assets “in the grasp.”  The XFL, using a hard count, asserts that its critical decisions are made by a defensive coordinator (an independent manager of the LLC).  

The first quarter of this game is already heavily contested.  The Creditors’ Committee has put “eight in the box,” objecting to the DIP financing, the proposed sale procedures, and to payments that XFL has asked to make to certain creditors.  The Committee has also shown a blitz package (discovery), which McMahon is trying to pick up with a blocker (an objection to subpoena).  The Court will have the final say on any proposed penalty flags and may ask for a video review (additional evidence in this season of online hearings) from the interested parties.  A hearing is currently set for May 27th on the proposed financing.  Between now and then, negotiations among the DIP Lender, the Debtor, and the Creditors Committee would be typical, as would additional discovery and related disputes.  

Meanwhile, a skirmish broke out on the sidelines, as Oliver Luck (“Luck” or “OL”) has sued McMahon in federal district court in Connecticut under a purported guaranty of XFL’s contract with OL (20-cv-0516-VAB). While the original complaint was filed conditionally under seal by OL, and therefore largely redacted, OL alleged that he “wholly disputes and rejects the allegations set forth in [XFL’s] Termination Letter and contends they are pretextual and devoid of merit.”  Shortly after filing his Complaint, Luck filed an Application for Prejudgment Remedy seeking an attachment and/or garnishment of McMahon’s assets in the amount of $23.8 million. 

At the judge’s whistle, much of the playbook was opened on May 13th when an unredacted complaint was filed by OL, and McMahon filed an Opposition to Luck’s Application for Prejudgment Remedy setting forth three reasons for Luck’s termination:  First, McMahon claims that Luck missed his blocking assignment when he left the league headquarters for his home in Indiana on March 13th and “disengage[d] from the XFL’s operations.”  Second, according to McMahon, Luck outkicked his coverage when he signed former Browns Wide Receiver, Antonio Callaway, to a draft contract promising a $125,000 signing bonus.  McMahon claims he was not aware of that deal, but should have been made aware, based on conduct that could have been considered detrimental to the enterprise.  Luck contends that the Callaway play was properly run.  Finally, McMahon claims that Luck encroached by allegedly using his league-issued iPhone for personal matters.  A hearing on prejudgment asset disclosure and garnishment sought by Luck is set for June 10th.  Other matters will likely be added to the docket on that date.  

Whether there are players (competing bidders) who will enter and affect the outcome of the XFL case remains to be seen, as well as whether pocket awareness and field vision bring additional investment from XX FL.  Even if early action establishes an insurmountable lead for one side, the case filings highlight the pressures of COVID-19 on start-ups and small leagues which don’t have broadcast or other inherent revenue streams to withstand the economic pressure that comes with the loss of games.

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