UNITED STATES DISTRICT COURT FOR THE SOUTHERN ......1 LOSANGELES 1043249 UNITED STATES DISTRICT...

1LOSANGELES 1043249

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, ) )

-against- ) )HOUSTON REGIONAL SPORTS )NETWORK, L.P., et al., ) )

Appellees. ))

Case No. 4:14-cv-304

BRIEF OF THE ROCKETS-APPELLEES

Case 4:14-cv-00304 Document 43 Filed in TXSD on 03/06/14 of 43

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TABLE OF CONTENTS

Page

INTRODUCTION ...............................................................................................................1

COUNTER STATEMENT OF JURISDICTION ................................................................5

This Appeal Involves Interlocutory Orders ..........................................................5 A.

There Are No Grounds for Hearing an Interlocutory Appeal ...............................7 B.

STANDARD OF REVIEW .................................................................................................9

COUNTER-STATEMENT OF THE CASE AND FACTUAL BACKGROUND ...........10

The Network .......................................................................................................10 A.

Corporate Structure .............................................................................................10 B.

The Chapter 11 Case ...........................................................................................12 C.

The Evidentiary Hearing .....................................................................................12 D.

The Final Arguments and Order for Relief .........................................................13 E.

The Memorandum Opinion.................................................................................14 F.

Notice of Appeal .................................................................................................14 G.

ARGUMENT .....................................................................................................................14

The Bankruptcy Court Did Not Err in Determining That the Network Can A.Reorganize ..........................................................................................................14

1. Corporate Deadlock Cannot Frustrate the Network’s Ability to Reorganize .................................................................................................15

The Network’s Directors Are Fiduciaries .........................................15 a.

There Is No Evidence that Corporate Deadlock Will Occur ............20 b.

A Reorganization Remains Possible, Even if the Astros Refuse to c.Cooperate ..........................................................................................21

2. Section 365 of the Bankruptcy Code Does Not Render Reorganization Futile ..........................................................................................................22

The Network Can Be Reorganized Under the “Actual Test” ...........22 a.

The Network’s Federal Fiduciary Duties Do Not Violate b.Section 365........................................................................................26

3. Reorganization Is Not Futile for Economic Reasons .................................31

The Chapter 11 Case Was Commenced in Good Faith ......................................33 B.

CONCLUSION ..................................................................................................................36


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TABLE OF AUTHORITIES

Page(s)

FEDERAL CASES

Am. Plumbing & Mech., Inc.,323 B.R. 442 (Bankr. W.D. Tex. 2005) .......................................................................29

Baxter v. PNC Bank Nat’l Ass’n,--- Fed. App’x ----, No. 12-51181, 2013 WL 5356894 (5th Cir. Sept. 26, 2013) ..26, 27

Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.),440 F.3d 238 (5th Cir. 2006) ...........................................................................23, 24, 28

Chevron USA, Inc. v. Aker Mar. Inc.,689 F.3d 497 (5th Cir. 2012) .......................................................................................26

Commodities Futures Trading Comm’n v. Weintraub,471 U.S. 343 (1985) ...............................................................................................16, 17

Cunningham v. Healthco, Inc.,824 F.2d 1148 (5th Cir. 1987) .....................................................................................17

Fetner v. Haggerty,99 F.3d 1180, 1181 (D.C. Cir. 1996) ...........................................................................33

Foster Secs., Inc. v. Sandoz (In re Delta Servs. Indus.), 782 F.2d 1267 (5th Cir. 1986) .......................................................................................6

Humble Place Joint Venture v. Fory (In re Humble Place Joint Venture), 936 F.2d 814 (5th Cir. 1991) .........................................................................................9

Ichinose v. Homer Nat’l Bank (In re Ichinose), 946 F.2d 1169 (5th Cir. 1991) .......................................................................................7

In re 1031 Tax Grp., LLC,No. 07-11448, 2007 WL 2085384 (Bankr. S.D.N.Y. Jul. 17, 2007) ...........................18

In re Alta Title Co.,55 B.R. 133 (Bankr. D. Utah 1985) .......................................................................34, 35

In re Ampal-American Israel Corp.,No. 12-13689, 2013 WL 1400346 (Bankr. S.D.N.Y. Apr. 5, 2013) ............................18

In re Application of the United States for Historical Cell Site Data,724 F.3d 600 (5th Cir. 2013) .........................................................................................9

In re Baldwin-United Corp.,43 B.R. 443 (S.D. Ohio 1984) .....................................................................................17

In re Bellevue Place Assoc.,171 B.R. 615 (Bankr. N.D. Ill. 1994) ..........................................................................29


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In re Cardinal Industries, Inc.,116 B.R. 964 (Bankr. S.D. Ohio 1990) ........................................................................29

In re Comm. of Asbestos-Related Litigants,749 F.2d 3 (2d Cir. 1984) ..............................................................................................6

In re Crescent Beach Inn, Inc.,22 B.R. 155 (Bankr. D. Me. 1982)...............................................................................22

In re FKF Madison Park Grp. Owner, LLC,435 B.R. 906 (Bankr. D. Del. 2010) ......................................................................34, 36

In re Footstar, Inc.,323 B.R. 566 (Bankr. S.D.N.Y. 2005) .........................................................................30

In re Harp,166 B.R. 740 (Bankr. N.D. Ala. 1993) ........................................................................29

In re Intermagnetics Am., Inc.,926 F.2d 912 (9th Cir. 1991) .......................................................................................29

In re J.V. Knitting Servs., Inc.,4 B.R. 597 (Bankr. S.D. Fla. 1980) ..............................................................................34

In re Jacobsen,465 B.R. 102 (Bankr. N.D. Miss. 2011) ......................................................................23

In re Manor Place,144 B.R. 679 (D.N.J. 1992) .........................................................................................31

In re Minn. Alpha Found.,122 B.R. 89 (Bankr. E.D.N.Y. 1981) .....................................................................15, 32

In re Norriss Bros. Lumber Co.,133 B.R. 599 (Bankr. N.D. Tex. 1991) ........................................................................35

In re Pub. Serv. Co. of N.H.,99 B.R. 155 (Bankr. D.N.H. 1989) ..............................................................................22

In re Quantegy, Inc.,326 B.R. 467 (Bankr. M.D. Ala. 2005)........................................................................25

In re Ramreddy, Inc.,440 B.R. 103 (Bankr. E.D. Pa. 2009) ..........................................................................14

In re Sovereign Grp. 1984-21 Ltd.,88 B.R. 325 (D. Colo. 1988) ........................................................................................18

In re Supernatural Foods, LLC,268 B.R. 759 (Bankr. M.D. La. 2001) .........................................................................25

In re Trans-High Corp.,3 B.R. 1 (Bankr. S.D.N.Y. 1980) .................................................................................34

In re Vento Dev. Corp.,560 F.2d 2 (1st Cir. 1977) ......................................................................................15, 32


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In re Virgin Offshore USA, Inc.,No. Civ. A. 13-79, 2013 WL 4854312 (E.D. La. Sept. 10, 2013) .........................23, 30

Institut Pasteur v. Cambridge Biotech Corp.,104 F.3d 489 (1st Cir. 1997) ............................................................................24, 27, 29

La. World Exposition v. Fed. Ins. Co.,858 F.2d 233 (5th Cir. 1988) .......................................................................................16

Lange v. Schropp (In re Brook Valley VII, Joint Venture), 496 F.3d 892 (8th Cir. 2007) .......................................................................................18

Love v. Tyson Foods, Inc.,677 F.3d 258 (5th Cir. 2012) .......................................................................................18

N.C.P. Mktg. Grp., Inc. v. Blanks (In re N.C.P. Mktg. Grp., Inc.), 129 S. Ct. 1577 (2009) .................................................................................................23

Nev. Partners Fund, LLC v. United States,720 F.3d 594 (5th Cir. 2013) .........................................................................................9

North Fork Bank v. Abelson,207 B.R. 382 (E.D.N.Y. 1997) ......................................................................................8

Northwestern Nat’l Bank of St. Paul v. Halux, Inc. (In re Halux, Inc.), 665 F.2d 213 (8th Cir. 1981) .......................................................................................18

Promenade National Bank v. Phillips (In re Phillips), 844 F.2d 230, 236 (5th Cir. 1988) .................................................................................6

Path-Science Labs., Inc. v. Greene Cnty. Hosp. (In re Greene Cnty. Hosp.),835 F.2d 589 (5th Cir. 1988) .........................................................................................6

Pickens Indus., Inc. v. Palmer, Palmer and Coffee (In re Tex. Extrusion Corp.), 68 B.R. 712 (N.D. Tex. 1986), aff’d 844 F.2d 1142 (5th Cir. 1988) ...........................21

Reed v. Edwards,487 Fed. App’x 904, 907 (5th Cir. 2012) ....................................................................27

Skeen v. Harms (In re Harms),10 B.R. 817 (Bankr. D. Colo. 1981) ............................................................................31

Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.),163 F.3d 925 (5th Cir. 1999) .......................................................................................17

Speer v. Tow (In re Royce Homes LP),466 B.R. 81 (S.D. Tex. 2012) ........................................................................................5

Stumpf v. McGee (In re O’Connor),258 F.3d 392 (5th Cir. 2001) .......................................................................................31

Turner v. Baylor Richardson Med. Ctr.,476 F.3d 337 (5th Cir. 2007) .......................................................................................27

United States ex rel. Willoughby v. Howard,302 U.S. 445 (1938) .....................................................................................................16


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Whaley v. United States,76 B.R. 95 (N.D. Miss. 1987) ........................................................................................6

STATE CASES

Star Cellular Tel. Co. v. Baton Rouge CGSA, Inc.,Civ. A. No. 12507, 1993 WL 294847 (Del. Ch. Aug. 2, 1993) ...................................29

FEDERAL CONSTITUTION

U.S. Const. Article I, § 8, cl. 4 ...........................................................................................20

FEDERAL STATUTES

11 U.S.C. § 303(c) .................................................................................................34, 35, 36

11 U.S.C. § 365 .......................................................................................................... passim

11 U.S.C. § 1107 ................................................................................................2, 17, 19, 20

11 U.S.C. § 1112(b)(4)(A) .................................................................................................14

11 U.S.C. § 1121(b) ...........................................................................................................21

28 U.S.C. § 158(a)(1) ...........................................................................................................5

28 U.S.C. § 158(a)(3) ...........................................................................................................7

28 U.S.C. § 1334(a), (e)(1) ................................................................................................19

FEDERAL RULES

Fed. R. Bankr. P. 9001 .......................................................................................................17

MISCELLANEOUS

S. Rep. No. 989, 95th Cong., 2d Sess. 116 (1978) ............................................................17

Thomas G. Kelch, The Phantom Fiduciary: The Debtor in Possession in Chapter 11,38 Wayne L. Rev. 1323 (1992) ....................................................................................17


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INTRODUCTION

The Astros1 appeal from the entry of an order for relief (the “Order for Relief”)

against Houston Regional Sports Network, L.P. (the “Network” or “Debtor”) and the

denial of their motion to dismiss (the “Motion to Dismiss”) the Network’s chapter 11

case (the “Chapter 11 Case”). The Astros’ appeal is without merit. The purpose of

chapter 11 is to reorganize valuable businesses and preserve their value for the benefit of

creditors, equity holders and other parties in interest. The Order for Relief puts the

Network on a course to fulfill exactly that purpose. There is no question that the

Network and its business will collapse if the Chapter 11 Case is dismissed. The Network

should be afforded an opportunity to reorganize, notwithstanding the Astros’ arguments

to the contrary.

As an initial matter, the Court is without jurisdiction to hear this appeal, and the

appeal should be dismissed. The Fifth Circuit has been clear that the denial of a motion

to dismiss a bankruptcy case is not a final order, because it does not result in the final

resolution of any rights. That is certainly true here. The Bankruptcy Court’s2 denial of

the Motion to Dismiss does nothing more than initiate a bankruptcy proceeding. It does

not modify any of the Astros’ rights to oppose a reorganization of the Network or

otherwise defend their interests in their media rights. On this basis alone, the appeal

should be dismissed.

Substantively, the Astros make three primary arguments in support of their

appeal. First, the Astros argue that the Bankruptcy Court erred by concluding that the

1 The “Astros” refers to Houston Astros, LLC and its affiliates. 2 The “Bankruptcy Court” refers to the United States Bankruptcy Court for the Southern District of Texas.


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Network’s directors would owe fiduciary duties to the Network’s estate after the Order

for Relief was entered. According to the Astros, this mistake is fatal to the Bankruptcy

Court’s determination that a reorganization of the Network is possible, because, if no

such duties exist, the Astros would simply direct the Network director that they appointed

to reject all attempts at reorganization. This argument fails. Most importantly, the

Bankruptcy Court was right to conclude that the directors of the Network likely owe

fiduciary duties to the Network after an order for relief has been entered. The fiduciary

relationship between a debtor in possession and the estate it controls is well established in

bankruptcy case law and at least partially codified in section 1107 of the Bankruptcy

Code. The state law waivers that form the basis of the Astros’ argument cannot trump

federal bankruptcy law.

The Astros’ argument also fails because it rests on the assumption that the Astros

will reject all restructuring proposals, no matter what they might be. The Bankruptcy

Court was right to conclude that this assumption has no support in the record. To the

contrary, the record supports the notion that the Astros will be responsible business

partners and will support a reasonable restructuring transaction that results in a viable

Network. Among other things, James Crane, the CEO of the Astros, testified that the

Astros had rejected previous restructuring proposals, not as a matter of policy, but

because they would not have led to a profitable Network. Mr. Crane further testified that

the Astros have considered, and would consider, all reasonable proposals on their merits.

There is simply no testimony anywhere in the record from any Astros witness indicating

that the Astros would reject any and all restructuring proposals out of hand. The Astros


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cannot argue that the Bankruptcy Court abused its discretion by crediting the testimony

of the Astros’ own CEO.

In any event, any inability of the Network to propose a plan of reorganization is

not fatal to the Network’s ability to reorganize. The Bankruptcy Code provides a chapter

11 debtor with a limited “exclusive period” to file and confirm a plan of reorganization.

However, the Bankruptcy Code expressly permits the exclusive period to be shortened

for “cause.” If the Network cannot propose a plan of reorganization as a result of

corporate deadlock, or the non-cooperation of the Astros, the Bankruptcy Court can

simply terminate exclusivity and allow the Rockets,3 Comcast,4 or any other party in

interest to propose a plan without the Network’s (or the Astros’) consent.

Second, the Astros argue that the Network cannot be reorganized, because section

365 of the Bankruptcy Code provides them with the right to veto any assignment of their

media rights agreement with the Network. The Astros’ argument places the cart before

the horse. Section 365(c) of the Bankruptcy Code limits the assignability of a protected

contract only if such assignment forces the non-debtor to accept performance from a

different entity than the original contracting party. The Fifth Circuit has made clear,

however, that the assignability of a protected contract must be determined on a case-by-

case basis, and only when there is an actual proposed assignment before the Bankruptcy

Court. This test is dispositive here, where the assignability of the Astros’ media rights

agreement is unknown. Simply put, the Chapter 11 Case has just begun and there is no

proposed assignment for the Bankruptcy Court to consider at this time.

3 “Rockets” refers to Rockets Partner, L.P., JTA Sports, Inc., Rocket Ball, Ltd., and Clutch City Entertainment. 4 “Comcast” refers to Comcast Corporation, Houston SportsNet Holdings, LLC, Comcast Sports Management Services, LLC, Comcast Cable Communications, LLC, Houston Sports Net Finance, LLC and their related affiliates.


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It is important to note that the Astros’ media rights agreement expressly

contemplates its assignability to a third party, states that it is assignable in connection

with a sale of substantially all of the Network’s assets, and, in any event, section 365(c)

does not limit the assumption of a protected contract by the debtor; it limits only the

assignment of that contract to a third party. As the Bankruptcy Court expressly noted,

section 365 might preclude some types of reorganizations, but it does not preclude all

reorganizations and that is enough to permit an entry of the Order for Relief.

The Astros’ argument that the Chapter 11 Case should be dismissed because a

reorganization of the Network is not economically feasible is also misplaced. At the

commencement of a bankruptcy case, the law merely requires that a reorganization not be

futile.5 In this case, the record easily satisfies this low standard. Mr. Crane himself

testified that the Network could be reorganized with the right business plan.

Additionally, Comcast has stated on the record that it will make an offer to purchase the

equity or assets of the Network.6 Under these circumstances, dismissal of the Chapter 11

Case at this point in time is simply not appropriate.

Finally, the Astros argue that the Bankruptcy Court erred by concluding that the

Network’s bankruptcy case should not be dismissed for bad faith. The Bankruptcy Court,

however, did not abuse its discretion by finding against the Astros. The Astros did not

challenge the good faith of the two Rockets entities or the Network’s landlord that joined

the involuntary petition, and could have commenced the Chapter 11 Case without

5 The Rockets note that they are owed millions of dollars in past due media rights fees, and that more past due media rights fees continue to accrue each month. Accordingly, while the Rockets do not believe that a reorganization of the Network is futile at this time, they do believe that the reorganization window is short and that a reorganization of the Network must occur quickly and without delay. 6 Comcast’s statements indicating that it would make a bid for the Network or its assets was a significant factor in the Rockets’ decision to ultimately join the involuntary petition.


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Comcast. The Bankruptcy Court was right to find that the good faith of such entities was

more than sufficient to justify ruling against the Astros, especially in light of the fact that

Comcast’s many statements on the record that it would make a stalking horse bid to

purchase the Network or its assets strongly suggested, at least to the Rockets, that a

bankruptcy proceeding was in the interests of all parties.

The Bankruptcy Court was right to conclude that the Network’s financial issues

can best be addressed in a bankruptcy proceeding, and the Bankruptcy Court’s denial of

the Motion to Dismiss should be affirmed.

COUNTER STATEMENT OF JURISDICTION

This appeal should be dismissed for lack of jurisdiction. Under well-established

Fifth Circuit precedent, the Bankruptcy Court’s denial of the Motion to Dismiss is an

interlocutory order not subject to appeal. Further, there are no exceptional circumstances

that would warrant interlocutory review. See Speer v. Tow (In re Royce Homes LP), 466

B.R. 81, 94 (S.D. Tex. 2012) (noting that interlocutory appeals are generally disfavored

and should be limited to “exceptional circumstances”). Because nothing has been

conclusively resolved with respect to any of the Astros’ property rights or interests, their

appeal should be dismissed.

This Appeal Involves Interlocutory Orders A.

Federal district courts have jurisdiction to hear bankruptcy appeals as a matter of

right “from final judgments, orders, and decrees.” 28 U.S.C. § 158(a)(1) (emphasis

added). The Court of Appeals for the Fifth Circuit has acknowledged that a bankruptcy

court’s order is “final” only if the “game [is] really [] over,” meaning that the bankruptcy

court must have entered an order that conclusively determines substantive rights. See


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Path-Science Labs., Inc. v. Greene Cnty. Hosp. (In re Greene Cnty. Hosp.), 835 F.2d 589,

595 (5th Cir. 1988).

Following the Fifth Circuit’s general view of finality, courts in this Circuit have

consistently held that orders denying motions to dismiss involuntary bankruptcy

proceedings are interlocutory. In Promenade National Bank v. Phillips (In re Phillips),

the Fifth Circuit, observed:

While the instant case did not involve a denial of a motion to dismiss for lack of subject matter jurisdiction, but rather a denial of a motion to dismiss based on the defense that the debtor was ineligible, we nevertheless are convinced that the instant order was non-final. Like an order that determines that the bankruptcy court has jurisdiction, an order determining that a debtor is eligible allows the bankruptcy proceedings to continue. It thus is a “preliminary step in some phase of the bankruptcy proceeding,” and does not “directly affect” the disposition of the estate’s assets.

844 F.2d 230, 236 (5th Cir. 1988). Other courts agree. See, e.g., In re Greene Cnty.

Hosp., 835 F.2d at 595-96 (order denying motion to dismiss was not final); see also In re

Comm. of Asbestos-Related Litigants, 749 F.2d 3, 4 (2d Cir. 1984) (noting that denial of

motion to dismiss Johns-Manville bankruptcy was interlocutory); Whaley v. United

States, 76 B.R. 95, 96 (N.D. Miss. 1987) (stating that “[a]ny appeal of a denial of a

motion to dismiss is interlocutory.”).

The logic of these opinions applies here. The denial of the Motion to Dismiss

does not affect any of the Astros’ substantive rights. No plan has been confirmed, or

even proposed, and the Bankruptcy Court has made no determination concerning whether

the Astros’ media rights agreement can or will be assumed or assigned and under what

circumstances. The denial of the Motion to Dismiss does nothing more than allow the

Chapter 11 Case to proceed as permitted by the Bankruptcy Code. It is what the Fifth

Circuit calls a “preliminary step” in the process of determining whether the Network can


7LOSANGELES 1043249

be reorganized. See Foster Secs., Inc. v. Sandoz (In re Delta Servs. Indus.), 782 F.2d

1267, 1270-71 (5th Cir. 1986).

The Astros have attempted to circumvent the Fifth Circuit’s rulings by claiming

that “the fiduciary duty issue and the involuntary nature of this case” somehow transform

the denial of the Motion to Dismiss into a final order. Not so. The question of whether

the Network’s individual directors are fiduciaries only indirectly affects the Astros.

Indeed, the Bankruptcy Court was clear that the Astros themselves are not fiduciaries and

are free to aggressively defend their rights in the Chapter 11 Case:

Again, to make clear, I am not holding that the Astros are the fiduciary. The Astros are free to defend their rights fully. They’re free to argue against assumptions of their contract. They’re free to take what actions they need to take in their own capacity. They just aren’t free to do that by directing the actions of their appointed director to breach his or her . . . fiduciary duties.

Feb. 11 Hr’g Tr. at 56:2-6. In any event, the Bankruptcy Court expressly stated that it

was not making a final determination regarding the applicability of fiduciary duties.

Mem. Op. at 20, fn. 3.

Finally, the involuntary nature of the Chapter 11 Case is no basis for

distinguishing the relevant case law. In fact, one of the cases cited by the Astros—In re

Phillips—was a decision concluding that an order denying a motion to dismiss an

involuntary bankruptcy case was interlocutory.

There Are No Grounds for Hearing an Interlocutory Appeal B.

In rare circumstances, district courts may hear interlocutory appeals.

See 28 U.S.C. § 158(a)(3). Leave to appeal an interlocutory order of a bankruptcy court,

however, should not be granted unless: (1) there is a controlling question of law; (2) there

are substantial grounds for difference of opinion; and (3) an immediate appeal may


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materially advance the ultimate termination of the litigation. Ichinose v. Homer Nat’l

Bank (In re Ichinose), 946 F.2d 1169, 1177 (5th Cir. 1991). Such factors are absent here.

There is no controlling question of law. As noted above, the Bankruptcy Court made no

final judgment regarding the directors’ fiduciary duties to the Network and its estate. In

addition, the Bankruptcy Court’s decision to deny the Motion to Dismiss was highly fact

driven. Among other things, the Bankruptcy Court found that: (a) a reorganization of the

Network was not futile because there was no evidentiary support for the notion that the

Astros would veto reasonable restructuring proposals out of hand; (b) as an economic

matter, the Network could be restructured and be profitable; and (c) the involuntary

petition was filed in good faith. These highly factual determinations should not be

reviewed in the context of an interlocutory order.

Likewise, there are no substantial grounds for difference of opinion. Strong

disagreement among litigants on any particular issue is not a basis for a finding that this

factor has been met. See N. Fork Bank v. Abelson, 207 B.R. 382, 390 (E.D.N.Y. 1997).

Instead, the appellate issues should be “difficult and of first impression.” Id. None of the

issues raised by the Astros are of that nature. In fact, the Astros’ leading argument—that

the reorganization is futile because the directors owe no fiduciary duties to the estate—is

not only factually wrong but is also contrary to decades of well-established bankruptcy

law.

Lastly, this appeal will not materially advance the termination of litigation.

Dismissal of the Chapter 11 Case would likely result in the liquidation of the Network,

which is likely to increase, not decrease, litigation. Further, the dismissal will not resolve

the intra-partner litigation that the Astros themselves commenced against Comcast and


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Drayton McLane, the Astros’ former owner.

In short, the Court has no jurisdiction to hear this appeal, and the appeal should be

dismissed on that basis.

STANDARD OF REVIEW

The Astros assert that the Bankruptcy Court erred in denying the Motion to

Dismiss because a reorganization of the Network is futile and the Chapter 11 Case was

filed in bad faith. The District Court should review the Bankruptcy Court’s denial of the

Motion to Dismiss for abuse of discretion. Humble Place Joint Venture v. Fory (In re

Humble Place Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991) (“We review the

bankruptcy court’s decision to dismiss for abuse of discretion . . . .”). Under this

standard, that the reviewing court would have determined a matter differently is

insufficient to justify reversal. Instead, a reviewing court should only reverse a lower

court if it is convinced that a clear error has been made. Id.

Further, findings of fact should only be disturbed if they are clearly erroneous.

“‘A finding of fact is clearly erroneous when although there is evidence to support it, the

reviewing court on the entire evidence is left with a firm and definite conviction that a

mistake has been committed.’” In re Application of the United States for Historical Cell

Site Data, 724 F.3d 600, 603 (5th Cir. 2013) (quoting In re Missionary Baptist Found. of

Am., Inc., 712 F.2d 206, 209 (5th Cir. 1983)) (internal quotations omitted); Nev. Partners

Fund, LLC v. United States, 720 F.3d 594, 615 (5th Cir. 2013) (“‘Clear error exists when

[the reviewing] court is left with the definite and firm conviction that a mistake has been

made.’”) (quoting Streber v. Comm’r, 138 F.3d 216, 219 (5th Cir. 1998)).


10LOSANGELES 1043249

As explained below, the Bankruptcy Court did not abuse its discretion in denying

the Motion to Dismiss. Accordingly, the Bankruptcy Court’s rulings should be affirmed.

COUNTER-STATEMENT OF THE CASE AND FACTUAL BACKGROUND

The Network A.

The Network operates a regional sports network that produces and distributes

content relating to the Houston Rockets, the Houston Astros, and other sports teams

within the City of Houston and its surrounding region. Mem. Op. at 1.7

The Network’s most valuable assets are two media rights agreements: one

providing media rights in respect of the Houston Rockets (the “Rockets Media Rights

Agreement”) and the other providing media rights in respect of the Houston Astros (the

“Astros Media Rights Agreement”). Mem. Op. at 3.

The substantial majority of the Network’s revenue is derived from affiliation

agreements with multi-channel video programming carriers (each such agreement, an

“Affiliation Agreement”) for the redistribution of the Network’s content. At present, the

Network’s only significant Affiliation Agreement is with Comcast.

Corporate Structure B.

The Network is governed by the Second Amended and Restated Agreement of

Limited Partnership of Houston Regional Sports Network, L.P., dated October 29, 2010

(the “LP Agreement”). Among other things, that document provides that the Network

will be managed by a general partner. Mem. Op. at 2.

7 References to “Mem. Op.” are references to the Memorandum Opinion of the Bankruptcy Court entered on February 12, 2014 and constituting the findings of fact and conclusions of law in respect of the Order for Relief and the Astros’ Motion to Dismiss.



Consistent with the foregoing, the general partner of the Network—Houston

Regional Sports Network, LLC (the “General Partner”)—exercises day-to-day

management, supervision, and control over the Network’s properties and business. The

Astros, Rockets and Comcast own the General Partner. See Mem. Op. at 2.

The General Partner, in turn, is managed by a board of directors (the “GP

Board,” and each member thereof a “Director”). The GP Board consists of four

individuals. One director is appointed by the Astros. One director is appointed by the

Rockets and two directors are appointed by Comcast. Mem. Op. at 2. Under the LP

Agreement and the Second Amended and Restated Limited Liability Company

Agreement of the General Partner, dated October 29, 2010 (the “GP Operating

Agreement”), unanimous consent of the Directors is required for the Network to enter

into Affiliation Agreements that are less favorable to the Network than the Network’s

Affiliation Agreement with Comcast. Mem. Op. at 2.

Prior to the commencement of the Chapter 11 Case, the Astros and Comcast were

at odds on how best to run the Network’s business. Among other things, the parties were

unable to agree on the proper terms of future Affiliation Agreements. As a result of this

deadlock, the Network is cash flow negative and at risk of losing its valuable media rights

and going concern value.

On July 31, 2013, the Network failed to make a required media rights payment to

the Astros. Mem. Op. at 3; Docket No. 64 at 15.8 On that same day, the Astros sent a

notice of default to the Network. The Network also failed to make the August 30, 2013

media rights payment to the Astros. The Astros sent a second notice of default on

8 References to “Docket No.” are references to the official docket of the Chapter 11 Case maintained by the Clerk of the Bankruptcy Court.



September 3, 2013. Mem. Op. at 3; Docket No. 64 at 15-16. The second notice of

default indicated that the Astros would have the right to terminate the Astros Media

Rights Agreement if the Network did not cure the defaults by September 29, 2013.

Mem. Op. at 3; Docket No. 64 at 16.

The Chapter 11 Case C.

On September 27, 2013, Houston SportsNet Finance, LLC, Comcast Sports

Management Services, LLC, National Digital Television Center, LLC, and Comcast

SportsNet California, LLC (the “Comcast Petitioning Creditors”) filed an involuntary

petition (the “Petition”) commencing the Chapter 11 Case.

On October 7, the Astros filed the Motion to Dismiss. In the Motion to Dismiss,

the Astros claimed that the Comcast Petitioning Creditors had filed the Petition in bad

faith, both because they were attempting to obtain an improper advantage in a business

dispute with the Astros and because reorganization was futile. The Motion to Dismiss

was opposed by the Rockets and Comcast.

The Evidentiary Hearing D.

On October 28 and 29, 2013, the Bankruptcy Court conducted an evidentiary

hearing to determine whether to enter the Order for Relief or grant the Motion to Dismiss.

During the evidentiary hearing, the Bankruptcy Court heard from multiple witnesses,

including Mr. Crane and several Comcast employees involved in Network activities.

During Mr. Crane’s examination, the Bankruptcy Court directly asked Mr. Crane:

“with the right business plan can [the Network] make money?” Oct. 28 Hr’g Tr. at

147:11-13. Mr. Crane responded unequivocally: “Yes, it can make money.” Id. at

147:13. The Bankruptcy Court further asked Mr. Crane whether he, personally, could



make the Network work. Once again, Mr. Crane answered: “I think I could, yeah.” Id. at

151:7-12.

On cross-examination, Comcast pressed Mr. Crane on why he, as the Astros’

representative, had rejected the terms of new Affiliation Agreements proposed to the

Network by Comcast. Mr. Crane indicated that he had rejected such agreements because

they would have “resulted in the Network and Partnership losing money.” Id. at

102:9-12. Mr. Crane then made clear that the Astros were willing to approve agreements

once the Astros “saw how the entire program was going to work and it could be

profitable.” Id. at 129:15-20.

The Astros never testified that they would reject restructuring proposals or

Affiliation Agreements out of hand.

During the October 28 hearing, two affiliates of the Rockets, Rocket Ball Ltd. and

Clutch City Sports & Entertainment, L.P., and the Network’s landlord (the “Landlord”),

HP Fanin Properties, L.P. (together, the “Joining Creditors”), joined the Comcast

Petitioning Creditors as petitioning creditors. The Bankruptcy Court provided the Astros

with additional time to conduct discovery of the Rockets and the Landlord in order to

determine whether the Joining Creditors acted in good faith in joining the Petition.

The Final Arguments and Order for Relief E.

On February 4, 2014, the Bankruptcy Court held a hearing to consider final

arguments on the Motion to Dismiss. At the beginning of the hearing, the Astros

indicated that they would not challenge the good faith of the Joining Creditors, including

the Rockets. Thereafter, the parties made their closing arguments. At the conclusion of

the Hearing, the Court entered the Order for Relief, which was supplemented by the



Court’s oral findings of fact and conclusions of law read into the record. The Court

further indicated that it would issue written findings of fact and conclusions of law at a

later date.

The Memorandum Opinion F.

On February 12, 2014, the Bankruptcy Court issued its Memorandum Opinion

in connection with the entry for the Order for Relief and the denial of the Motion

to Dismiss.

Notice of Appeal G.

On February 7, 2014, the Astros filed the Houston Astros’ Notice of Appeal (the

“Notice of Appeal”) Docket No. 217. The Astros elected to pursue their appeal in this

Court Docket No. 218.

ARGUMENT

The Astros argue that the Chapter 11 Case should have been dismissed because an

attempt at reorganization is futile, and because the Chapter 11 Case was filed in bad faith.

The Astros failed to establish either argument at trial. Accordingly, the Bankruptcy

Court did not abuse its discretion by denying the Motion to Dismiss and entering the

Order for Relief.

The Bankruptcy Court Did Not Err in Determining That the Network Can A.Reorganize

In order for a case to be dismissed pursuant to section 1112(b)(4)(A) of the

Bankruptcy Code, the movant must show, among other things, “the absence of a

reasonable likelihood of rehabilitation.” In the initial stages of a chapter 11 case, the

burden of a movant under section 1112(b) is high. See, e.g., In re Ramreddy, Inc., 440

B.R. 103, 114 (Bankr. E.D. Pa. 2009). Indeed, “the movant . . . must show that there is



no more than a ‘hopeless and unrealistic prospect’ of rehabilitation.” In re Minn. Alpha

Found., 122 B.R. 89, 91 (Bankr. E.D.N.Y. 1981) (quoting In re Steak Loft of Oakdale,

Inc., 10 B.R. 182, 185 (Bankr. E.D.N.Y. 1981)) (additional quotations omitted). Further,

to deny a motion to dismiss in the early phases of a bankruptcy case, a court need not

receive “a specific plan” of reorganization; rather, it must merely be satisfied that there

exists “a reasonable possibility that a plan can be formulated.” In re Vento Dev. Corp.,

560 F.2d 2, 6 (1st Cir. 1977).

Despite this high bar, the Astros argue that rehabilitation is futile. The Astros

argue that any plan of reorganization must be unanimously approved by the Directors,

including the Astros’ Director, and that this makes a restructuring futile because the

Astros will instruct their Director to reject any plan of reorganization that could possibly

be proposed by the Network out of hand. The Astros also argue that section 365(c) of the

Bankruptcy Code prevents the Network from assigning the Astros Media Rights

Agreement without the Astros’ consent, and the Astros will not provide such consent

under any circumstances. Finally, the Astros argue that there is simply no feasible plan

that can make the Network profitable. None of these arguments is persuasive, and the

Bankruptcy Court did not abuse its discretion by rejecting them.

1. Corporate Deadlock Cannot Frustrate the Network’s Ability to Reorganize

The Network’s Directors Are Fiduciariesa.

The Astros argue that the Network cannot be reorganized because any decision to

reorganize must be unanimously approved by the Network’s directors and the Astros will

instruct their appointed director to reject any and all reorganization proposals. The

Bankruptcy Court properly rejected this argument and found that the Network’s



governance structure is no bar to reorganization.

The Bankruptcy Court found that the Astros could not simply instruct their

director to reject all restructuring proposals out of hand. The Bankruptcy Court noted

that, once the Order for Relief was entered, it was highly likely that the Network’s

directors would owe fiduciary duties to the Network. As a result, the director appointed

by the Astros would not be able to “veto” viable reorganization transactions at the whim

of the Astros but, instead, would have to act for the benefit of the Network. The Astros

assert that the Bankruptcy Court’s conclusions are wrong. They note that the LP

Agreement and GP Agreement waive fiduciary duties under Delaware law, and that those

waivers are effective, even after a chapter 11 case has been commenced. In essence, the

Astros argue that the Network can be a debtor in possession under federal bankruptcy

protection without being subject to any fiduciary duties. This is just not so.

It has long been recognized that bankruptcy trustees are fiduciaries of the

bankruptcy estate. See United States ex rel. Willoughby v. Howard, 302 U.S. 445, 450

(1938) (noting that the trustee “of an estate has the duty of exercising reasonable care in

the custody of the fiduciary estate unless relieved of such duty by agreement”).

Similarly, the Supreme Court has noted that directors of a debtor in possession “bear

essentially the same fiduciary obligation to creditors and shareholders as would the

trustee for a debtor out of possession.” Commodities Futures Trading Comm’n v.

Weintraub, 471 U.S. 343, 355 (1985) (citing Wolf v. Weinstein, 372 U.S. 633, 649-52

(1963)); see also La. World Exposition v. Fed. Ins. Co., 858 F.2d 233, 249-50 (5th Cir.

1988). This is because “the willingness of courts to leave debtors in possession of their

assets ‘is premised upon an assurance that the officers and managing employees can be



depended upon to carry out the fiduciary responsibilities of a trustee.’” Weintraub, 471

U.S. at 355 (quoting Wolf, 372 U.S. at 651). Cf. Thomas G. Kelch, The Phantom

Fiduciary: The Debtor in Possession in Chapter 11, 38 Wayne L. Rev. 1323, 1323

(1992); In re Baldwin-United Corp., 43 B.R. 443, 459 n.22 (S.D. Ohio 1984) (directors of

a chapter 11 debtor “are fiduciaries of the estate, which the debtor in possession holds as

trustee for the creditors”).

The fiduciary nature of the obligations of a debtor in possession to the estate it

controls is partially codified in the Bankruptcy Code. Section 1107 provides that “a

debtor in possession shall have all the rights . . . and powers, and shall perform all the

functions and duties, of a trustee serving in a case under this chapter.” 11 U.S.C.

§ 1107(a). In addition, the legislative history of such section is clear that:

This section [1107] places a debtor in possession in the shoes of a trustee in every way. The debtor is given the rights and powers of a Chapter 11 trustee. He is required to perform the functions and duties of a Chapter 11 trustee (except the investigative duties). He is also subject to any limitations on a Chapter 11 trustee, and to such other limitation and conditions as the court prescribes. Cf. Wolf v. Weinstein, 372 U.S. 633, 649-50 (1963).

S. Rep. No. 989, 95th Cong., 2d Sess. 116 (1978) (emphasis added); see also Fed. R.

Bankr. P. 9001 (stating that the term “Trustee,” when used in the Bankruptcy Rules,

includes a debtor in possession in a chapter 11 case). The Fifth Circuit, as it must,

agrees. See, e.g., Cunningham v. Healthco, Inc., 824 F.2d 1148, 1459 (5th Cir. 1987)

(noting that the debtor in possession assumes duties of a chapter 7 trustee); Southmark

Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 931 (5th Cir. 1999)

(“A sine qua non in restructuring the debtor-creditor relationship is the court’s ability to

police the fiduciaries, whether trustees or debtors in possession.”); Love v. Tyson Foods,

Inc., 677 F.3d 258, 273 n.11 (5th Cir. 2012) (“The debtor in possession is the



representative of the estate and is saddled with the same fiduciary duty as a trustee to

maximize the value of the estate available to pay creditors.”) (citing Cheng v. K&S

Diversified Invs., Inc. (In re Cheng), 308 B.R. 448, 455 (B.A.P. 9th Cir. 2004), aff’d, 160

Fed. App’x 644 (9th Cir. 2005)).

The fact that a debtor in possession is a limited partnership or limited liability

company does not change this rule. Indeed, courts have concluded that “the partners in a

bankruptcy partnership, acting as a debtor in possession, must run the business as agents

of the bankruptcy estate, and not for their own personal gain.” Lange v. Schropp (In re

Brook Valley VII, Joint Venture), 496 F.3d 892, 900 (8th Cir. 2007). Partners must

“protect and conserve the property in [their] possession for the benefit of

creditors.” Northwestern Nat’l Bank of St. Paul v. Halux, Inc. (In re Halux, Inc.), 665

F.2d 213, 216 (8th Cir. 1981).

In contrast to the overwhelming authority supporting the Bankruptcy Court’s

conclusions, the Astros do not cite a single case that directly supports their position that a

debtor in possession can exist without fiduciary duties. Indeed, no case has ever held that

a debtor in possession and its officers and directors can protect their own parochial

interests at the expense of the estate. Further, the cases most prominently cited by the

Astros for this position—In re 1031 Tax Grp., LLC, No. 07-11448, 2007 WL 2085384

(Bankr. S.D.N.Y. Jul. 17, 2007); In re Ampal-American Israel Corp., No. 12-13689, 2013

WL 1400346 (Bankr. S.D.N.Y. Apr. 5, 2013); and In re Sovereign Grp. 1984-21 Ltd., 88

B.R. 325 (D. Colo. 1988)—do not include any discussion of fiduciary duties whatsoever.

The Astros’ lack of authority is not surprising because what the Astros are

seeking to do is change the law and turn well-established bankruptcy principles on their



head. Waivers of fiduciary duties under Delaware law cannot affect the rights and

responsibilities of a debtor in possession under the Bankruptcy Code, and section 1107 of

the Bankruptcy Code and federal common law expressly impose upon a debtor in

possession the duties of a trustee. Moreover, federal law preempts state law in defining

the duties and obligations of a debtor in possession. Among other things, U. S. District

Courts have (subject to referral to the bankruptcy judges) “original and exclusive”

jurisdiction of all bankruptcy cases, and exclusive jurisdiction of “all of the property,

wherever located, of the debtor as of the commencement of such case, and of property of

the estate.” 28 U.S.C. § 1334(a), (e)(1). It is simply inconceivable that the directors of a

debtor in possession could engage in self-dealing, or waste assets subject to the exclusive

jurisdiction of a federal court, and then argue that they were entitled to do so under

Delaware law.9

Importantly, the imposition of fiduciary duties under bankruptcy law does not

effect a change in the governance structure of the Network. Fiduciary duties are legal

requirements that directors must consider (along with all other legal requirements) when

exercising their governance authority, but they do not alter any governance procedures.

Indeed, in this case, notwithstanding the entry of the Order for Relief, the Network

remains governed by substantially the same Directors; the unanimous consent

requirements remain the same; and each partner remains entitled to appoint the same

9 Indeed, the Astros’ argument would destroy the basic constitutional mandate of the Bankruptcy Code—to serve as a uniform system of bankruptcy laws. See U.S. Const. art. I, § 8, cl. 4 (authorizing Congress “To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”). Under the Astros’ view, debtors in possession incorporated in states where directors are able to waive fiduciary duties could self-deal with impunity, while those from states that did not allow such waivers would be required to act for the benefit of the estate. This result makes no sense and runs counter to the constitutional authorization for the Bankruptcy Code.



number of Directors.10

Finally, the Astros’ argument that the proper remedy to the lack of a fiduciary

duty is the appointment of the trustee is absurd. Under the Astros’ reasoning, no

partnership or limited liability company as to which state law fiduciary duties are waived

could ever be a debtor in possession. But that is not the law. Under chapter 11, debtors

are expected to remain in possession of their assets, and the appointment of a trustee is an

extraordinary remedy. This is so because debtors in possession must act like trustees.

See 11 U.S.C. § 1107. The Astros cannot turn this clear Congressional scheme on its

head through their novel arguments.

There Is No Evidence that Corporate Deadlock Will Occur b.

The Astros’ argument not only fails as a matter of law; it also fails as a factual

matter. In order to accept the Astros’ argument that a reorganization of the Network is

futile, the Bankruptcy Court would have to conclude that the Astros will veto all

restructuring proposals indiscriminately. During the trial before the Bankruptcy Court,

however, the Astros’ witnesses testified to the contrary. Mr. Crane stated that the Astros

had rejected various proposals for new carriage, not out of hand, but because such

proposals would not have resulted in a profitable Network.11 Mr. Crane also testified that

he thought that the Network could be profitable if run correctly; and both Mr. Crane and

George Postolos, a highly placed Astros official during the time periods relevant to this

10 As noted by the Bankruptcy Court, the Astros have the right to appoint a Director, but they do not have the right to directly control their Director, the General Partner, or the Network. This was true before the entry of the Order for Relief and remains true now. Importantly, that governance is vested in the individual Directors and not in the partners of the Network was a deliberate choice to provide the partners with limited liability. The Astros cannot claim to directly control the affairs of the Network when they bargained for something entirely different. 11 Counsel for the Astros has continuously argued that the Astros will never consent to any restructuring of the Network, but that is not consistent with the evidentiary record before the Court.



matter, repeatedly stated throughout their testimony that the Astros would consider new

carriage deals in good faith once a new feasible business plan was presented to them.

Finally, in at least one communication presented to the Bankruptcy Court at the trial, the

Astros expressly confirmed that they were prepared to cooperate in structuring a new

business plan and, presumably, to approve new carriage deals consistent with that plan.

See Mem. Op. at 19.

The Bankruptcy Court was more than justified, in light of these facts in the

record, in concluding that the Astros’ director would act in a commercially reasonable

fashion and would not veto transactions that could lead to a profitable Network. No

abuse of discretion occurred.

A Reorganization Remains Possible, Even if the Astros Refuse c.to Cooperate

This Court should affirm the Bankruptcy Court’s conclusion that a reorganization

of the Network is not futile, even if it concludes that the Astros are entitled to prevent the

Network from proposing a plan of reorganization. That, in and of itself, does not make a

reorganization futile.

Section 1121(b) of the Bankruptcy Code provides a debtor in possession with a

120-day period where only the debtor may file a plan of reorganization. This period is

known as the “exclusive period.” Section 1121(d), however, allows a court to reduce or

terminate the exclusive period for “cause,” allowing any party interest to file a plan.

Importantly, governance disputes are often cited as a reason to terminate exclusivity

early. See Pickens Indus., Inc. v. Palmer, Palmer and Coffee (In re Tex. Extrusion

Corp.), 68 B.R. 712 (N.D. Tex. 1986), aff’d 844 F.2d 1142 (5th Cir. 1988) (reduction of

exclusive period appropriate due to acrimonious relations between the parties); In re



Crescent Beach Inn, Inc., 22 B.R. 155, 160-61 (Bankr. D. Me. 1982) (reducing period of

exclusivity where “it appear[ed] the major obstacle in the path to a successful

reorganization [was] the principal parties’ acrimonious relations”); see also In re Pub.

Serv. Co. of N.H., 99 B.R. 155, 175-77 (Bankr. D.N.H. 1989) (extension of exclusivity

denied where debtor and creditors could not constructively negotiate).

In this case, any corporate deadlock caused by the Astros’ (or Comcast’s)

unwillingness to accept a reasonable reorganization proposal can be quickly resolved

through the termination of exclusivity. Upon such termination, any of the Network’s

partners, each clearly a party in interest, would be entitled to propose one or more plans

of reorganization for the Network without any other partner’s consent. While these plans

would still be required to meet the Bankruptcy Code’s confirmation standards, that

question would be settled by the Bankruptcy Court irrespective of any governance issues.

Once exclusivity is waived, no partner could prevent any other partner from proposing a

plan of reorganization.

2. Section 365 of the Bankruptcy Code Does Not Render Reorganization Futile

The Astros next argue that the Network cannot be reorganized because section

365(c) of the Bankruptcy Code renders the Astros Media Rights Agreement unassignable

to third parties without their consent. Once again, the assumption underlying this

argument is that the Astros will refuse to consent to any assignment of their media rights

under any circumstances. This argument is premature and without merit.

The Network Can Be Reorganized Under the “Actual Test” a.

Section 365 of the Bankruptcy Code affords special treatment to those contracts

as to which the identity of the counterparty is material under applicable law. See



11 U.S.C. § 365(c)(1), (e). The United States Courts of Appeal are divided regarding the

circumstances under which that special treatment is triggered. In some circuits, the mere

filing of the bankruptcy case is sufficient. These circuits apply the “hypothetical test.” In

others, including the Fifth Circuit, the “actual test” applies. See Bonneville Power

Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 250 (5th Cir. 2006) (adopting

the hypothetical test in the context of § 365(e)(1)).12

Justice Kennedy explained the two tests in a statement denying certiorari on the

issue, N.C.P. Mktg. Grp., Inc. v. Blanks (In re N.C.P. Mktg. Grp., Inc.), 129 S. Ct. 1577

(2009). Under the hypothetical test, “if the debtor-in-possession lacks hypothetical

authority to assign a contract, then it may not assume it [or escape the counterparty’s

exercise of a contractual right to terminate]—even if the debtor-in-possession has no

actual intention of assigning the contract to another.” Id. at 1577. By contrast, under the

actual test, “a Chapter 11 debtor-in-possession may assume an executory contract [and

termination-on-bankruptcy clauses are invalidated] provided it has no actual intent to

assign the contract to a third party.” Id. at 1578.

The fact that the Fifth Circuit has adopted the actual test is fatal to the Astros’

position. It is easy to envision a reorganization wherein the Network assumes, but does

not assign, the Astros Media Rights Agreement. Among other things, the Network could

confirm a plan of reorganization where it maintains its existence under different

ownership or leaves the Astros’ economic rights unimpaired.13 The Bankruptcy Court

12 See also In re Virgin Offshore USA, Inc., No. Civ. A. 13-79, 2013 WL 4854312, at *5 (E.D. La. Sept. 10, 2013) (concluding that Mirant and other Fifth Circuit authorities indicate that the Fifth Circuit would apply the “actual” test in the context of 11 U.S.C. § 365(c)(1); observing that “[b]ankruptcy courts within the Fifth Circuit’s jurisdiction have expressly rejected the hypothetical test”); In re Jacobsen, 465 B.R. 102 (Bankr. N.D. Miss. 2011) (expressly rejecting the hypothetical test in the context of section 365(c)(1)). 13 Importantly, in Institut Pastuer v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir.



expressly recognized this fact when it stated during the February 4 hearing in connection

with the Motion to Dismiss that:

There are all sorts of plan permutations [that are possible for the Network.] Some of those plan permutations put at risk the media rights agreements because they’re done adverse to the Astros or to the Rockets. Some of those don’t because they may be done by the Astros or the Rockets to Comcast, at which point they probably don’t jeopardize the media rights agreements. There’s a world of opportunity out there. I’m not going to limit what they are, but I’m going to make the Debtor explore those options, figure out what is going.

Feb. 4 Hr’g Tr. at 172:11-19.

Further, the Astros’ argument is also premature, because the actual test requires a

fact-driven case-by-case analysis of an actually proposed transaction. See Mirant, 440

F.3d at 248 (“[t]he actual test requires on a case-by-case basis a showing that the

nondebtor party’s contract will actually be assigned or that the non-debtor party will in

fact be asked to accept performance from or render performance to a party—including

the trustee—other than the party with whom it originally contracted.”). No transaction

has yet been proposed in the Chapter 11 Case.

Moreover, the Astros’ premise that the Astros Media Rights Agreement can never

be assigned is also wrong. Section 365(c)(1)(B) expressly recognizes that assignment is

always possible with the consent of the non-debtor party. Here, the Astros have

consented to assignment in connection with the sale of substantially all of the Network’s

assets. Section 13.8(A) of the Astros Media Rights Agreement provides that “Network

shall not, without the prior written consent of [the Astros], make any assignment of this

Agreement to any Person other than . . . to a purchaser of all or substantially all of the

1997), the case that established the “actual test,” the court expressly held that a change of control did not violate the “actual” test because the entity assuming the patent license was the same even if it had been the subject of a change of control.



assets of the Network.” Under these circumstances, not only can the Astros Media Rights

Agreement be assumed by the Network under the “actual test,” but it can be assigned if

the Network’s assets are sold to a third party, a distinct possibility in a chapter 11 case.

See In re Supernatural Foods, LLC, 268 B.R. 759, 805 (Bankr. M.D. La. 2001) (finding

that “§ 365(c)(1) is not applicable to prohibit assignment[] if the parties have opted out of

the generally applicable law prohibiting assignment [pursuant to contractual

provisions]”); In re Quantegy, Inc., 326 B.R. 467, 472 (Bankr. M.D. Ala. 2005)

(contractual consent to assignment in connection sale of substantially all of the debtors’

assets renders section 365(c) inapplicable).

The Astros argue that Section 13.8(A) does not mean what it says. They claim

that it must be read in connection with the LP Agreement and GP Agreement, which

require the approval of the Astros’ Director in order for the Network to sell all of its

assets in the first instance. This argument, however, disregards Section 13.5 of the Astros

Media Rights Agreement, which provides that the Astros Media Rights Agreement

“supercedes all prior agreements and understandings between the parties with respect to

the subject matter hereof.” In short, the Astros Media Rights Agreement itself excludes

consideration of other agreements when interpreting its provisions.

The Astros have also consented to the transfer of their interests in the Network to

third parties pursuant to an auction process set forth in Section 15.6 of the LP Agreement.

That section expressly permits the equity interests of the Network to be auctioned off to

the highest bidder commencing on April 1, 2020 and on certain dates thereafter. It is, at

best, disingenuous for the Astros to claim that they bargained for absolute control over



the assignment or transfer of control of their media rights when both the Astros’ Media

Rights Agreement and the LP Agreement specifically provide otherwise.

Ultimately, the dispute over whether the Astros Media Rights Agreement can be

assumed by the Network under the “actual test,” assigned to a third party in connection

with the sale of all of the Network’s assets, or otherwise transferred is not a matter for

this appeal. It is a fact intensive question that should be resolved when an actual

restructuring transaction has been brought before the Bankruptcy Court for review. In the

meantime, it is entirely proper for the Chapter 11 Case to proceed and a reorganization of

the Network is not futile.

The Network’s Federal Fiduciary Duties Do Not Violate b.Section 365

The Astros next argue that the actual test does not apply because, under section

365(c), the Network’s fiduciary duties to creditors and other parties trigger the rejection

of the Astros Media Rights Agreement. This argument fails both procedurally and

substantively.

Procedurally, the Astros’ argument fails because it is being raised for the first

time on appeal. It is well settled that appellate courts sitting in the Fifth Circuit generally

do not consider arguments raised for the first time on appeal. Turner v. Baylor

Richardson Med. Ctr., 476 F.3d 337, 344 n.3 (5th Cir. 2007); see also Baxter v. PNC

Bank Nat’l Ass’n, --- Fed. App’x ----, No. 12-51181, 2013 WL 5356894, at *2 (5th Cir.

Sept. 26, 2013) (“As a general principle of appellate review, failure to raise an argument

before the district court waives that argument on appeal . . . .”) (internal quotations

omitted).



Appellate courts deviate from this general rule only in “extraordinary

circumstances.” Chevron USA, Inc. v. Aker Mar. Inc., 689 F.3d 497, 503 (5th Cir. 2012).

“‘Extraordinary circumstances exist when the issue involved is a pure question of law

and a miscarriage of justice would result from [the] failure to consider it.’” Id. (quoting

N. Alamo Water Supply Corp. v. City of San Juan, Tex., 90 F.3d 910, 916 (5th Cir.

1996)). A “miscarriage of justice” occurs only as a result of plain error. See Baxter v.

PNC Bank, 2013 WL 5356894, at *2. Thus, there can be no “miscarriage of justice”

where it is unclear that the appellant would have prevailed at trial on its newly asserted

theory. Reed v. Edwards, 487 Fed. App’x 904, 907 (5th Cir. 2012) (citing Payne v.

McLemore’s Wholesale & Retail Stores, 654 F.2d 1130, 1144-45 (5th Cir. Unit A Sept.

1981)).

Here, the Astros would not have prevailed at trial. Moreover, there can be no

miscarriage of justice where the order being appealed from is interlocutory, and the

Astros retain all of their substantive rights in the Chapter 11 Case. Additionally, more

facts would be required to determine how the imposition of fiduciary duties on the

Network’s directors would result in a change in management of the Network, if any,

rendering the issue not “a pure question of law.” Id.

In any event, the Astros are wrong on the merits. When it adopted the “actual

test,” the Fifth Circuit recognized Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d

489 (1st Cir. 1997), as the leading appellate authority supporting that approach. See In re

Mirant, 440 F.3d at 248. This is significant, because Institut Pasteur would clearly

require the Astros to continue rendering performance to the Network despite the

imposition of fiduciary duties on the Network’s managers.



In Institut Pasteur, a patent licensor to the debtor asserted that section 365(c)(1)

of the Bankruptcy Code excused it from continuing to license its patents to the debtor

where, under the debtor’s plan of reorganization, all of the stock in the debtor would be

transferred to “a giant French biotechnology corporation and [the licensor’s] direct

competitor in international biotechnology sales.” Institut Pasteur, 104 F.3d at 490. This

transaction, the licensor argued, amounted to a “de facto ‘assignment’ to a third party” in

contravention of applicable federal common law and the express terms of the patent

licenses. Id. at 491. The First Circuit rejected this argument, holding that the debtor

remained “the same corporate entity which functioned prepetition, while utilizing [the

licensor’s patents] in [the] same prepetition endeavor.” Id. at 494. The same is true of

the Network and its expected use of the Astros Media Rights Agreement during the

Chapter 11 Case. Indeed, here, unlike in Institut Pasteur, there is no change of ownership

and the members of the board of directors will largely be the same individuals.14

The Astros cite a number of Delaware cases they claim excuse the Astros’

performance under Delaware law and bankruptcy cases they claim excuse the Astros'

performance under bankruptcy law. None support the result the Astros urge.

With respect to the Delaware cases, the Astros argument is premised on the notion

that the likely new duties of the Network’s managers have effected a “change in control”

of the Network. This is a false premise. The Network is still managed by its General

Partner, which, in turn, is still managed by one appointee of the Astros, one appointee of

the Rockets, and two appointees of Comcast. If the imposition of bankruptcy-specific

fiduciary duties on a debtor’s management was sufficient to trigger special section 365

14 The only entity that chose to change its director was the Astros. The directors appointed by Comcast and the Rockets remain the same.



rights, it would happen in every case, because bankruptcy always imposes new duties on

the managers of a debtor. See, e.g., Am. Plumbing & Mech., Inc., 323 B.R. 442, 463

(Bankr. W.D. Tex. 2005) (recognizing “special fiduciary obligations which are imposed

on [corporate officers and directors] in chapter 11”); In re Harp, 166 B.R. 740, 752

(Bankr. N.D. Ala. 1993) (recognizing “the Chapter 11 debtor-in-possession’s special

fiduciary duties to his own unsecured creditors”).15 Thus, if the Astros were correct, the

“actual test” would become “hypothetical test,” because the event of a bankruptcy filing

would always prohibit a debtor in possession from assuming a personal contract absent

the counterparty’s consent. The Fifth Circuit has rejected that logic in its entirety by

adopting the “actual test.”

Moreover, the Astros cite no case—from Delaware or anywhere else—in which a

modification to the duties owed by the managers of a legal entity has been deemed a

change in that entity’s identity or violated an anti-assignment provision. The Astros cite

one case in which a contract party objected to a purported assignment—by merger of its

counterparty—on grounds that the fiduciary duties owed by the counterparty’s managers

to the counterparty would be diminished. See Star Cellular Tel. Co. v. Baton Rouge

CGSA, Inc., Civ. A. No. 12507, 1993 WL 294847, at *10 (Del. Ch. Aug. 2, 1993). The

court rejected this argument. Id.

The Astros’ bankruptcy citations are even less persuasive. In In re Cardinal

Industries, Inc., 116 B.R. 964 (Bankr. S.D. Ohio 1990), a chapter 11 trustee had been

15 See also In re Intermagnetics Am., Inc., 926 F.2d 912, 916 (9th Cir. 1991) (“Officers of a debtor-in-possession are officers of the court because of their responsibility to act in the best interests of the estate as a whole and the accompanying fiduciary duties.”); In re Bellevue Place Assoc., 171 B.R. 615, 623 (Bankr. N.D. Ill. 1994) (“Chief among [the specific duties and obligations imposed upon the debtor-in-possession] is that the debtor-in-possession is a fiduciary to all of its creditors and equity security holders.”).



appointed for the corporate debtor, and the court still found that the non-debtor

counterparty was obligated to render performance on the basis that the debtor’s

performance would “not be by the Trustee individually but by the Debtor as managed by

the Trustee.” Id. at 981. This was so even though the court expressly recognized that

“after the Chapter 11 filing a debtor, whether in possession of the estate or being

managed by an operating trustee, acts for different interests than it acted for prior to the

filing.” Id. (emphasis added). This reasoning in the Astros’ own authority defeats their

argument that the imposition of new fiduciary duties somehow excuses performance.

The Astros also argue that this Court should look to Delaware law to determine

whether the imposition of fiduciary duties constitutes an assignment. Appellant’s

Opening Br. at 39-40. This argument fails. In re Footstar, Inc., 323 B.R. 566 (Bankr.

S.D.N.Y. 2005),16 a case cited by the Astros themselves in support of their argument, the

bankruptcy court expressly declined to reach the issue of whether “applicable law”

excuses performance in the face of an assignment, id. at 569, because it concluded that,

as a matter of federal law, under section 365, no assignment occurs when the debtor in

possession, rather than a trustee, seeks to assume a contract, id. at 573-74.

The situation here is the same. The entry of the Order for Relief is not an

assignment. The Network, therefore, is entitled to continued performance under, and to

assume executory contracts with, its prepetition contract counterparties, regardless of the

personal nature of any such contracts. See Virgin Offshore, 2013 WL 4854312, at *4

(actual test permits “a Chapter 11 debtor-in-possession [to] assume an executory

16 Though the Astros cite this case for the proposition that “courts already look to state law when determining whether an assignment excuses performance of an executory contract,” “state law”—generically or with respect to a particular state—is never mentioned in the opinion.



[personal contract] provided it has no actual intent to assign the contract to a third party”)

(internal quotations omitted).

The only cases the Astros cite in support of their new argument, where special

section 365 rights were actually triggered, involved situations where an individual

manager was displaced entirely. See Stumpf v. McGee (In re O’Connor), 258 F.3d 392

(5th Cir. 2001) (partnership agreement did not “pass through” individual chapter 11 case

where trustee had been appointed); In re Manor Place, 144 B.R. 679, 684, 685 (D.N.J.

1992) (rejecting substitution of individual with “long personal relationship” with business

enterprise for management committee comprised of “largely strangers”); Skeen v. Harms

(In re Harms), 10 B.R. 817 (Bankr. D. Colo. 1981) (refusing to allow chapter 11 trustee

for individual debtor to be substituted as general partner of debtor’s limited partnerships).

Here, no such change has taken place. The Astros are entitled (as they were prior to the

Order for Relief) to appoint whomever they choose to occupy their designated seat on the

board of the Network’s general partner. The Astros’ argument is without merit.

3. Reorganization Is Not Futile for Economic Reasons

The Astros also argue that the Chapter 11 Case is futile because, as an economic

matter, the Network cannot be restructured. Once again, the Astros’ argument fails.

Most importantly, this argument is inconsistent with the record before the Bankruptcy

Court. When asked by the Bankruptcy Court at trial whether the Network could make

money, Mr. Crane answered, “[y]es, it can make money.” Oct. 28 Hr’g Tr. at 147:13.

And, when the Bankruptcy Court asked Mr. Crane if he could make the Network feasible,

Mr. Crane answered, “I think I could, yeah.” Id. at 151:7-12. These statements provide

more than enough factual support for the Bankruptcy Court’s determination that a

reorganization is not futile as an economic matter. There was no abuse of discretion.



The Astros attempt to run away from Mr. Crane’s statements by arguing that they

were taken out of context. Not so. The Bankruptcy Court expressly asked Mr. Crane if

the Network could make money, and Mr. Crane said “yes.” It is as simple as that, and the

Astros cannot fault the Bankruptcy Court for believing their principal witness and owner.

The Astros also claim that the current lack of a reorganization plan is also

evidence of economic futility. This argument disregards the law. In the initial stages of a

chapter 11 case, dismissal is not proper unless there is nothing more than a “hopeless and

unrealistic prospect of rehabilitation.” Minn. Alpha Found., 122 B.R. at 91. Further,

there need not be a specific plan of reorganization; only “a reasonable possibility that a

plan can be formulated.” In re Vento Dev. Corp., 560 F.2d at 6. The possibility of a plan

currently exists.17 Not only did the Astros themselves testify that the Network could

make money, but the Bankruptcy Court properly found that the Astros Media Rights

Agreement and the Rockets’ Media Rights Agreement are valuable assets that can form

the core of a valuable business. Mem. Op. at 18.

In addition, Comcast has consistently stated that it is prepared to make an offer to

purchase the Network, either through a plan of reorganization or a purchase of assets. In

their Emergency Motion of Petitioning Creditors for Appointment of Interim Chapter 11,

Comcast stated that “[Comcast Lender], the Network’s secured lender, believes the

Network’s assets have meaningful value, and would be prepared to make a bid to acquire

either the Network (under a plan of reorganization) or substantially all of its assets.”

Docket No. 3 at ¶¶ 6-7. In their Comcast Petitioning Creditors’ Motion to Terminate

Exclusivity and to Appoint an Examiner with Expanded Powers, Comcast reiterated that

17 As noted above, while the Rockets believe that a reorganization is possible at this time, the Rockets also believe that time is of the essence and that the reorganization window will close rapidly.



it “remains prepared to serve as a stalking-horse bidder, and is prepared to acquire the

Network, and thus permit the Network successfully to reorganize in bankruptcy.” Docket

No. 188 at ¶ 6. Certainly, this is sufficient evidence that a plan can be formulated to

justify the denial of the Motion to Dismiss.18

The Chapter 11 Case Was Commenced in Good Faith B.

The Astros contend that the Bankruptcy Court should have dismissed the Chapter

11 Case because Comcast acted in bad faith. This argument, however, ignores the fact

that the Astros did not challenge the good faith of the Joining Creditors. The good faith

of the Joining Creditors is more than sufficient for the Bankruptcy Court to have denied

the Motion to Dismiss.

As noted above, it is undisputed that the Joining Creditors acted in good faith. It

is also undisputed that the Joining Creditors were legitimate creditors of the Network and

could have initiated the involuntary proceedings against the Network on their own

without Comcast. Under these circumstances, the Bankruptcy Court properly concluded

that the Petition should not be dismissed for bad faith and simply did not need to address

the question of Comcast’s good faith to deny the Motion to Dismiss.

Many courts have acknowledged that the bad faith of an initial petitioning creditor

does not taint the joinder of subsequent creditors. In Fetner v. Haggerty, the Court of

Appeals for the D.C. Circuit rejected an argument that the claims of joining creditors

should be ignored where the initial petitioner filed in bad faith. 99 F.3d 1180, 1181 (D.C.

Cir. 1996), cert. denied, 521 U.S. 1105 (1997). It explained that it

18 As previously noted, Comcast’s statements indicating a willingness to make a stalking horse bid to purchase the Network or its assets was a significant factor in the Rockets’ decision to join the Petition.



disagree[d] that a bad faith petition bars the joinder of valid claims. Other methods exist for addressing bad actors without punishing properly joined creditors. . . . [T]here is a panoply of weapons in a court’s arsenal to deal with bad faith petitioners without depriving valid creditors of their statutory right to join the bankruptcy petition. Dismissing the petition would merely postpone the inevitable in an area where time is of the essence.

Id. (internal citations omitted). Other courts have reached similar conclusions. See, e.g.,

In re FKF Madison Park Grp. Owner, LLC, 435 B.R. 906, 908 (Bankr. D. Del. 2010)

(noting that “the ‘bar to joinder doctrine’ is not binding on this Court and the plain

language of section 303(c), which this Court is required to construe strictly, does not

permit the Court to arbitrarily impose non-statutory conditions to joinder”); In re Trans-

High Corp., 3 B.R. 1, 4 (Bankr. S.D.N.Y. 1980) (timely joining creditor should not be

punished by the bad faith of a filing petitioner); accord In re J.V. Knitting Servs., Inc., 4

B.R. 597, 598 (Bankr. S.D. Fla. 1980).

The Bankruptcy Court reasoned that, “[i]f involuntary relief is appropriate, then

additional petitioning creditors, acting in good faith, must be allowed to preserve their

rights to maximize recovery through a bankruptcy case.” Mem. Op. at 14. This

reasoning makes perfect sense. The Rockets joined the Petition to maximize the value of

the Network and had a reasonable basis for concluding that chapter 11 was appropriate

under the circumstances of this case. Among other things, as noted above, Comcast

made many representations on the record that it would make an offer to purchase the

Network and its assets for “meaningful value.” On the other hand, dismissing the

Petition would have immediately destroyed the Network, severely prejudicing the

Rockets.19

19 The Rockets are owed hundreds of millions of dollars in future media rights fees under the Rockets Media Rights Agreement. A dismissal of the Chapter 11 Case would have a dramatic



The Astros have relied heavily on In re Alta Title Co., 55 B.R. 133 (Bankr. D.

Utah 1985) to support their position that Comcast’s bad faith (if any) taints the Joining

Creditors. See Oct. 28 Hr’g Tr. at 86:7-12. There, the bankruptcy court found that the

bad faith of an initial petitioning creditor could not be cured by a subsequent creditor

where:

(1) the petition is clearly insufficient on its face, or (2) the petition was filed in bad faith, with a view of being later supported by the intervention of additional creditors.

Id. at 143. Other courts have reached similar conclusions and adopted what is sometimes

called the “bar to joinder doctrine.” See, e.g., In re Norriss Bros. Lumber Co., 133 B.R.

599, 608 (Bankr. N.D. Tex. 1991).

Such cases are wrong as a matter of law because they ignore the plain meaning of

section 303 of the Bankruptcy Code, which expressly permits eligible creditors to join a

pending petition, and provides that such joinder should be treated as if part of the original

filing. See 11 U.S.C. § 303(c); In re FKF Madison Park Grp. Owner, 435 B.R. at 908

(“The plain language of section 303(c) simply does not condition joinder on the good

faith of the original petitioning creditors.”). Further, the Astros’ cases are factually

distinguishable because the Petition was not insufficient on its face, and there is no

evidence to suggest that the Comcast Petitioning Creditors filed the Petition in

anticipation of later being joined by others.

Importantly, many cases applying the bar to joinder doctrine involved single

creditor involuntary filings, where the petition undoubtedly knew that its filing was

deficient and where there were clear badges of bad faith. See, e.g., In re Alta Title Co.,

55 B.R. at 134-35; In re Norris Bros., 133 B.R. at 608. Here, the Network is a legitimate

negative impact on the Rockets’ ability to collect those fees.



business that should be preserved for the benefit of all of its stakeholders. Under the

circumstances, the Bankruptcy Court did not commit error, and its ruling should

be affirmed whether or not the Bankruptcy Court’s rulings with respect to Comcast’s

good or bad faith are correct.

CONCLUSION

The Astros appeal from an interlocutory order. As a result, this appeal should be

dismissed. In any event, the Bankruptcy Court’s opinion is well rooted in the facts and

applicable law. Notwithstanding the Astros’ arguments, a plan of reorganization can be

proposed, the Astros Media Rights Agreement can be assumed, and the Network’s value

can be preserved for all parties in interest. The Bankruptcy Court should be affirmed.

Dated: March 6, 2014 New York, New York

MITHOFF LAW FIRM Richard Warren Mithoff Sherie Potts Beckman One Allen Center, Penthouse 500 Dallas Street Houston, Texas 77002-4800 Telephone: (713) 654-1122 Facsimile: (713) 739-8085

WACHTELL, LIPTON, ROSEN & KATZ Douglas K. Mayer51 West 52nd Street New York, New York 10019-6119 Telephone: (212) 403-1000 Facsimile: (212) 403-2000

WHITE & CASE LLP

By: /s/ Alan Shore Gover Alan Shore Gover 1155 Avenue of the Americas New York, New York 10036-2787 Telephone: (212) 819-8200 Facsimile: (212) 354-8113

Roberto J. Kampfner (admitted pro hac vice)633 West Fifth Street, Suite 1900 Los Angeles, California 90071-2007 Telephone: (213) 620-7700 Facsimile: (213) 452-2329



CERTIFICATE OF SERVICE

I hereby certify that on the 6th day of March, 2014, I electronically filed the

foregoing document with the Clerk of the Court for the U.S. District Court, Southern

District of Texas, Houston Division, using the electronic case filing system of the court.

The electronic case filing system sent a Notice of Electronic Filing to the attorneys of

record who have consented in writing to accept this Notice as service of this document by

electronic means.

/s/ Alan Shore Gover


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