April 16, 2008

Sonics' Old Owner Tries to Put Horse Back in Barn

Earlier this week Seattle got a shot of hope from former owner and Starbucks CEO Howard Schultz. Apparently Mr. Schultz had a provision in the contract of sale that transferred the Sonics to Oklahoma City businessman Clay Bennett that required Bennett to make a good faith effort to keep the team in Seattle. Now, Schultz alleges, Bennett has violated the contract. In effect, Schultz is suing to undo the sale.

I have not been able to find an actual copy of the contract effecting the sale of the Sonics, but I am skeptical that Schultz can succeed.

First of all, Schultz' suit is based on a "good faith" provision. That phrase has a commonly accepted definition and connotation in legal circles. Black's Law Dictionary defines good faith as:

A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one's duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage.

Here's Schultz's problem: all Bennett has to say is that he had every intention of keeping the Sonics in Seattle if the city cooperated and helped him replace the Key Arena. They didn't and the reasonable commercial standards of fair dealing in the NBA is that you move the team to where you think you can make money. The Hornets and Grizzlies moved recently, the Hornets played half their schedule in Oklahoma City after Katrina and did well, and the NBA has a long history of team relocations (MPLS Lakers, Baltimore Bullets, San Diego Clippers, Kansas City Kings, New Orleans Jazz, etc. etc. etc.). In effect, Bennett is not doing anything unusual.

Schultz, as a Seattle icon, HAS to do everything he can to keep the team in Seattle. Otherwise it appears that he sold out the city for the profit he earned from selling the franchise. Considering he has more money than any man would need (though less than Gates, which might be a source of jealousy), the average Seattlite is not going to understand why the millions a year he earned from the franchise was insufficient. We all know the truth: Schultz sold the team because he knew he wouldn't get a government-funded arena. He couldn't move the team himself, and he couldn't make it profitable long-term. Instead, he sold it.

To further complicate matters, even if Schultz can prove a breach of the good faith clause, he has to show that the contract contained a mechanism for undoing the sale. This could come in a few forms, including a delayed rescission or a forced sell-back, but it's extremely rare. If one puts any thought into what it would entail, it becomes clear why courts don't favor the delayed unraveling of completed deals. For one, the Sonics have acquired a valuable asset since the sale in the form of Kevin Durant. For another, Bennett has made investments into the team, mingling his assets with the assets that existed when Schultz owns the team.

Most likely the court will find, as Stern already has, that Bennett made good faith efforts to keep the team in Seattle. Even if they think he violated the contract a court would likely find that the good faith clause was a mere recitation of the intentions of the party, but that it is not binding on post-contract behavior.

Either way, the people of Seattle need to spend more time loving the M's and Seahawks, because the Sonics are headed to Oklahoma City.

5 Responses:

Charlie Anthe said...

I'm guessing you guys on the east coast don't get all the details of what's going on out here in Seattle.

First of all, it's clear there was no "good faith" by Bennett (and I say that as a disinterested basketball person). Emails uncovered by the city's lawsuit against the Sonics to hold them to their lease through 2010 (which is iron-clad), show that on the day the sale was finalized, Bennett was emailing his partners debating names for an Oklahoma City team.

And yes, the penalty is specified as unwinding the sale in the contract. How that would affect the Storm (Who have since been re-sold to a local ownership group), is debatable.

The point is not to win, it's to make life so untenable for Bennett and Co. (and the NBA) that they find new ownership.

And the KeyArena thing was a dodge. No way any team reasonably expects a city to come up with $500 million after just doing a $300 million renovation. It was all smoke and mirrors while they made plans to move.

I have some details on this at http://the-foghorn.blogspot.com/search/label/Sonics

J-Red said...

I recall those e-mails, but all he has to say is "We wouldn't be responsible businessmen if we didn't come up with a contingency plan in the very real case that the city failed to help us with a new venue."

Case closed, good faith shown. The only way they blow it is if there's a smoking gun out there that says "We're moving even if they build it."

I'm impressed at Schultz's foresight to include an unwinding decision, and I found a 2006 Washington Supreme Court case that speaks favorably about equitable rescission of contracts, which surprises me. I still wouldn't hold out much hope for the good faith breach. You're probably right that the best they can hope for is an injunction while the case is tried (with ample discovery that would take a couple years probably). Maybe he'd sell or settle, maybe he wouldn't.

Anonymous said...

What if the Oklahomans say "If they build a new arena, we'll sell the team because we're looking to relocate one to OK?" It's basically what they stated in the latest e-mail released.

The suit's accusations of "fraud" and "deception" are based on a series of e-mails written by Clay Bennett, the leader of the Oklahoma City group, and his partners. In one e-mail, written in July of 2006 two days before the sale, Bennett told his partners they could do a "sweet flip" and leave Seattle despite their promises to stay in the market.

The e-mail, and others with similar sentiments, prove that Bennett's group "never intended to own a team that would continue playing in Seattle," the suit asserts.


Anonymous said...

Does anyone have a link to the sales contract that shows there was recission specified in the sales contract as a penalty? Des anyone have a link to the sales contract? Was the side letter included specifically mentioned in the contract? Just interested.

Anonymous said...

"The e-mail, and others with similar sentiments, prove that Bennett's group "never intended to own a team that would continue playing in Seattle," the suit asserts." I've read the side letter, and I see no promise that the owners "intended to own a team that would continue playing in Seattle." They said, "...it is our desire to have the Sonics and the Storm continue their existence in the Greater Seattle Area, and it is not our intention to move or relocate the teams so long, of course, if we are able to negotitate an attractive successor venue and lease arrangement." They promise not to relocate the teams if a successor venue is found, but never state who would own the teams. If anything, the "sweet flip" e-mail implies that if an arena were built in Seattle, the owners would simply sell the team. It implies nothing about moving the team from Seattle, which would have never been approved by the BOG had there been an arena built or even promised.

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