Pro Hockey Player Confirms Ch. 11 Plan Based on Future Earnings

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Daniel Gill

Nov. 15 — The judge in NHL defenseman Jack Johnson’s Chapter 11 case on Nov. 10 approved the player’s proposed Chapter 11 reorganization plan over the objection of some creditors ( In re John Joseph Louis Johnson, III , Bankr. S.D. Ohio, No. 2:14-bk-57104, Bench Decision 11/10/16 ).

Judge John E. Hoffman, Jr., of the U.S. Bankruptcy Court for the Southern District of Ohio issued his detailed bench decision confirming Johnson’s plan, the primary funding for which would be the hockey player’s future earnings. The judge confirmed the plan over the objection of some creditors on the same day he approved settlements between the debtor and other creditors of his estate.

According to a previous opinion in Johnson’s bankruptcy case, the player — with the “aid” of his parents — took on large debts after signing a lucrative, seven year $30 million contract. In October 2014, he filed for Chapter 11 protection. Chapter 11 allows companies or individuals to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan that must be approved by the bankruptcy court.

The court previously denied Johnson’s motion to have his case converted to Chapter 7. In Chapter 7 bankruptcy, a debtor’s nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out dischargeable debts (that is, those debts not subject to an exception).

Johnson attempted to convert the case in order to preserve his future income—i.e., everything he earned after the case converted—as his sole and separate property, beyond the reach of his pre-bankruptcy creditors. “I found that the Debtor had failed to engage in good-faith negotiations with his creditors,” the court said of his prior order denying the conversion.

But after the motion was denied, “the debtor finally engaged in the negotiations that should have taken place all along,” Judge Hoffman said.

The result of the negotiations was that six creditors holding more than $12 million of debt supported the proposed plan, and only one creditor continued to object to it. Several of those creditors entered into settlement agreements with the debtor, fixing the amount of their claims and what they would receive through the plan, and ending costly ongoing litigation.

The approved plan is to be funded by the debtor’s future earnings, including after his current contract with the National Hockey League Columbus Blue Jackets expires after the 2017-2018 season. The debtor is required to contribute income from any future player contract through the 2020-21 season, the court said.

Although the plan doesn’t allow the debtor to retain any non-exempt assets, it does provide for a substantial allowance for living expenses, in an amount which is “absolutely” higher than those of “the typical individual debtor,” the court said. The plan provides that the debtor retain more than $831,000 per year during the life of the plan.

In approving the budged expenses, the court concluded that the evidence supported higher living expenses because of the debtor’s professional training and nutrition needs, as well as his “expenditures related to clothing, entertainment, charity and other professional obligations that are in line with the expectations imposed on an NHL player.”

The court pointed out that the settling creditors supported the larger living expenses, and quoted one of them as saying, “This is an investment in a professional sports player.... And if we don’t invest in that business in a way that not just physically but also mentally gives him a reason to play at his best, we’re idiots as creditors who expect essentially a return....”

The court noted that even with the high living expenses, creditors would receive more under the plan than if the debtor delivered all his projected disposable income to his creditors. The court ultimately determined that the plan was fair and equitable, as well as feasible.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.