A bankruptcy judge in San Antonio has determined that Dallas-based investment firm Dundon Capital Partners, the biggest investor in the bankrupt Alliance of American Football, does not owe its creditors $180 million.
A 199-page ruling issued Tuesday from Chief U.S. Bankruptcy Judge Craig A. Gargotta largely cleared DCP and its executives, Tom Dundon and John Zutter, of claims of breach of contract, fraud and breach of fiduciary duty related to the demise of the AAF, a minor league football team that collapsed and filed for Chapter 7 bankruptcy in 2019 during its inaugural season.
The bankruptcy trustee had accused DCP of failing to follow through on an alleged oral agreement to invest $250 million to fund the league, precipitating its downfall, while the defendants alleged they did everything possible to help the league survive, including investing $70 million, but could not overcome preexisting liabilities.
As it relates to the alleged oral agreement, the judge wrote that the only evidence of its existence was in statements Dundon made to the media and in testimony from Charlie Ebersol, who founded the league. The judge concluded an oral agreement for a $250 million investment was not reached between the two men.
“While Dundon mentioned the $250 million figure in media messaging, it is unclear whether he and Ebersol discussed, let alone reached an agreement, on Dundon or any entity under his control investing $250 million in the League,” he wrote. “Nor did Ebersol and Dundon ever discuss or agree upon any specific terms or conditions for any hypothetical investment of $250 million in the League.”
Chief Judge Gargotta presided over a 20-day trial that spanned five weeks, ending with closing arguments June 30. The judge has been presiding over the bankruptcy and related cases for six years.
“All parties were well represented by competent counsel. Arguments were fully presented, and evidence was fully developed. The credibility of all witnesses has been weighed, and all admitted documents have been evaluated,” he wrote. “This matter ultimately was decided on what the trustee could prove. In doing so, the evidence adduced only supported one claim for relief as discussed in this memorandum opinion. Further, there was insufficient evidence to support an award of damages or attorney’s fees in this case. The result may be viewed as harsh, but it is appropriate.”
Chief Judge Gargotta did find that Dundon owes $1 in damages for offering free advertising during league games to “marquee advertisers” such as AT&T, Carvana, Sony Pictures, Invisalign and TopGolf.
“Dundon engaged in self-dealing by providing free or discounted advertising to friends or affiliates, notwithstanding that Dundon testified that his advertising strategy was to get big brands associated with the league by offering them advertising slots, which would, in turn, create buzz around the league and increase the league’s perceived prestige due to its association with major brands,” Chief Judge Gargotta wrote. “Free advertising may have exacerbated AAF’s financial condition.”
But because the bankruptcy trustee “was unable to prove any causally related harm,” the judge decided to award just $1 in damages for the “self-interested decisions and self-dealing,” he wrote.
Brent Hockaday of K&L Gates, who represented DCP, Dundon and Zutter, praised the court’s ruling in an interview with The Lawbook Wednesday.
“We are very grateful for the Court’s determination, which largely mirrors what we have known for six years — Tom Dundon and John Zutter did not hurt the AAF,” he said. “They did everything they could to see it survive and succeed. Ultimately, the league met its demise through no fault of either Mr. Dundon or Mr. Zutter.”
Hockaday was also complimentary of the “professionalism” exhibited by opposing counsel.
Hockaday’s co-counsel, Jeffrey Lowenstein of Bell Nunnally & Martin, told The Lawbook the judge reached the correct result in this case.
“And it’s clear from his order … he spent a lot of time going through the facts and the law and thinking through the whole process,” Lowenstein said. “This was not just a rubber stamp for the winner. This was a judge showing he cared and putting in the time.”
A message seeking comment from counsel for the trustee was not immediately returned Wednesday afternoon.
The AAF filed for Chapter 7 bankruptcy April 17, 2019. The Chapter 7 bankruptcy trustee, Randolph N. Osherow, filed this adversary proceeding Nov. 14, 2022, naming as defendants Dundon Capital Partners, its CEO, Dundon, and its partner, Zutter.
According to the adversary complaint, the original primary financier of the AAF was going to be Reginald “Reggie” Fowler, a former part owner of the Minnesota Vikings.
“Unbeknownst to the League, Fowler was associated with major criminal activity, and ultimately his criminal actions caused him and his companies to deprive the League of liquidity just as the League was entering its inaugural season in 2019,” the complaint reads.
Fowler was sentenced to 75 months in prison in June 2023 for his role in a $700 million cryptocurrency scam facilitated through his company, Global Trading Solutions, and was also found to have defrauded the AAF by claiming certain funds were his and using those funds to purchase a stake in the AAF when they actually belonged to his clients.
“Moreover, although Fowler experienced account closures and government seizure of [Global Trading Solutions] funds in the month leading up to his investment in the AAF, Fowler did not disclose those facts to the AAF,” the Department of Justice wrote in a press release announcing Fowler’s sentence. “Fowler acquired a significant investment stake in the AAF in November 2018 yet was unable to fund that investment. Based, in part, on Fowler’s lies, the AAF declared bankruptcy in about April 2019, ending the season and dashing the hopes of Fowler’s victims.”
Once Fowler’s financial struggles were known to the League, it began seeking other investment partners, and Dundon, a billionaire who owned the Carolina Hurricanes professional hockey team, “quickly became the front runner because he promised a long-term financial partnership with the AAF in addition to having the financial wherewithal to do so.”
The complaint alleges that Dundon made an oral promise to invest $250 million and “reiterated, person-to-person to those associated with the League, and through the media, his financing commitment.”
“In reliance on Dundon’s promises, the AAF, among other things, disengaged with its search for any other major financing,” the complaint reads.
The AAF and Dundon reached an agreement under which Dundon became the league’s financial partner and majority shareholder, and on Feb. 14, 2019, Dundon and Zutter took effective control of the league, according to the complaint.
“Contrary to Dundon’s statements about his support of the continued viability of the AAF only weeks previously, on April 2, 2019, Dundon and Zutter forced the AAF to suspend operations immediately,” the complaint reads. “Dundon’s ‘Series Infinity’ funding lasted only 46 days. Instead of the $250 million financing commitment Dundon had promised, Dundon and his entities invested a total of only $69.7 million in the League, with some of that money funding their decision to bankrupt the League rather than for the benefit of the League.”
As DCP argued in a motion to dismiss, “the trustee theorizes that Dundon injected $70 million into the League for the purpose of imploding it.”
“Even the least critical view of the trustee’s pleading shows that his theory is not plausible,” the motion reads.
DCP told the court in a motion for summary judgment that the alleged oral agreement for a $250 million investment “contradicts the written agreement the league signed with DCP pursuant to which DCP invested $70 million into the league.” Additionally, the individual the trustee alleges the oral promise was made to, Charlie Ebersol, “lacked the authority to make the agreement without board or shareholder approval, and he never sought or obtained those approvals.”
“The Court should not enforce the alleged oral agreement because the balance of the alleged $250 million investment ($180 million after DCP’s $70 million investment) was to be invested for a to be-determined consideration through a to-be-determined combination of equity and debt (a loan) to be funded at a to-be-determined time after the league finished its first season,” the motion reads. “Because no one knows what the equity/debt combination would have been, what consideration Dundon would have received, or any of the other details of the proposed transaction, the alleged agreement is too uncertain to be enforced.”
DCP argued it “makes no logical sense that the parties would have left an agreement for another $180 million to the vagaries of a phone call.”
“In cases like this one with little or no detail to substantiate an agreement, Texas courts have held them unenforceable,” DCP told the court.
DCP, Dundon and Zutter are also represented by Ben Nabors and Suzi Goebel of K&L Gates and David Webster, Troy “T.J.” Hales, Brent A. Turman, Gwen Walraven, Beverly Whitley and Laura Lavernia of Bell Nunnally & Martin.
The trustee is represented by John P. Atkins, Katharine Clark and Nicole Williams of Thompson Coburn.