Carolina Hurricanes owner, and soon to be Portland Trailblazers boss, Tom Dundon won a resounding legal victory in a lawsuit stemming from the 2019 collapse of the short-lived Alliance of American Football.
A federal bankruptcy judge dismissed all but one charge brought against Dundon for his role in owning the AAF. Judge Craig Gargotta did find Dundon guilty of breach of fiduciary duty, but then awarded the U.S. Trustee who brought the suit and had sought $144 million, just $1 in damages.
The case was brought three years ago by the Trustee over claims Dundon, after buying the financially precarious league weeks into what was its only season, purposefully tanked the AAF for tax benefits. The Trustee argued Dundon had an oral agreement with AAF founder Charlie Ebersol to invest $250 million but invested only $70 million before pulling the plug in April 2019 and filing Chapter 7.
Judge Gargotta wrote in his 199-page decision that he found no evidence of that.
“While the Court believes that Ebersol and Dundon discussed the possibility of a total investment of $250 million, it does not appear that such discussions reached other decision makers of ESMG and merely represented an intent to negotiate about additional funding tranches in the future,” the judge wrote. ESMG was Ebersol Sports Media Group, the AAF-founder’s company.
After agreeing to buy the league on February 14, 2019 after the AAF had already missed payroll following the first week of the inaugural season, Dundon publicly touted he had committed to invest the quarter billion dollars. But judge Gargotta found that while this may have been evidence of “puffery,” the term sheet memorializing the deal only mentions $70 million to get through the first season.
“Both Ebersol and Ken Schanzer, a 24-year high-level veteran of NBC Sports and a one-time consultant with AAF, testified that handshake deals, oral agreements of the magnitude of $250 million, are common in the sports entertainment business,” judge Gargotta wrote. “Given the circumstances and the actors involved, that testimony lacked credibility. This was the biggest deal of Ebersol’s life.”
Judge Gargotta did agree with the Trustee that Dundon breached his fiduciary duty to the AAF by giving away league advertising to his own companies. But the judge found no economic damages.
“The Court found that Dundon engaged in inequitable conduct by granting free advertising to Dundon-owned, controlled, or preferred entities,” the judge found. “That said, the Trustee has not established that misconduct by Defendants resulted in an injury to the creditors of Debtors or conferred an unfair advantage to Defendants. DDFSP [a Dundon company} paid $70 million into the League at a time when no other investor was willing to make a substantial commitment to the League. DDFSP’s investment enabled the players to be paid for every game played. If DDFSP had not made its investment, the League would have collapsed earlier, and the creditors (including players) who did get paid out of the $70 million would not have received those payments.”
The decision may finally close the book on the AAF, which Ebersol launched in 2018, with the scheduled first season in 2019. He initially secured a major funding commitment from a former Minnesota Vikings limited partner, Reggie Fowler. But his funding fell through because of Fowler’s role in a crypto scam (he was convicted and incarcerated for his conduct).
Despite the Fowler development in late 2018, Gargotta noted, wanted to beat to market the new XFL, which planned to launch in 2020. He could have delayed the launch or invested his own money, Gargotta wrote, but he instead chose to sell to Dundon.
There is one more chapter in the case, the Trustee can of course appeal. In his decision, Gargotta granted Dundon the right to seek legal fees from the Trustee. Given the Trustee’s case lasted three years and a trial that consumed months and involved 23 witnesses (including NFL commissioner Roger Goodell), that ask may be quite steep.