Miami-Dade County, the FTX Implosion, and How Venue Owners Navigate Naming Rights Agreements with Bankrupt Parties

In March 2021, Miami-Dade County approved a naming rights agreement with cryptocurrency platform FTX to rename the Miami Heat’s home arena “FTX Arena.”¹[1]Douglas Hanks, Miami Heat to play in FTX Arena after county approves $135M deal with crypto exchange, MIAMI HERALD (Updated June 24, 2022); see also Naming Rights Agreement. The risk of partnering with a cryptocurrency platform was evident to some: cryptocurrency is an extremely volatile industry, and Miami-Dade County’s chief operations officer noted at the time “[w]e recognize there is a risk in this deal, particularly with a relatively new company in a relatively new industry.”²[2]Id. Nonetheless, with an attention grabbing partnership in a new industry and a deal at $135 million over 19 years, Miami-Dade County approved enthusiastically.³[3]Id.

In just under two years, the agreement played out about as poorly as possible. In November 2022, FTX filed for bankruptcy in New York following a risky business relationship with trading firm Alameda Research and an alleged misuse of customer deposits.⁴[4]Suvashree Ghosh, FTX Bahamas Unit Files for Chapter 15 Bankruptcy in New York, BLOOMBERG (Nov. 16, 2022); David Yaffe-Bellany, How Sam Bankman-Fried’s Crypto Empire Collapsed, N.Y. TIMES (Nov. 14, 2022). In December 2022, the Securities and Exchange Commission charged FTX’s founder and CEO Sam Bankman-Fried with eight criminal charges, including fraud and conspiracy to commit money laundering; Bankman-Fried was arrested in the Bahamas and extradited to the United States.⁵[5]Dominic Rushe, Kari Paul, Alex Hern, Edward Helmore, FTX founder Sam Bankman-Fried charged with defrauding investors, THE GUARDIAN (Dec. 13, 2022). The implosion of FTX left the Miami Heat and Miami-Dade County in an uncomfortable position: the name of a bankrupt company, led by a possibly criminally liable executive, adorned their arena. Despite FTX’s tarnished reputation, the Miami Heat were stuck playing in FTX Arena for several months until a federal bankruptcy court terminated the naming rights agreement between Miami-Dade County and FTX.⁶[6]Tim Reynolds, Miami-Dade County wins right to strip FTX name off Heat arena, WPTV (Jan. 12, 2023).

Considering the high-profile failure of FTX, one may wonder the why Miami-Dade County had to run to a bankruptcy court at all. Why couldn’t Miami-Dade County terminate its agreement with FTX immediately? To answer that question, this article will explore the intersection of naming rights agreements and bankruptcy and explain why it took months for Miami-Dade County to get FTX’s name off its arena. In short, bankruptcy law prevents creditors from emptying a bankrupt party’s assets before it can go through bankruptcy proceedings, but well-crafted naming rights agreements may allow venue owners to get out of agreements with bankrupt parties as quickly as possible.

Bankruptcy & The Automatic Stay

When a company or individual declares bankruptcy, it usually means that something has gone horribly wrong. A bankrupt party is unable to pay all their debts and needs to go through bankruptcy proceedings to either restructure their debt or dissolve their assets to payout creditors. A bankruptcy court facilitates the process of reducing or eliminating unsecured debts or creating a timeline for the manageable repayment of secured debts of bankrupt parties.⁷[7]Practical Law Bankruptcy & Restructuring and Practical Law Finance, The Automatic Stay in Bankruptcy: An Overview, AMERICAN BAR ASSOCIATION (Sep. 22, 2022).

When someone declares bankruptcy, creditors have every incentive to look for the first door out. When a large company such as FTX declares bankruptcy, there are undoubtedly hundreds, if not thousands, of creditors eager to secure their debt before FTX runs out of money. Parties in an agreement with the bankrupt party may want to terminate those agreements, knowing the bankrupt party is highly unlikely to fulfill its terms.

United States bankruptcy law contemplates this creditor feeding frenzy. To that end, the automatic stay provision, triggered immediately when someone declares bankruptcy, stops all proceedings against a debtor’s assets until bankruptcy plays out.⁸[8]See 11 U.S.C. § 362 (West 2023); Practical Law Bankruptcy & Restructuring and Practical Law Finance, The Automatic Stay in Bankruptcy: An Overview, AMERICAN BAR ASSOCIATION (Sep. 22, 2022). The purpose of the automatic stay provision is to ensure creditors, in their race to secure their own debt, do not empty the bankrupt party’s estate before bankruptcy proceedings can play out.⁹[9]United States v. Inslaw, Inc., 932 F.2d 1467, 1473 (D.C. Cir. 1991). Because creditors have every incentive to secure their own debt at the expense of other creditors, the automatic stay prevents all actions against the bankrupt party that may deplete their estate, broadly including acts to collect claims against the bankrupt party that arose before they declared bankruptcy.¹⁰[10]11 U.S.C. § 362 (a)(6).

Evading the Automatic Stay

The automatic stay provision seems daunting to anyone trying to collect or get out of their relationship with a bankrupt party. So how did Miami-Dade County terminate its naming rights agreement? The automatic stay provision has a “for cause” exception, which the court may grant at the request of a party.¹¹[11]U.S.C. § 362 (d)(1). Whether someone has adequate cause for relief from the automatic stay provision is generally at the discretion of the bankruptcy court, considering the totality of the circumstances in each proceeding.¹²[12]In re Heine, 2022 WL 883938 (3d Cir. 2022). Generally, to establish cause, the party seeking relief from the automatic stay must show the “balance of hardships” from not obtaining relief from the automatic stay “tips significantly in its favor.”¹³[13]In re American Classic Voyages, 298 B.R. 222, 225 (D. Del. 2003).

Miami-Dade County made a compelling cause that the balance of hardships tipped in its favor. First, under the naming rights agreement, FTX’s next payment to Miami-Dade County was due in a few months, and Miami-Dade County would have been entitled to damages for FTX’s failure to pay.¹⁴[14]See Motion of Miami Dade County, Florida, For Relief From The Automatic Stay To Terminate The Naming Rights Agreement, In re FTX Trading, LTD., Case 22-11068-JTD (D. Del. Bankr. Nov. 22, 2022). This would have increased FTX’s liabilities in the middle of bankruptcy proceedings. Furthermore, the Naming Rights Agreement had a Compliance with Laws provision, in which FTX agreed to comply with applicable statutes, ordinances, rules, and regulations.¹⁵[15]See Naming Rights Agreement § 35. The breach of this provision constituted default under the Naming Rights Agreement, and entitled Miami-Dade County to termination.¹⁶[16]See Naming Rights Agreement §§ 9.2.2, 9.2.3. Finally, the name “FTX Arena” on Miami-Dade County’s venue caused reputational harm considering the magnitude of FTX’s implosion, and any delay in seeking a new naming rights partner for the arena would cost Miami-Dade County revenue in the short- and medium-term.¹⁷[17]Motion of Miami Dade County, Florida, For Relief From The Automatic Stay To Terminate The Naming Rights Agreement, In re FTX Trading, LTD., Case 22-11068-JTD at 5–6. (D. Del. Bankr. Nov. 22, 2022).

Ultimately, the bankruptcy court was convinced. It lifted the automatic stay with regards to Miami-Dade County, and permitted Miami-Dade County to terminate its Naming Rights Agreement with FTX.¹⁸[18]Christina Vasquez, Judge rules Miami Dade County can remove FTX Arena name from downtown venue, LOCAL 10 (Jan. 12, 2023 7:58 AM).

Escaping Naming Rights Agreements

Going forward, venue owners can best position themselves to get out of naming rights agreements by giving themselves clear exits for illegal or immoral behavior by partners. The FTX implosion was an embarrassing episode for Miami-Dade County and the Miami Heat. What could Miami-Dade County have done differently so the Miami Heat were not stuck playing in FTX Arena after the company’s collapse? It turns out, Miami-Dade County positioned itself relatively well.

Perhaps Miami-Dade County did not even have to seek an exemption from the automatic stay to terminate its Naming Rights Agreement with FTX in the first place. In their motion, Miami-Dade County stated they sought relief from the automatic stay provision “[i]n an abundance of caution.”¹⁹[19]Motion of Miami Dade County, Florida, For Relief From The Automatic Stay To Terminate The Naming Rights Agreement, In re FTX Trading, LTD., Case 22-11068-JTD at 2 (D. Del. Bankr. Nov. 22, 2022). In other words, the venue owner could throw caution to the wind, and gamble that the automatic stay would not apply to a default on a naming rights agreement as severe as FTX’s would not require an exemption from the automatic stay. Such a gamble carries the downside risk of sanctions for violating the automatic stay.

The best option may be to do exactly what Miami-Dade County did and pursue contractual remedies in court as quickly as possible. Provisions requiring compliance with law and other morality clauses, paired with a right to terminate for violation of such provisions, provide a quick path out of an agreement with an undesirable partner. Unfortunately, no matter how thorough a naming rights agreement, a venue may just have to wait for a bankruptcy court to resolve bankruptcy proceedings in an orderly fashion.

Naming rights agreements are a great tool for up-and-coming companies to increase their brand recognition. However, up-and-coming companies are likely the most susceptible to implosions like FTX’s. Despite those risks, venues are likely to partner with companies who are looking to increase brand recognition, and willing to pay the highest price possible. To protect themselves from companies failing and relationships deteriorating, venue owners should continue to wield morality clauses and other provisions to give them as quick an out as possible when partnerships turn sour.

Written By: Mathew Santoyo
Mathew is a 2024 J.D. Candidate at Brooklyn Law School