As the World Cup Rages, Rival Ownership Groups Spar for Control of Pittsburgh Soccer Team

While the best men’s national soccer teams from around the world are battling in Brazil to be crowned the World Cup champion, some club teams in the U.S. have their sights set on more modest goals. Take the Pittsburgh Riverhounds  of the men’s USL Professional Division, for instance, who are not only fighting to move up from last place in the current standings of the National Division, but are also struggling to stabilize their operations in a chapter 11 proceeding pending in the Western District of Pennsylvania. 

On March 26, 2014, two days’ before their season opener, the Hounds were forced to file for bankruptcy protection, citing the burdens of servicing debt that arose from the team’s construction of a 3,500 seat stadium in 2013.  A $400,000 postpetition loan from Shallenberger Investments — the team’s majority owner — was approved by the Bankruptcy Court back in March to fund the team while it considered restructuring alternatives.  Last Friday, the team was back in Court, winning approval to increase the DIP loan by another $100,000 to pay for upcoming promotional events.

Shallenberger appears poised to propose a reorganizing plan that would convert the DIP loans into substantially all of the equity of the reorganized debtor.  Implementing that strategy will not be as easy as converting a penalty kick when the goalie is down, however.  Shallenberger’s plan is likely to be opposed by the team’s founders and original investors, who are now the team’s minority owners and whose tale of impending woe may be unparalleled in the annals of modern pro sports.

In the summer of 2013, when the original investors were short on cash as a result of the construction of the new stadium and desperately seeking new capital, Shallenberger agreed to provide the team a lifeline.  In exchange for 51% of the team’s equity, Shallenberger infused over $5 million into the team.  According to the disgruntled minority shareholders, Shallenberger also agreed to obtain a new $4.6 million credit facility – secured by Shallenberger collateral – and to use those funds to retire the team’s existing secured and unsecured debt.

When Shallenberger failed to procure this new financing, the team was forced to commence a chapter 11 proceeding, which the minority owners characterize as a ploy by Shallenberger to wipe out their remaining ownerships interests and acquire the newly built stadium at a substantial discount.  In April, they unsuccessfully lobbied the Bankruptcy Court to turn the team’s day-to-day operations over to a trustee, citing Shallenberger’s allegedly intentional failure to arrange the new financing and other unspecified instances of mismanagement as the proximate causes of the team’s financial distress.  Shallenberger countered that he only agreed to try to obtain new financing for the team, and blamed the Riverhounds’ insolvency on the original investors, who failed to stem significant cost overruns during the new stadium’s construction.

The Bankruptcy Court did not deem the allegations of Shallenberger’s impropriety serious enough to appoint a trustee.  Nonetheless, in light of the unique circumstances that precipitated the chapter 11 case, the Bankruptcy Court may view any attempt by Shallenberger to walk away from the bankruptcy with 100% control of the team and full ownership of the new stadium with a jaundiced eye.

While perhaps not as compelling as the impending match between the U.S. and number two ranked Germany, the looming conflict between Shallenberger and the Riverhounds’ minority owners will be the decisive battle in the fight for control over the future of professional soccer in Pittsburgh.

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