The Dodgers Bankruptcy: A Q&A

With the automatic stay in place, MLB Commissioner Bud Selig should be prevented (for the moment, at least) from seizing control of the team or taking any other punitive action against McCourt.

Where is Frank McCourt going to come up with the money to run the Dodgers while the Dodgers are in bankruptcy?

This is the first issue for the Bankruptcy Court, and will probably be addressed in a preliminary way at a hearing today before the Bankruptcy Court. Companies in Chapter 11 bankruptcy frequently seek special “debtor in possession” (DIP) financing to stay in operation during bankruptcy. DIP lenders get a special priority – they are repaid in bankruptcy before just about everyone else.   McCourt has a proposal in place to borrow $150 million from a hedge fund affiliated with J.P. Morgan Chase. The proposal is, in the words of Craig Calcaterra, a “crappy loan”, at a 10% interest rate, with a $4.5 million fee on top of it, but the loan would keep the Dodgers afloat.

My guess is that Major League Baseball will offer the Dodgers a DIP financing package of its own – probably a smaller but less “crappy” package, enough to keep the Dodgers going until the bankruptcy is better organized and the Dodgers’ creditors have time to form committees to represent them. “Typically the whole package of DIP financing would not be approved so very early in the case,” says Ashleigh Danker, a bankruptcy lawyer in the Los Angeles office of Kaye Scholer LLP. “Rather, the Judge would approve only the bare minimum needed to get through the next few days, particularly since an unsecured creditors’ committee is not yet up and running.”

Once the financing is in place, can the Bankruptcy Court order the team sold to a new owner?

Not so fast! There’s a procedure here that needs to be followed. The team’s creditors need to be identified and given a chance to organize – this may be more complicated than it appears, given the fact that the Dodgers are divided into 20-odd companies, only five of which have filed for bankruptcy, and some of these companies owe obligations to each other.  The Dodgers would then be given time to prepare and file a plan of reorganization. This normally takes 180 days; the parties may seek to speed things up, or the process may be extended, and of course the Dodgers’ creditors may object to the Dodgers’ plans and seek approval of a competing plan.

Moreover, we can’t be absolutely certain that the Dodgers will be sold in bankruptcy. Frank McCourt appears to want to retain ownership of the team. Many Chapter 11 bankruptcies end with the reorganization of the business rather than its sale to new management. Frank McCourt will probably build a reorganization plan around a new TV deal with Fox or someone else, featuring a big cash payment up front that will give the team the liquidity it needs for its reorganization. Major League Baseball may seek instead to have the team sold, but it’s not clear that MLB will control this process.

What about the Commissioner’s power to act in the “best interests of baseball”? Does the Bankruptcy Court have to respect this power?

This is unknown. We can expect that MLB will seek to control the bankruptcy process in one way or the other. But remember that the purpose of bankruptcy is to get creditors paid. The Bankruptcy Court is not primarily interested in doing the right thing by Dodger fans, or promoting competitive balance, or respecting the proud tradition of the Dodgers, or doing other things that Bud Selig or others might think are good for the national pastime.

At the same time, the Bankruptcy Court must keep in mind that the Dodgers’ value derives from its right to play major league baseball, and this right is necessarily subject to rules and regulations by which all teams must abide. If pushed too hard, the Commissioner (with support of ¾ of the other teams) can terminate the Dodgers’ franchise, which would certainly eliminate any TV network’s interest in televising its games, and would make it impossible for the team to satisfy its existing creditors. Of course, McCourt would argue that MLB is blocked by the automatic stay from taking any such action, but the mere threat of such action (even if the action is delayed until the bankruptcy is completed and the automatic stay is lifted) might prevent a TV contract from being signed.

The best solution is for the parties to work together cooperatively, balancing the best interests of the sport against the need to get creditors paid. In the Texas Rangers bankruptcy, MLB worked in concert with the old team ownership to get the team sold to new owners. But McCourt and Selig are not likely to cooperate. So MLB needs to proceed carefully, asserting its “best interests of baseball” power with a deft touch and with due regard for the procedures of the Court and the interests of other creditors.

There’s one interesting precedent case worth discussing. In the bankruptcy of the Phoenix Coyotes, team management sought to sell to new owners who wanted to relocate the team to Hamilton, Ontario. The National Hockey League opposed the relocation and was able to block the sale. This case is precedent for a sports league having some authority to protect its interests in a team bankruptcy.

Let’s go back to the TV deal. Fox has said that it would not support McCourt if he asked a bankruptcy judge to force MLB approval of an extended TV contract. So how does McCourt plan to build a plan of reorganization around such an extended contract?

Truth is, Fox is in a difficult position. Fox can try to provide McCourt with the extended TV deal he is seeking, with a rich up-front cash payment, but Fox may face MLB opposition if it tries to do so. Even if MLB is unable to use its “best interests of baseball” powers to block the extended contract, a contract extension might poison the relationship between Fox and MLB. On the other hand, if Fox does not offer McCourt the extension he seeks, McCourt can negotiate with other potential TV rights buyers, such as Time Warner.

If McCourt grows unhappy with Fox, McCourt might even seek to terminate Fox’s existing TV contract with the Dodgers, which runs through 2013. A debtor in bankruptcy has the right to reject “executory contracts”, defined as contracts where both sides still have substantial unperformed obligations. The existing Fox TV deal appears to be an executory contract. The Dodgers might owe damages to Fox for the rejection of the existing contract, but the threat of rejection might compel Fox to cooperate with McCourt.

I hadn’t heard the concept of “executory contracts” discussed before! Are there any other executory contracts we should know about?

Sure.  Leases are executor contracts, so the Dodgers could (if they wished) reject the existing leases of Dodger Stadium and the surrounding parking lots. Since the entity that owns the Stadium has also filed for bankruptcy, the Stadium lease could be rejected here by the landlord, the tenant, or both. While I don’t see a Dodgers’ lease rejection as being in anyone’s best interests, McCourt might toy with a lease rejection or two just to make life more difficult for Selig and MLB.

Does Jamie McCourt have anything to say in this bankruptcy?

Absolutely! But I’m not sure what.

Through her attorney David Boies, Jamie McCourt called the bankruptcy filing “bad for everyone who cares about the Dodgers” and motivated by Frank McCourt’s “rule or ruin philosophy”. If Jamie McCourt is opposed to the bankruptcy, she might try to do something about it. The Dodgers’ bankruptcy filing recites that Frank McCourt is the ultimate owner of the Dodgers, but this is yet to be decided by the McCourt divorce court. If Jaime McCourt appears in Delaware Bankruptcy Court and asserts her potential half-interest in the Dodgers, what happens then?  What happens in Bankruptcy Court if the divorce court determines that the Dodgers are community property? I don’t think anyone knows.

Bankruptcy law is difficult enough to understand, but this case gets truly complicated when you consider the intersection of bankruptcy and divorce law. Bankruptcy Court focuses on maximizing value for debtors; divorce law takes a similar attitude toward protecting assets for the benefit of each spouse. For the most part, divorce law takes a back seat to bankruptcy law; the divorce court cannot distribute assets that are tied up in bankruptcy. Still, expect that Jamie McCourt will find some way to have her interests heard in this case.

Who do we blame for this? Is this Bud Selig’s fault for allowing McCourt to buy the Dodgers in the first place?

It is probably true that Selig gave McCourt the “inside track” to buy the Dodgers from News Corp. (Fox). But Selig has recently stated that there were “no other bidders” for the Dodgers, and there’s some truth to this as well.  One-time Madison Square Garden boss Dave Checketts reportedly made a $650 million bid for both the Dodgers and L.A.-based Fox Sports Net 2, then withdrew the offer when Fox would not sell the sports channel.   At one point, Tampa Bay Bucs owner Malcolm Glazer was the leading candidate to purchase the Dodgers, but the NFL prohibited Glazer from using the Bucs team as collateral and insisted that the Dodgers would need to be operated independently from the Bucs.  Jeff Smulyan, the former owner of the Seattle Mariners, was interested in purchasing the Dodgers, but only if News Corp. (i.e. Fox, the then-Dodgers owner) included 6 TV stations in the deal. Alan Casden, another real estate developer, made an offer for the Dodgers contingent on tearing down Dodger Stadium and moving the team downtown, then withdrew the bid.

McCourt made his bid for the Dodgers relatively late, in September or October of 2003, after the bids noted above failed to materialize.  At that point, News Corp. was “frustrated” and fairly desperate to sell. McCourt posed none of the problems of the other potential buyers – McCourt had no NFL entanglements, and more significantly, was not interested in buying TV networks from Fox. McCourt’s bid did have one perceived weakness – he lacked money. But ultimately, Fox provided McCourt with the final piece of the financing he needed to buy the team.  L.A.-based philanthropist Eli Broad emerged at the last minute as a McCourt alternative, but at that point Fox was determined to press ahead with McCourt, and the Broad offer reportedly was contingent on McCourt’s offer falling through.

Ultimately, it was Selig’s job to vet McCourt, and Selig deserves some responsibility for the mess the McCourts have made of the Dodgers. But we’re talking about vetting a potential business owner, not a Supreme Court Justice. As an illustration, consider that Mark Cuban – hailed by many as an ideal successor to McCourt in Los Angeles – may have some dirty laundry of his own. Nobody’s perfect. In the final analysis, Fox wanted to sell the team, Fox wanted to sell the team to McCourt, there may not have been any competing offers, and ultimately MLB had to say “yes” to someone.

What prevents this from happening again, to the Dodgers or to some other team?

Here’s where I’m willing to be very critical of Major League Baseball, and Commissioner Selig. Unless baseball does a better job of monitoring and regulating the financial health of its 30 franchises, there will be more “messes” like the one created by McCourt. This is critical to understand. The McCourt’s divorce, their lifestyle, their systematic looting of the Dodgers, may all be unique. But the Dodgers’ financial disaster is not unique. The Mets faced a similar crisis this year. Over the last two years, the Texas Rangers and Chicago Cubs were both dragged into bankruptcy.

I wrote above about the Commissioner’s responsibility to act in the best interests of baseball. But that’s something of a fuzzy standard, so let me make an alternative suggestion: MLB should act like a responsible commercial lender, and treat each team like a commercial borrower and the beneficiary of a commercial guaranty.  Each baseball team receives a $75 million line of credit from MLB, and each team gets the benefit of having its player contracts backed by MLB.

Commercial lenders keep careful track of their borrowers. Lenders require frequent financial reports. Lenders require borrowers to keep their debt within confined limits, relative to the borrowers’ earnings and asset values. Frequently, lenders set separate limits for short-term and long-term obligations, and require their borrowers to maintain minimum liquidity and cash flow. Lenders often prohibit borrowers from making pell mell distributions of assets to subsidiaries and affiliated companies.  Lenders frequently limit the salaries and distributions that borrowers can pay to their owners. If MLB made a determined effort to treat baseball teams like commercial borrowers, the Dodgers’ “mess” would not be nearly as serious as it is now.

Baseball does place limits on each team’s ability to borrow, but these limits are lax and not well enforced.  In most other respects, baseball teams are not financially regulated. This laissez-faire policy made sense 40 years ago, when a team like the Yankees could be bought for only $8.8 million. But even in inflation-adjusted dollars, the value of the Yankees (based on the recent Forbes valuation of $1.7 billion) has increased 40-fold. Keep in mind that the Boston Red Sox sold for $700 million in 2002, and the Cubs sold for a reported $700 million in 2009. How many people can afford to buy a baseball team today as a hobby (particularly when only 8 baseball teams are owned by billionaires)?

With teams this expensive, a rational baseball team owner will seek to build on the team as a cornerstone for a profitable business enterprise. Look at the Yankees, with their YES network and concessions joint venture with the Cowboys. Or look at the Red Sox, with their own regional sports network and purchase of the Liverpool soccer team.  If something goes wrong with one of these enterprises, MLB is potentially on the hook for unpaid loans and player contracts. This may be a risk that MLB is willing to take, but the only way to limit this risk is for the league to do a better job policing the operations of its teams.

23 thoughts on “The Dodgers Bankruptcy: A Q&A

  1. Doesn't the Chapter 11 Trustee also have the power to accept or reject the Debtor's executory contracts? What if a potential buyer for the team, e.g., Mark Cuban, came forth with a better deal for creditors and the health of the Dodgers franchise going forward than the Fox television contract, contingent upon the rejection of the leases and parking lot concessions that would otherwise line McCourt's pockets if the team proper was sold out from under him?

    Wouldn't the Trustee have a fiduciary duty to the creditors to accept the best possible offer he could make given the totality of the circumstances?

  2. Terrific stuff Larry, great read. I think Selig gets criticized too often for his cronyism. As you laid out, MLB has good reason to want to know who they're letting into this club of theirs, and if anything should be even more vigilant.

  3. Great job as usual Larry. You have answered all my questions. Now i can go sound smart in front of my dad and other family members about this whole messy situation.

  4. forged, in his usual fashion william has done a great job answering questions I left open in my piece!

    The union IS a force lurking in the background. MLB will be careful to manage the Dodgers' mess so that players past and present (even Manny) are paid in full and on time. MLB does not want the Players' Union to become overly concerned about how teams are being managed.

  5. Guest, a correction: contracts may indeed by accepted or rejected as part of the approval of a plan of reorganization, or concurrently with the consideration or approval of such a plan. Happens all the time.

  6. with today ruling and the fact they will have a hearing on july 20th what will happend if mlb wins the july 20th hearing and how long will it take the judge to make a ruling

  7. If we assume that would be able MLB directly seized the Dodgers after any possible legal entanglements are taken care of (i.e. McCourt suing to retain control) is there a reason why MLB didn't do it when the Rangers entered bankruptcy? I didn't follow the Rangers problems that closely, but it seemed to me they had a lot of cash issues, and it took an extremely long time to sell the club just because the creditors did not like some of the sales plans that were possible. Is this just a case of the Dodgers being that much worse off than the Rangers, or Selig not being as big of a fan of McCourt as he was of Hicks?

  8. Larry – Great analysis! I am struck by how seamlessly you could substitute the word "Greece" for "the Los Angeles Dodgers" and submit this story to The Wall Street Journal otherwise unaltered. Don't know what the odds are on how this all turns out, but would guess that back in the day even Jimmy the Greek would have hedged his bets.

  9. How does the divorce affect the bankruptcy filing? What if Jamie is granted her 50% community property interest in the Dodgers? Since she disagrees with the bankruptcy filing what would happen?

  10. John, I wish things were that simple.

    First, there's every possibility that the divorce court will decide that the Dodgers ARE Frank McCourt's separate property.

    Let's assume that the Dodgers are McCourt community property. This doesn't mean as a legal matter that the team must be sold, but I think that for practical reasons the McCourts would have to sell the team. But who controls that sale, who gets to pick the buyer? Bud Selig would argue that the buyer has to be approved by MLB, and that the buyer need not be the highest bidder for the team. Naturally, McCourt wants the team to go to the highest bidder regardless of what Selig thinks might be in the best interests of baseball. This goes beyond who Selig wants to admit into the "club" of baseball owners. For example, what if buyer A is willing to pay $200 million for the Dodgers, while buyer "B" offers to pay $100 million for the Dodgers and in addition agrees to invest $500 million into the team to pay down its existing debt? McCourt would favor buyer A, Selig would prefer buyer B.

    Outside of bankruptcy, Selig controls the sale process. Inside of bankruptcy, the Bankruptcy judge may force the sale into an auction. This is what happened with the Texas Rangers.

    Things get even more complicated than this. Keep in mind that the Dodgers are split up into separate companies: one owns the team, another the Stadium, and another the parking lots and land that completely surround the Stadium. There's a fourth company that purports to own the right to sell tickets to Dodger games, and a fifth company that Frank formed to own the TV rights (though Frank may not have transferred the TV rights out to that company before he filed the bankruptcy). At the moment, the companies that own the team and the Stadium are in bankruptcy, but the other companies are not. What, exactly, is going to be sold in the bankruptcy? Keep in mind that Tom Hicks, the former owner of the Texas Rangers who took that team into bankruptcy (in that case in cooperation with MLB), emerged from the bankruptcy owning the team's parking lots (and Hicks and the team have been battling in court over the parking fees Hicks wanted to charge Rangers fans this year).

    Things can get more complicated than this. What if McCourt decided to sell only a minority interest in the Dodgers? Or to hang onto a small stake in the Dodgers after the sale? The Tribune Company, the bankrupt former owner of the Chicago Cubs, sold the Cubs out of bankruptcy but held onto a 5% piece of the team.

    Whoever controls the Dodgers throughout the bankruptcy has the first say in whatever happens. Formally, the Bankruptcy judge does not "force" anyone to do anything; he rules on motions, he approves plans proposed by others. If you look at the motions filed yesterday by McCourt and MLB, you'll notice that McCourt's motion was for approval of a plan of financing, and MLB's motion was an objection to McCourt's motion. Formally, the judge's job yesterday was to give a thumb's up or a thumb's down to McCourt's motion. Imagine how much better MLB's formal position would have been yesterday if it had the power to propose the plan. Expect that MLB is working now to take control from McCourt in the bankruptcy, or to improve its leverage over the bankruptcy proceeding.

  11. Great article. Definitely seems like a risky move by Frank McCourt and definitely, as his ex-wife said, a scorched earth philosophy.

    It seems entirely possible that the Bankruptcy Court might take back all the real estate and toys the McCourts have bought since 2002 as a "fraudulent conveyance" (not fraud necessarily, but a bankruptcy concept that would let the Dodger's take back anything that shouldn't have been paid out). Maybe more follow-up on that particular issue as the saga unfolds?

  12. JeffG, I'm thinking about fraudulent conveyances, and also preferential transfers.

    For those of you who don't keep bankruptcy treatises on your night table .. bankruptcy law provides a couple of ways for a debtor to recover payments made or assets transferred out of the debtor prior to bankruptcy. One such way covers "preferential" transfers, which are certain debt payments made by the debtor within 90 days of the bankruptcy (or one year for payments to insiders like McCourt himself).

    Another way for the debtor to recover assets is if the assets were transferred out of the debtor in a so-called "fraudulent conveyance". There are two kinds of fraudulent conveyance. One is where the debtor transferred out the asset with the actual intent to defraud creditors. This can be hard to prove, and I believe this only covers transfers made within one year of the bankruptcy (though California law may extend this to 3 years). The second kind of fraudulent conveyance is potentially broader — it covers transfers made prior to the bankruptcy (1) for less than reasonably equivalent value, and (2) that are made while the debtor was insolvent (either before or as a result of the transfer). I haven't spent much time in this area of law recently, but there appear to be competing laws that might place anything from a three-year to a seven-year limit on the ability to reach back and challenge the transfer. Please don't quote me on any of this — whenever you deal with time limits like this, the analysis can get quite complicated, and I'm just trying to provide a relatively simple explanation.

    Anyway … if a transfer is made by a solvent company, it's not a fraudulent conveyance. In all likelihood, the Dodgers were solvent when they made transfers to the McCourts, moved the Stadium and parking lots into separate companies, etc. The Dodgers' financial difficulties appear to be quite recent. So without giving this question a great deal of thought, I don't think McCourt has much to fear from fraudulent conveyance law. I'm happy to hear a contrary opinion.

  13. WE (dodgers) are just screwed either way we go. This is just awful and makes me sick. I don't think I will ever go to another game again (under McCourt). This guy is so messed up how does he think that he can run a team. No, but he sure knows how to ruin a team. I hope MLB takes over the team and finds a good buyer for us…..Mark Cuban and or Garvey/Hershiser Group PLEASE. I have never ever in my life as a Dodger fan seen so much chaos. It's ridiculous our team is in limbo and you can tell with the players on an everyday basis cause we look at times like a three ring circus out there. And there are days when we look like we can actually compete. But until that so called 1/2 owner Frank McCourt pulls his head out his rear and realize how much misery that he has caused not only the Dodgers but the WHO CITY OF LOS ANGELES. FRANK YOU WORN OUT YOUR WELCOME PLEASE LEAVE….OH BUT LEAVE THE DODGERS HERE PLEASE ….THIS IS WHERE THEY BELONG YOU SCAM ARTIST.

  14. I'm also not an expert on bankruptcy law, but it seems arguable that the 2002 acquisition made the Dodgers insolvent; everything since has been band-aids. I believe the 3rd Cir. has a history of slapping down bootstraps/LBOs in the vein of Tabor Court Realty Corp. That said, I'm sure McCourt has competent counsel and they filed DE because they agree with you.

    Maybe I'm just sentimental that I think a judge should take money from the McCourts and give it to more deserving people like Bryan Stow. Heck, even Manny and Eric Chavez. Ok, Manny might be stretch.

    Greedy executives raiding the corporate coffers isn't exactly a sympathetic case, nor is it even good business (which probably matters more to the judge). From my non-expert viewpoint it's bad to pocket $6-9M/year on parking lots that aren't maintained and scare attendance away. I'd like to see a judge clawback as much as he can from the owners, whether under fraudulent conveyance, laches, unclean hands, or just appointing a trustee who makes McCourt's life miserable until he settles.

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  16. The league should be a little stricter with salaries. Those multi-million dollar figures are what's driving a lot of teams deeper into financial ruin every year.