Category Archives: Bankruptcy

Guest Post: A Proactive Cure for the Athlete Wealth Disease Epidemic – Part 1

By:  Todd Burach (Twitter:  @ToddBurach)

Todd Burach works in wealth management in New York City. He specializes in asset allocation and investment strategy for upper high net worth clients, including corporate executives, professional athletes and entrepreneurs.  He is a 2007 graduate of Syracuse University where he was a member of Coach Boeheim’s back-to-back Big East championship teams. In 2012, Todd completed his MBA at New York University with concentrations in Finance and Economics.

Curt Schilling had a storied baseball career. He accomplished feats on the field of play that most athletes can only dream of achieving. Schilling won World Series rings with the Arizona Diamondbacks and the Boston Red Sox, highlighted by his 2001 World Series MVP Award. He is one of four pitchers to amass 3,000 strikeouts and fewer than 1,000 walks over the course of a career, joining Ferguson Jenkins, Greg Maddux, and Pedro Martinez.  However, despite athletic triumph that most players will never know, Schilling recently experienced a career milestone of sorts that, regrettably, many professional athletes will more than likely achieve:  bankruptcy.

“According to Chapter 7 bankruptcy documents filed in Delaware, Mr. Schilling’s company, 38 studios, and three subsidiaries owe more than $150 million to creditors, but have assets of no more than $50 million.”

Unfortunately, this is a familiar tune for many of us who follow sports. See the below statistics from the 2009 Sports Illustrated report, “How (and Why) Athletes Go Broke” by sports writer Pablo S. Torre published in the midst of the Great Recession, and highlighted again at the start of ESPN’s 30 for 30 documentary “Broke”:

– By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce. 

– Within five years of retirement, an estimated 60% of former NBA players are broke.

Torre’s article outlines several theories intended to explain how athlete after athlete can blow through so much money time after time. While the article is worth reading in its entirety, the quick synopsis of the how (for the sake of this writing) is summarized below:

1. The Lure of the Tangible – ‘chronic over-allocation to real estate and bad private equity’

2. Misplaced Trust – ‘hiring the wrong people as advisors’

3. Family Matters – ‘the divorce rate for pro athletes ranges from 60% to 80%’

Torre called attention to the epidemic of financial troubles amongst athletes at a time when financial markets were a hot topic even outside of Wall Street. Yet now, more than three years removed from the onset of the most impactful financial crisis since the Great Depression, with stock markets marking new highs, real estate prices off their bottoms, and credit markets beginning to open, professional athletes and their business ventures are still going broke. What this tells us is a very important, albeit somewhat readily apparent lesson: the epidemic of financial duress for professional athletes is not cyclical.  Athletes do not go broke only when markets go down. Athletes will go broke all the time.  That is, unless, something changes.

The fact of the matter is that we – professional athletes and those charged to support them – need to do more. We need to implement proactive solutions that address the root of the issue before an athlete ends up in the next Pablo Torre article or “Broke” documentary.

How can we influence professional athletes to make smarter decisions?

1. Demand more from Players Associations.

The NFL Players Association as a whole strives “to do whatever is necessary for the betterment of our membership,” while the NBA Players Association pledges to ensure “that every conceivable measure is taken to assist players in maximizing their opportunities and achieving their goals, both on and off the court.”  It is safe to say that the long-term financial health of players falls squarely within the confines of these stated objectives. However, of the four major sports leagues in the United States, only one players association (the NFL) has a formal Financial Advisor Program. The NFLPA Financial Advisor Program’s mission is ‘to provide an additional layer of protection – not just from poor financial advice, but from outright fraud.’  While this stated mission is certainly just and warranted, it inadequately addresses the overarching problem. As Torre explained, trusting the wrong people is just one reason that players go broke.

For more effective and meaningful financial support, players and their advocates should demand their players associations form Player Finance Divisions, tasked specifically with promoting the current and long-term financial health of its players. In addition to services similar to those offered by the current NFL Financial Advisor Program, these divisions would provide education and outreach programs, alumni initiatives, foundation management workshops, and research of potential programs. The necessity of such support has been widely recognized. Forbes contributor James Crotty wrote in his February 2012 article on Allen Iverson that “an NBA that cared more about its personnel and brand would have required that Iverson, as well as all players, pass a yearly financial planning and retirement course before they were allowed on the hardwood.”  The NBA is a corporation much the same way my employer is a corporation.  My firm offers annual educational seminars on 401(k) plans and retirement benefits and takes an interest in the health of its employees. Why? Employees who are physically, emotionally, and financially healthy are superior employees. They are more productive, more committed, and ultimately present a stronger representation of a company’s brand. 

Between the NFLPA Financial Advisor program and Rookie Transition Program, which provides business training to new players, players associations have certainly demonstrated a commitment to aiding athletes in their financial health. The documentary “Broke” includes clips of Former NFL player and coach Herm Edwards speaking at a rookie symposium highlighting this fact. “A goal without a plan is a wish,” Edwards told the players in attendance. The Financial Advisor programs and Rookie Symposiums currently in place seem to be just that. Bankruptcy statistics suggest that these programs need broader scope, new life, increased funding, more staffing, and a lot more media attention.

Visit tomorrow for Part 2 of Mr. Burach’s piece.

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Curt Schilling’s Video Game Company 38 Studios, LLC Files For Bankruptcy

From 1988 through 2007, Curt Schilling amassed an impressive resume as a MLB pitcher.  At the helm of retirement in late 2006, Schilling attempted to find similar success in a new career by launching the video game development company 38 Studios, LLC.  Known largely for his play with the Boston Red Sox, the company was founded in Massachusetts.  However, in 2010, the company moved to Rhode Island.  This move was due largely to the enticing cash bonds 38 Studios, LLC received from the state of Rhode Island.  According to reports, these bonds totaled $49.5 million.  38 Studios, LLC was expected to repay these bonds.  Its most recent payment to bondholders was 17 days late.  In the wake of being unable to pay its bondholders, 38 Studios, LLC recently laid off its entire staff.  Its Chapter 7 bankruptcy filing came today.

Chapter 7 bankruptcy is a process whereby a debtor liquidates its assets.  It differs from other types of bankruptcy in that it does not offer a reorganization plan.  Thus, unless a trustee otherwise orders, 38 Studios, LLC will likely cease all business operations.  As such, it will sell its property and distribute those proceeds and any other assets to its creditors.

A review of 38 Studios, LLC’s bankruptcy petition provides some insight into the company’s assets and liabilities.  It also demonstrates some of the potentially risky situations that the company entered into.

First, the petition lists 38 Studios, LLC’s total assets as being $21,679,906.35, which is made up entirely of the company’s personal property.  The personal property includes money in bank accounts, security deposits, insurance policy interests, stock in 38 Studios Baltimore, LLC, notes receivable for relocation loans given to former employees, intellectual property, office equipment, and prepaid expenses. 

As noted above, 38 Studios, LLC included notes receivable for relocation loans given to former employees as one of its assets.  This item sheds light on a potentially financially problematic practice that the company entered into.  According to the bankruptcy petition, 38 Studios, LLC was a party to a contract with MoveTrek Mobility, LLC.  Under this contract, MoveTrek made mortgage payments on the former homes of specific 38 Studios, LLC employees and assisted in the sale of their homes, pursuant to 38 Studios, LLC’s relocation policy.  Notably, there were six 38 Studios, LLC employees who were participating in this program.  Their total mortgage balances amounted to $1,939,783.00.  Taking into consideration the current estimated sales prices of their homes along with commissions and fees, 38 Studios, LLC claims its expected liability from this program is $303,921.00.

Another interesting issue related to the personal property listed by 38 Studios, LLC deals with intellectual property.  According to the filing, the company held two registered trademarks and had filed applications for five other trademarks.  The company only held one registered copyright.  Most notably though, were the statements related to 38 Studios, LLC’s patents.  Although the process to obtain a patent is time-consuming, it is somewhat surprising that a video game development company in existence since 2006 only held one patent.  Along with that patent, the company only had one pending provisional patent application.  However, this patent application was under the system’s inventors names and it had not been assigned to 38 Studios, LLC.  Likewise, that the company’s inventors held the patent rights to the systems they were developing while employed by 38 Studios, LLC is somewhat surprising.  Typically, companies enter into agreements with employees whereby employees assign their intellectual property rights, including patents, for things they invent while working for the company, to the company.

38 Studios, LLC’s liabilities greatly outnumbered the company’s assets at $150,670,195.97.  The bulk of the company’s liabilities was in the form of secured creditors’ claims.  The two largest claims were owed to the Rhode Island Economic Development Corporation and the Bank of New York Mellon.  These claims arose from secured bond debt which 38 Studios, LLC obtained when it received the $49.5 million in bonds from Rhode Island.  This debt was secured by a blanket lien on 38 Studios, LLC’s assets.  The total liability caused to the company by this debt amounted to $115.9 million.

It’s unfortunate that a talented player like Schilling finds  himself in this situation.  Per reports, the former pitcher has indicated that he has poured a sizable amount of his life savings into trying to rescue the company.  Given that 38 Studios, LLC filed for Chapter 7 bankruptcy, it is unlikely that the company will see another day in business upon completion of the bankruptcy proceedings.

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For the Love of The Game: Why “The Game” Prevents MLB’s Takeover of the Dodgers

On June 27, 2011, Los Angeles Dodgers LLC and four other entities related to the Los Angeles Dodgers filed for Chapter 11 Bankruptcy in the United States Bankruptcy Court for the District of Delaware.  The filing came nearly seven-and-one-half years to the date when Frank McCourt purchased the team for $430 million.  That transaction was a leveraged deal that was financed mostly by debt.  While the Los Angeles Dodgers have obtained reasonable statistical success as a team under the ownership of Frank McCourt, Frank McCourt’s separation from his wife Jamie in late-2009 arguably perpetuated the scrutiny of the team’s always-present financial woes.

On the eve of the Dodgers entering play in their first consecutive NLCS appearance since 1977-78, Frank and Jamie McCourt announced their separation after thirty years of marriage.  Thereafter, on October 22, 2009 Frank fired Jamie as the Chief Executive Officer of the Dodgers.  A review of the timeline of events leading to the current bankruptcy filing pinpoints this action as the moment when Major League Baseball became an interested party to the happenings of the McCourt’s and the Dodgers.  Proof of this is found in the fact that it was only after the firing of Jamie McCourt, on October 24, 2009, that Commissioner of Major League Baseball, Bud Selig, said that the league would monitor the dispute between the McCourt’s.

The McCourt’s would later file for divorce and ultimately come to an agreement over the ownership of the Dodgers.  This agreement contained contingencies, one being Selig’s approval of a television contract between the Dodgers and Fox.  In the time between the filing of the McCourt’s divorce and its settlement, several events potentially catastrophic to the financial success of the Dodgers occurred.  First, San Francisco Giants fan Bryan Stow was beaten outside of Dodgers Stadium after the Dodgers’ opening game on March 31, 2011.  On April 20, 2011, fearing for the team’s financial health, Major League Baseball appointed a trustee to oversee the day-to-day operations of the team.  This trustee, Thomas Schieffer, would later be ousted by the Dodgers upon the filing of their Chapter 11 bankruptcy petition.  In filing the petition, the team argued that Schieffer’s presence violated the “automatic stay” protection granted under bankruptcy law.  It is to be seen whether Schieffer will be restored to his position as MLB’s trustee overseeing the Dodgers.

Two-months after appointing Schieffer to oversee the Dodgers, Bud Selig rejected the television deal negotiated between the Dodgers and Fox.  This effectively nullified the divorce agreement entered into between the McCourt’s.  One week later, with a $30 million payroll looming at the week’s end, the Dodgers filed for bankruptcy protection under Chapter 11 of the United States Code.  This form of bankruptcy allows businesses and individuals to “reorganize,” as opposed to bankruptcy methods, such as Chapter 7, which require the liquidation of assets.

In response to this action, Major League Baseball filed a motion objecting to the Dodgers’ petition’s financing plan, which includes the receipt by the Dodgers of a $150 million loan from Highbridge Capital Management.  In its objection, Major League Baseball accuses Frank McCourt of “. . . siphon[ing] off well over $100 million of club revenues.”  Major League Baseball further asserted that it did not approve the Dodgers-Fox television deal “. . . because it was not in the best interests of the Los Angeles Dodgers or Baseball.”  The objection further contains the chastising of the Dodgers by Major League Baseball for not approaching it for a loan, and rather, seeking a loan with a higher interest rate and greater fees from a third-party.  A temporary agreement was reached by the Dodgers and MLB, which allowed the Dodgers to access $60 million of the $150 million loan, and subsequently make its slated payroll payouts.  Ultimately, the bankruptcy proceedings will likely last into 2012.  However, the Dodgers and MLB are slated to return to court on July 20, 2011 to further hash out the disputed loan issue.  That being said, MLB must consider what options it has to protect the financial stability of the team that broke the color barrier with Jackie Robinson, and the team that is highly regarded by baseball fans as one of the sport’s “crown jewels.”

How “The Game” Prevents a MLB Takeover of the Dodgers

Anyone who has heard of the Dodger’s bankruptcy filing has heard pundits mention the fact that MLB is seeking to “takeover” the Dodgers as a result of its Chapter 11 bankruptcy filing.  However, upon reviewing the document which grants MLB this right, a MLB takeover of the Dodgers is not a clear-cut and feasible option or solution for Major League Baseball to pursue in order to meet its needs and address its interests in this instance.

The Major League Baseball Constitution, Article VIII, Section 4 (l) provides for the rights and privileges of a MLB team to be terminated if it files for bankruptcy.  However, this termination is not contingent upon the filing of bankruptcy itself.  Rather, 75 percent of the other teams in the league must vote to terminate the other team’s rights.  Thus, at least 23 teams would need to vote in favor of terminating the rights of the Dodgers in order to effectuate a MLB takeover of the organization as a result of the Dodgers filing for bankruptcy.

From a business perspective, it is unlikely that Major League Baseball could muster up the votes required to institute a takeover of the Dodgers.  MLB’s objection to the Dodgers’ bankruptcy filing indicates that 2011 attendance at Dodgers’ games is down by 20 percent.  As of today, the Dodgers are in last place in the NL West.  Many of the “Top 40” creditors named by the Dodgers in their bankruptcy petition are the team’s own players.  The existence of these facts can be seen as a “dream come true” to opposing teams in their bids against the Dodgers for free agents and fan bases.

The perfect storm of factors listed above creates a free agency nightmare for the Dodgers, as players facing free agency at the end of this season are unlikely to negotiate with a team facing a severe financial crisis, the highest decline the game’s attendance, and the worst record in its division.  Furthermore, the team’s decline in stadium attendance signals baseball fans’ frustration with the Dodgers.  This frustration spurs an opportunity for opposing teams to capitalize upon the Dodgers’ financial misfortunes by pursuing the good-will and “fandom” of a disenchanted Dodgers fan base.

Thus, in seeking ways to protect and restore the value of its “crown jewel,” Major League Baseball must look to other available legal methods and talk of a MLB “takeover” of the Dodgers must cease.

Check back tomorrow, when Ruling Sports will discuss two options available to Major League Baseball in protecting its interest in the Dodgers.

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