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.