Los Angeles Dodgers Bankruptcy – by Brett Fortuna, Law Clerk – 2011

The Los Angeles Dodgers filed for Chapter 11 bankruptcy protection this week amid their owner, Frank McCourt’s, turbulent divorce. Two months ago MLB Commissioner Bud Selig installed a financial overseer in hopes of preventing the team from going into financial ruin. Since that time Selig rejected a television deal that McCourt brokered with FOX that could have potentially allowed the Dodger’s to make payroll for June. The FOX deal was also structured to send cash directly to McCourt so that he could resolve personal problems through the vehicle of the Dodgers. Selig’s rejection of the plan also nullified the divorce settlement that McCourt had reached with his wife further personalizing McCourt and Major League Baseballs business relationship.

McCourt is taking a massive and unnecessary gamble by filing the Dodgers for Chapter 11 bankruptcy. As it stands, MLB rules allow for the league to seize the team in event of bankruptcy or inability to meet payroll. McCourt has been unable to secure financing for the Dodger for several months and as a result the team’s financial woes have reached a critical mass. Selig was poised to seize the team at the end of June when McCourt failed to meet payroll. Had Selig been allowed to take the team, MLB could have financed the Dodgers at relatively low interest rates just as it did with the Texas Rangers last year. McCourt would have still been entitled to contractual profits independent of other creditors’ claims. By filing bankruptcy in hopes of correcting his own personal problems, McCourt may have placed his head under the guillotine.

The fate of the Dodgers is now in the hands of a bankruptcy judge. Should the judge rule that McCourt is not fit to retain ownership of the team, he would then become a creditor in the same manner as all the players he stiffed. As a creditor McCourt would receive only a fraction of what he would have had he sold the team outright back to MLB. In addition, the new owner of the Dodger’s in bankruptcy, MLB, is not likely to do McCourt any favors when drawing up the reorganization plan. McCourt’s logic behind filing a Chapter 11 is further flawed in that the best case result of the bankruptcy would still put him and the team in a worse financial position than if he would sell the team. Should the bankruptcy judge accept McCourt’s proposed refinancing plan, the new creditors would have new senior liens on all Dodger’s property and the interest rate for the financing would be a burdensome 10% (as opposed to 7% if financed by MLB). Yes, McCourt would retain his named “ownership” in the Dodgers, but his assets would be so encumbered and his relationship with his franchisor so damaged, that it would be only a matter of time until McCourt was pried from the team once and for all. Oh, and did I mention that McCourt’s ex-wife will fight for half of everything McCourt is desperately clinging to? McCourt had two options, sell the team and resolve his divorce, or dig a hole so deep even the gopher from Caddyshack couldn’t get out. Well, I guess that gopher was hilarious right…