Major League Baseball is preparing for the possibility that Frank McCourt might take the Dodgers into bankruptcy court before the league could strip him of the team.
Bankruptcy could provide McCourt with the authority and funding to remain in control of the Dodgers, at least in the short term, experts said.
The league is “looking hard” at that option, said a personal familiar with the matter but not authorized to comment publicly because of the potential for litigation.
The embattled owner would almost certainly face opposition in bankruptcy court from the league, which could use a “voluntary termination” clause as empowered by the MLB constitution to revoke a franchise upon a bankruptcy filing.
Also, Jamie McCourt would argue that ex-husband Frank has no right to take the team into bankruptcy without her approval, since she claims half-ownership of the team, according to a person familiar with her thinking but not authorized to discuss it publicly.
In appointing a financial overseer for the Dodgers three weeks ago, Commissioner Bud Selig authorized an investigation into “the operations and finances of the Dodgers and related entities.” According to one person briefed on the matter, investigators want to learn whether McCourt would default on loans to the related entities if the Dodgers filed for bankruptcy. Those entities, including companies controlling Dodger Stadium and the surrounding land, are largely funded with revenue generated by the Dodgers.
Steve Sugerman, the spokesman for McCourt, declined to say whether McCourt had ruled out a bankruptcy filing.
Alan Gover, an attorney with White and Case, the firm that represented the incoming owners of the Texas Rangers through that club’s bankruptcy process last year, said, “Behind any bankruptcy filing by Mr. McCourt would be a strategy to maintain control of the club.”
Bankruptcy courts need not yield to MLB rules. One high-ranking major league executive, speaking on condition of anonymity because of the potential for litigation, expressed surprise McCourt did not file for protection as soon as Selig announced his intervention.
McCourt’s argument to a bankruptcy judge would be the same one he has made to MLB executives and in media interviews: The Dodgers’ financial problems would be resolved with the approval of a long-term broadcast contract with Fox.
That contract has been with Selig for five weeks, even with the Dodgers in danger of missing payroll. If McCourt were able to convince the bankruptcy judge that he could repay his creditors if the Fox contract were approved, the judge could grant approval over Selig’s objections.
“If I were McCourt, I’d take a shot at getting the court to approve the contract,” said Rob Kampfner, another attorney at White and Case.
However, the large banks that are the Dodgers’ primary creditors might not authorize whatever reorganization plan McCourt might put forth, Kampfner said, in the interest of preserving business opportunities with other teams and with the league.
“If the creditors were completely supportive of Mr. McCourt, he would be in a pretty strong position,” Kampfner said. “But they’re probably inclined to see their portfolio in a much larger sense than people that sell pencils to the Dodgers.”
Nonetheless, a bankruptcy judge would have the authority to approve the Fox contract even over the objections of creditors, since the bankruptcy court has no more fundamental purpose than ensuring debts are repaid, according to a sports investment banker who declined to be identified because of the potential litigation.
“You can’t tell somebody you can’t get paid back,” the banker said. “The one right a debtor has is the right to pay back his lenders.”
Ultimately, McCourt would need the big banks to buck Selig and side with him.
“He would be rolling the dice that the creditors would support him,” attorney Gover said. “If they don’t, he’s walking into a trusteeship. That would be an endgame and a wasteful use of litigation.”
The Dodgers do not currently have the funds to meet the May 31 payroll, according to two people familiar with the matter. If the Dodgers fail to meet payroll, MLB can seize the team from McCourt, who has said he believes the league has a “predetermined” plan to oust him.
If McCourt were to shift his priority from maintaining control of the Dodgers to securing the best possible price in a sale, and if he were concerned that Selig would steer the team to a preferred bidder rather than a high bidder, the bankruptcy litigation would not necessarily be “wasteful.”
Jamie McCourt probably would approve a bankruptcy filing in conjunction with a sale to the highest bidder, according to the person familiar with her thinking.
In bankruptcy court, the team would be subject to an auction, although MLB would retain the right to approve a new owner.
In 2001, the trustees of the Boston Red Sox agreed to sell the team to a group led by John Henry and Tom Werner, in a deal backed by Selig. The group was not the high bidder, and the Massachusetts attorney general negotiated a $30-million settlement on behalf of the local charities funded by the trust.
Selig pushed last year for the Rangers to be sold to a group led by Chuck Greenberg and Nolan Ryan. They were, but only after a bankruptcy court auction pushed the sale price from $520 million for the opening bid to $593 million for the winning bid.