Major League Baseball has never been more prosperous. But, in the span of just 3 years, as many clubs in the league have been voluntarily placed into bankruptcy. In 2009, the Tribune Co. placed the Chicago Cubs into bankruptcy as a technical move to help expedite the sale, which was speedily approved by Tribune’s creditors. In May of 2010, the Texas Rangers entered bankruptcy in what was a contentious and difficult process with the creditors, and Monday, the Dodgers became the third as Frank McCourt’s beleaguered club, mired in debt, joins these unfortunate ranks. To place it in perspective, the last true bankruptcy of an MLB club before that was 1993 with the Baltimore Orioles. Before that, it was 1970 with the Seattle Pilots.
In looking at the Dodgers, there are the two recent bankruptcies, but also the 2009 bankruptcy of the Phoenix Coyotes of the NHL.
Here are the similarities (and differences) between the four.
Tom Hicks and the McCourts Self-Inflicted Woes
With the Texas Rangers, former owner Tom Hicks got around MLB’s debt rules by setting up Hicks Sports Group, a holding company which was an umbrella over the Rangers. Borrowing against the HSG as opposed to the Rangers, Hicks racked up half-a-billion in debt, and defaulted, throwing the Rangers in chaos.
The Dodgers situation is similar in that a reported $100 million was funneled out of the Dodgers to Frank and Jamie McCourt to live an opulent lifestyle. But Frank McCourt sank the Dodgers deeper into debt to the point of being $500 million in the red. Add in the divorce of the couple and Frank McCourt is floundering in so much debt that is self-inflicted, he may have bumped Tom Hicks from the ranks as the most hated owner in baseball.
Has MLB Turned Down TV Extensions Before?
Frank McCourt has said that Commissioner Selig is “un-American” and today said, "He's turned his back on the Dodgers, treated us differently, and forced us to the point we find ourselves in today."
McCourt is referencing the league’s rejection of a proposed television contract extension with FOX. The deal – worth as much as $3 billion – would have $385 million of it up-front. But, there is a catch. Frank and Jamie McCourt reached a settlement by which $173.5 million of that would have been used to settle their divorce and pay legal fees. Selig said in a statement today that, “We have consistently communicated to Mr. McCourt that any potential solution to his problems that contemplates mortgaging the future of the Dodgers franchise to the long-term detriment of the club [...] would not be acceptable,” adding that not granting the extension was in the best interests of Baseball.
If McCourt has done his homework, he’ll know that this isn’t the first time that the league has done this. In fact, it happened most recently with Tom Hicks and the Rangers.
The reasons for that rejection were very similar. Hicks had placed the Rangers in debt through loans acquired through HSG, and was going to use a television extension with FOX to pay down debt.
As is the case now, MLB blocked that deal saying that it was not going to be used to improve the club or its team.
Hedge Funds, the Rangers, the Dodgers and MLB
The nastiest part of the Texas Rangers bankruptcy occurred when the HSG debt hit the open market and was gobbled up by hedge funds, namely Monarch Alternative Capital, a “predatory” hedge fund. Monarch didn’t care a bit about cozy relationships with MLB such as other large banks had, and was looking to extract as much out of the Rangers sale as possible, regardless if Chuck Greenberg and Nolan Ryan thought they were only going to have to deal with the Rangers debt, not HSG’s.
The particulars are a bit different, but a hedge fund is in play with the Dodgers. Unable to get any cash to make payroll and remain a debtor in possession of the Dodgers through bankruptcy, McCourt has enlisted hedge fund Highbridge Capital Management LLC which is owned by JPMorgan Chase & Co. (JPM). As it’s a hedge fund, the interest rate is exceptionally high – 10 percent. The deal would let McCourt have access to $60 million now, and if the bankruptcy court approves it, an additional $90 million.
According to Bloomberg News, Highbridge would have first claim on the Dodgers’ assets, gets a $4.5 million deferred commitment fee, plus 0.5 percent of the unused part of the loan, payable monthly.
MLB, clearly looking to keep another hedge fund from entering the mix, will likely approach the court in a hearing tomorrow and say that they can provide funding at a lower interest rate, something that MLB did during the Rangers bankruptcy to help wade through the legal process and keep the club running with as little impact to the bankruptcy proceedings as possible.
An Auction Process, Albeit a bit Different
The Texas Rangers were auctioned off to a group led by Nolan Ryan and Chuck Greenberg. In 1993, Peter Angelos beat out Jeffery Loria at auction.
An auction is part of the Dodgers scenario envisioned by McCourt, but it’s a bit different: it centers on the television deal.
In the bankruptcy filing today, a request for a "competitive sale process" on the television extension was asked. The current Dodgers deal with FOX runs through 2013. The earliest the club can begin to negotiate with other networks would be Nov. 30, 2012.
What McCourt envisions is getting over the hump through all the debt with an auction for the TV deal. In the most likely scenario, Time Warner Cable would jump into the fray after inking a 20-year deal with the Los Angeles Lakers.
Currently, FOX hasn’t been willing to push the extension deal with McCourt knowing that, as was the case with Hicks and the Rangers, when new ownership lands with the Dodgers the extension will be approved by the league.
The auction process would be a gamble for FOX. Siding with MLB could mean losing out to TWC. Of course, FOX probably has a whole lot to say about this, and MLB will make its case as well.
The Power of Sports Leagues In the Context of the Phoenix Coyotes Bankruptcy
We mentioned the Coyotes, and how they relate to the Dodgers is a bit distant.
With the Coyotes case, the court rejected Jim Balsillie’s higher bid for the Coyotes siding with the NHL who put $140 million on the table saying that they could get a deal done to keep the club in Phoenix.
Balsillie had designs to purchase the club and move them to Hamilton, Ontario, Canada, something the NHL did not wish to do.
I said it was a distant relationship to the Dodgers, and here’s why: the key factor in the Coyotes deal was the power of sports leagues to control clubs in the context of relocation. The Dodgers are, of course, not relocating.
The issue of the powers of sports leagues over their clubs is a looming and powerful matter. McCourt is challenging “the best interests of Baseball”. He will look to the court to trump those powers. If the Rangers auction is any example, the court could win.
MLB, the Rangers, Dodgers and Seizing Clubs
Under the league constitution, MLB can seize control of clubs that fall under bankruptcy, or if they miss payroll.
MLB could –repeat, could – seize the club, but they're wary of challenging the bankruptcy court.
Last year, the league very nearly did so with the Texas Rangers. In fact, in an embarrassing moment on a conference call with the Judge Michael Lynn who was overseeing the bankruptcy, a lawyer who thought the call had ended said, "If [Lynn] doesn’t confirm the (bankruptcy) plan, we’ll just terminate the franchise. We'll take over the g--damn franchise."
Lynn tore into the league’s lawyers at a later hearing, but the threat was out there and was something considered. Still, the trigger was never pulled.
This case with the Dodgers, as it was with the Rangers, Coyotes, and Cubs, are all different. While there are slight similarities, the core issues are hard to point to and say that they lend themselves to what might happen with the Dodgers.
This much does seem certain: it will be some time before the Dodgers' financial woes exit the courts. It’s possible that we could still be talking this case into the upcoming off-season.
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Maury Brown is the Founder and President of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey, as well as a contributor to FanGraphs and Forbes SportsMoney. He is available for hire or freelance. Brown's full bio is here. He looks forward to your comments via email and can be contacted through the Business of Sports Network.
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