The legal war for the Los Angeles Dodgers has officially begun. When the Dodgers filed for bankruptcy on June 27, sparks flew between the public faces of the two sides—Dodgers owner Frank McCourt and MLB Commissioner Bud Selig. McCourt accused Selig of “knowingly and intentionally … [exposing] the Dodgers to financial risk” while Selig declared that the bankruptcy filing “does nothing but inflict further harm to this historic franchise.” How can one make sense of these and the other accusations flying back and forth? Here’s a primer on the past, present, and future of the litigation.
The Background – Proceedings to Date
The Dodgers need money. Unable to meet payroll on June 30, the Dodgers filed for bankruptcy to prevent Major League Baseball from seizing the team. To maintain control of the Dodgers, McCourt must take out a $150-million loan that will let him pay the team’s creditors and submit a business plan that shows how he will maintain the team’s financial stability. McCourt wanted to finance that debt with a loan from hedge fund Highbridge Capital Management instead of the one MLB offered.
The dispute over the Dodger’s financing was the subject of last week’s hearing, which The Biz of Baseball’s Maury Brown detailed here. The two biggest takeaways from those proceedings were that U.S. Bankruptcy Judge Kevin Gross is focusing only on the Dodgers’ finances, not their controlling interest, and that the Dodgers must negotiate a loan with MLB, not Highbridge.
Now, McCourt has eight court dates over the next six months to obtain the court’s approval of a plan to reorganize the Dodgers. The first of those hearings will take place on August 16.
What happens now? – August through December
By all accounts, the key to Frank McCourt bringing the Dodgers out of bankruptcy is his attempt to auction off the Dodgers’ future cable television rights. Currently, Fox Sports West is under contract through 2013 and maintains exclusive negotiating rights through 2012. The Dodgers sought to extend that deal, and the two sides agreed in principle to a 17-year extension worth $3 billion by McCourt’s valuation. However, MLB valued the deal only at $1.6 billion, a startling undersell, leading Bud Selig to reject it by the power of the MLB Constitution, which all team owners must ratify. Selig then reprimanded McCourt for sacrificing a wealth of long-term revenue in order to secure an immediate $385 million payment that would have kept the team out of bankruptcy and in McCourt’s control.
Now McCourt must argue that he can legally auction off the television rights to the highest bidder. There is a sequential set of points that he would have to legally prove to achieve this. First, McCourt would have to show that the only way he can make the money to pay the creditors is by selling the TV rights. Then, he would have to show that the exclusive negotiating rights belonging to Fox are null and void due to the Dodgers’ bankruptcy. This would allow McCourt to sell the television rights to the highest bidder, meaning he would have to attract cable giants like Time Warner Cable, DirecTV, and Viacom to compete with Fox. Finally, McCourt would have to actually execute the sale, which MLB would likely still oppose since the deal would favor short-term over long-term benefit. The question at that point would be whether bankruptcy law supersedes the MLB Constitution.
The Future – 2012 and Beyond
The scenario detailed above can best be described as a longshot. There seems to be little reason to believe that bankruptcy law would override either the Fox contract or the MLB Constitution, let alone both. In the event that it does happen, though, McCourt would be able to successfully take the team out of bankruptcy with significant long-term cost.
Even in that case, though, Frank McCourt will not maintain control of the Dodgers for much longer. If he manages to bring the team out of bankruptcy court, he will still have to spar with Jamie McCourt in divorce court. The result of that case is highly predictable. In California, which is known as a community property state, all jointly owned property must be split 50/50 in the event of a divorce. Since the Dodgers cannot be split in half, Frank would have to sell the team and give half of the money from the sale to Jamie, bringing new ownership to the L.A. franchise.
In the more likely scenario, however, McCourt’s attempt to sell the television rights will fail. In that event, since Major League Baseball is financing the Dodgers, the league will have the opportunity to use its own business plan to bring the team out of bankruptcy. This would entail selling the Dodgers, paying off the creditors, and returning the remaining money from the sale to the McCourts. This would be a faster road to a new Dodgers owner, but regardless, time appears to be running out for Frank McCourt.
Even when the Dodgers are sold, though, Frank’s legal war may continue. As this Dodgers organization chart shows, McCourt has created a company—Dodgers Tickets LLC—that sells the tickets but is not a part of the Los Angeles Dodgers. Similarly, McCourt also controls the land surrounding Dodger Stadium separately from the actual team, so he would retain control of it even after a sale of the Dodgers. MLB and the Dodgers’ new ownership will need to engage in some degree of further litigation to resolve these conflicts and prevent McCourt from unduly controlling any part of the Dodgers.
It is no secret that Frank McCourt will cling to convoluted litigation for as long as he can. At the end of the day, though, he will almost certainly be forced out one way or another—either by MLB in bankruptcy court or by Jamie in divorce court. The basic framework of the next several months is now in place. It is now just a matter of time until the lawyers determine which procedure will give the Dodgers franchise a fresh start and a chance to restore its former glory.
Lance Gurewitz is an undergraduate at The Wharton School of the University of Pennsylvania, Class of 2014. He has served as a sales/marketing intern at ESPN 760 AM Radio and as a residential team adviser for the inaugural Wharton Sports Business Academy, a summer program designed to introduce high school students to the business of sports. His primary interest lies in the critical analysis of athletes and their contributions to winning team sports, particularly baseball.
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