Monday, June 27th, 2011...10:13 pm

Dodgers File Bankruptcy

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By Sam Mann

A lot of potential topics to cover tonight. We have the two big labor disputes in the NFL and the NBA, the Mets/Madoff crisis and a multitude of NCAA drama, from North Carolina to Ohio St. to USC to Boise State (I think the most amazing thing with the NCAA stuff is that John Calipari just got an extension from Kentucky. This just weeks after Kentucky admitted that they should not have celebrated Calipari’s 500th win because of wins vacated at UMass and Memphis, but that’s another post.)

In my eyes, however, the biggest story out there is the tale of the Los Angeles Dodgers, one of the most famous franchises in sports. As we have mentioned several times, most notably here, the Dodgers are in significant financial trouble, mostly because of mismanagement by owner Frank McCourt. Reports seem to indicate that McCourt was never all that financially stable in the first place. He and his wife spent millions upon millions on houses all over the country (I think before the divorce they had 7). There were also many reports, mostly verified, that the McCourts were using team funds for “personal spending. ” His money came from parking lots of all things, and his net worth took a huge hit when the real estate market tumbled. Then, of course, the McCourts filed for divorce, an ugly proceeding which recently came to a conditional settlement (conditioned on the fact that the team remains in McCourt’s hands through all the financial trouble, and then based on a one-day trial to determine whether Jamie McCourt has an ownership stake. I know, it’s ridiculously complex. Anyone out there take family law?)

And let’s not forget that the team itself hasn’t exactly been managed with prudence. Among the unsecured creditors listed in today’s filingsĀ  which total about $75 million, are: Manny Ramirez at nearly $21 million; Andruw Jones at $11 million; pitcher Hiroki Kuroda at $4.4 million; and the Chicago White Sox, which share a spring training facility with the Dodgers in Arizona, at $3.5 million (See the above ESPN link for all the gory details). So let’s just say this isn’t a matter of one or two bad decisions; the Dodgers have been a mess financially for some time now, although in fairness they did make a couple of trips to the NLCS. And that’s before you even factor in the Casey Blake for Carlos Santana trade. (Not that Carlos Santana, the catcher thought to be one of the best prospects in baseball when the trade was made, and a crucial part of my fantasy team).

What began with MLB taking over day-to-day operations of the club has culminated in bankruptcy. The Dodgers filed for Chapter 11 today in Delaware. Why Delaware you ask? Well apparently they’re incorporated in Delaware. Anyway, the Dodgers simultaneously sought a loan from Highbridge Principal Strategies for $60 million up front and a total believed to be $150 million. If approved that would help them make payroll on Thursday, which they claim they will do either way. Dodgers personnel cites dropping attendance and deferred salaries, as well as Selig’s interference, as reasons for the filings, while also pointing out that the Rangers went through bankruptcy before being sold to Nolan Ryan’s group last summer.

Bud Selig, the commissioner has a slightly different take, and I quote, “The Commissioner’s Office has spent the better part of one year working with Mr. McCourt and his representatives on the financial situation of the Los Angeles Dodgers, which was caused by Mr. McCourt’s excessive debt and his diversion of club assets for his own personal needs. 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, its loyal fans and the game of Baseball would not be acceptable.” WOW… no support for one of his own there.

Selig and MLB are expected to contest the bankruptcy filing. The argument, essentially, is that the 30 MLB organizations are privately owned and affiliated and that the league constitution gives it the right to take over an organization filing for Chapter 11. While sometimes court defer to the special interests of an industry (see: baseball’s anti-trust exemption), it is unclear whether the bankruptcy judge will take control or grant baseball’s motion and keep the matter within the confines of baseball. Personally, I hope that happens, because that may be the only way to force a sale and get McCourt out.

The mechanics of bankruptcy are relatively simple. The filing puts a temporary stay on all creditors, and the debtor is required to submit a payment plan for the court to ratify. In practice, it is not so simple, nor is it a quick process, however, so if this matter goes through the courts, it will take a while. If you like the Dodgers that’s bad news because the team and organization are in trouble.

So what we are left with is one of the essential questions in sports law: what is the role of the courts in matters arising from professional sports? When the steroid mess went down (and I guess is still going down with the Bonds and Clemens prosecutions), commentators wondered why the courts and the government needed to get involved in matters of sport. That question is now applied to a different set of facts. Is a professional baseball franchise the type of organization where Chapter 11 bankruptcy is appropriate? I do not believe so, but that is purely a matter of opinion.

What I do know is that this is McCourt’s last stand as owner of the Dodgers. Bankruptcy is his last option. Without it, the team is as good as gone. Selig recently denied a television rights deal that would have given some relief, at least temporarily, but the deal basically granted McCourt a $150 million personal loan. That’s not why baseball clubs exist. Fans do not pay exorbitant ticket and merchandise prices to fund an owner’s spending habits. In fact, that is the most fundamental issue with the whole McCourt era – they have continually used the Dodgers as their own personal ATM. If the CEO of any other type of company did this, the entire country would go crazy. Now, only MLB executives and Dodger fans are going crazy.

No one is sure how long this matter will take to resolve itself, but when it does we will have something for you. For more information, see the Wall Street Journal’s Law Blog here.

Ed’s note: We plan to have more coming for you this week and will continue to sporadically update as the summer goes on. Until next time…

Sam Mann is a second-year law student at William and Mary, and can be reached at sgmann@email.wm.edu

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