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Take Me Out to the Courts: the Los Angeles Dodgers File for Bankruptcy

By Marie-Andrée Weiss

On Monday June 27th, the Los Angeles Dodgers, owned by Frank McCourt, filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. Bankruptcy filing is the last episode of a saga that had been featured in the news for some two years now.

The bankruptcy filing lists the creditors holding the 40 largest unsecured claims. Among them are Manny Ramirez, the now-retired slugger who is owed $20,992,086, and Andruw Jones, now playing for the New York Yankees, who is owed $11,075, 000. The assets of the team are listed in the filing as being 500,000,001 to one billion dollars. Major League Baseball (MLB) Commissioner Bud Selig issued a statement the same day, writing that "[t]he action taken today by Mr. McCourt does nothing but inflict further harm to this historic franchise."

Indeed, the Dodgers are an historic baseball team, still dear to many New Yorkers, whether or not they can remember when the Brooklyn Dodgers became the Los Angeles Dodgers in 1958. It is the team of Jackie Robinson, Sandy Koufax, and Pee Wee Reese, a team which won six World Series titles, one of these titles while still playing at Ebbets Field.

Jamie and Frank McCourt bought the franchise in 2004. After the couple commenced divorce proceedings in 2009, the question of whether the team was community property, and thus co-owned by Ms. McCourt, or whether it was owned solely by Mr. McCourt, became contentious.

Citing "deep concerns regarding the finances and operations of the Dodgers and to protect the best interests of the Club, its great fans and all of Major League Baseball," Commissioner Selig seized control of the Dodgers on April 20, 2011, and took over day-to-day operations of the club. Mr. Selig then appointed Tom Schieffer, a former president of the Texas Rangers, to monitor the franchise.

On June 17, 2011, Frank and Jamie McCourt agreed to a binding divorce settlement. The court would then have conducted a one-day trial to characterize the Dodger's assets as community property, or as Mr. McCourt's sole property. However, the agreement was contingent upon MLB approving a proposed transaction with Fox. Mr. Selig, however, rejected a 17-year, $2.7 billion deal with a Fox, citing the "best interests of Baseball" clause of the MLB Constitution when rejecting the deal between the Dodgers and Fox. Mr. McCourt planned to use some $150 million from the deal to settle his divorce with Jamie McCourt, and to pay off some of his debts.

MLB and its two constituent members, the National and the American Leagues, is largely self-regulated, and operates under its own private rules, the MLB Constitution, the document governing all major league baseball franchises. Article II § 2(b) of the MLB Constitution describes the Office of the Commissioner of Baseball as being "Chief Executive Officer of Major League Baseball" and gives him the power to "investigate, either upon complaint or upon the Commissioner's own initiative, any act, transaction or practice charged, alleged or suspected to be not in the best interests of the national game of Baseball."

Indeed, the office of the Commissioner stems from the "Black Sox scandal" of 1919, when players of the White Socks team "threw" World Series games. Baseball club owners (16 at the time) decided in 1920 to have one sole commissioner of baseball, and Judge Kenesaw Mountain Landis was appointed in 1921 as the first Commissioner of Baseball. The team owners pledged to "loyally... support the Commissioner in his important and difficult task..."

Baseball clubs are still privately owned, by persons of great wealth, and more often than not, big personalities. George Steinbrenner will not be forgotten any time soon in New York, and Frank and Jamie McCourt were wealthy real estate developers when they bought the team. However, Article II § 3(c) of the Baseball Constitution gives the Commissioner the right to suspend or remove any owner of a Major League club. The sale of a team must be approved by a vote of the MLB owners, who indeed voted unanimously in 2004 to approve the sale of the Dodgers to the McCourts.

Pursuant to article II § 4(ii)(l) of the MLB Constitution, "[t]he rights, privileges and other property rights of a Major League Club hereunder and under any other Baseball-related agreement may be terminated... if the Club in question... files a voluntary petition in bankruptcy." The New York Times reported on June 30 that MLB may plan to use this rule and to ask the court to let it take control of the Dodgers.

What could be next? According to the New York Times, the Dodgers and the MLB agreed on June 29 to let the Dodgers accept interim financing from an outside lender in order to continue to operate, and agreed that the loan would not have to be tied to a sale of the team's future television rights. This compromise was approved by Judge Kevin Gross in the U.S. Bankruptcy Court in Wilmington, Delaware. However, the MLB contended in court that the Dodgers should have first obtained approval from Mr. Schieffer, the MLB-appointed monitor, before filing for bankruptcy.

Two other baseball teams have filed for bankruptcy in the last two years, the Chicago Cubs in 2009, and the Texas Rangers in 2010. Before that, the Seattle Pilots was the last baseball team to have filed for bankruptcy in... 1970. In the case of the Texas Rangers, the general partnership operating the Rangers had entered into an agreement with the Commissioner of Baseball, giving the Commissioner certain rights concerning the sale of the team, and the Commissioner contended that the agreement gave him the right to bar any unapproved sale of the team. The bankruptcy Judge, however, ordered the team to be sold at an open auction, not to a preferred bidder.

Meanwhile, baseball is still America's favorite summer pastime. The MLB reported the best weekend attendance since 2008 during last Father's Day weekend, when 1,646,000 spectators attended the 45 games played over the weekend.

Bankruptcy filing: http://online.wsj.com/public/resources/documents/dodgers.pdf

Bud Selig statement re bankruptcy filing, June 2011: http://mlb.mlb.com/news/press_releases/press_release.jsp?ymd=20110627&content_id=21076822&vkey=pr_mlb&fext=.jsp&c_id=mlb

Bud Selig statement re Dodgers, April 2011: http://mlb.mlb.com/news/press_releases/press_release.jsp?ymd=20110420&content_id=18038724&vkey=pr_mlb&fext=.jsp&c_id=mlb

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This page contains a single entry from the blog posted on July 1, 2011 8:24 AM.

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