Dodgers owner Frank McCourt must negotiate with Major League Baseball for a loan to fund the team in bankruptcy, a judge ruled Friday.
U.S. Bankruptcy Judge Kevin Gross denied McCourt's bid to use the loan he had arranged, over McCourt's objections that the league could leverage its standing as a lender to oust him from ownership. Gross said he would ensure Commissioner Bud Selig would not abuse that power and criticized McCourt for refusing even to consider an MLB loan that would save the Dodgers millions of dollars.
The decision doesn't mean McCourt will lose ownership of the Dodgers during the bankruptcy proceedings, but it was a rebuke to the way he has handled the team's business with MLB.
"It is unclear to the court how [the Dodgers] think they can successfully operate a team within the framework of baseball," Gross wrote in his ruling, "if they are unwilling to sit with baseball to consider and negotiate even more favorable terms while under the court's protection."
For The Record
Los Angeles Times Tuesday, July 26, 2011 Home Edition Main News Part A Page 4 News Desk 1 inches; 48 words Type of Material: Correction
Dodgers bankruptcy: A news article in the July 23 Sports section said that Highbridge Capital Partners received $5.5 million in fees from Dodgers owner Frank McCourt even though its $150-million loan would not be used. Those fees were paid to Highbridge by the team, not by McCourt personally.
McCourt and his attorneys had argued that, as the debtors, the Dodgers were entitled to pick the loan they preferred. That is standard under bankruptcy law, but Gross ruled that McCourt forfeited that priority by failing to disclose he would have personally owed his lender $5.25 million if the court did not approve the loan.
That "clearly compromised McCourt's judgment," Gross wrote.
The lone witness in Wednesday's hearing, Dodgers assistant treasurer Jeffrey Ingram, conceded that the league was not hostile to the Dodgers, and that the lower interest rate and absence of fees in the proposed MLB loan made its financial terms superior to that of the loan arranged by McCourt.
Kris Hansen, a New York bankruptcy attorney who has argued cases before Gross, said the judge clearly felt McCourt had put his own financial interest ahead of the team's.
"It is definitely a lesson ... baseball has conducted itself well and you haven't," Hansen said.
Thomas Salerno, the lead attorney for the Phoenix Coyotes during the NHL team's bankruptcy, said Gross could appoint a trustee to handle the Dodgers' financial affairs if he finds additional evidence of what the judge considers actions not in the best interest of the team. MLB also could ask Gross to appoint a trustee, one of several steps the league is considering.
For now, Gross ordered McCourt to negotiate a loan with the league "cooperatively and in good faith" and ordered MLB to ensure the terms are "independent of and uncoupled from" baseball rules the league might use to justify a takeover of the Dodgers in bankruptcy.
"There's no question in my mind the judge wants a constructive dialogue between the Dodgers on one hand and MLB on the other hand," said Bruce Bennett, the lead attorney for McCourt. "If a constructive dialogue is possible, the Dodgers will be part of it."
Bennett said he expected to file court papers next week to start the process of the sale of the Dodgers' cable television rights, the revenues from which could be critical to McCourt emerging from bankruptcy as the team owner.
MLB and Fox, the current rights-holder, are expected to oppose the sale. A hearing is scheduled for Aug. 16.
Gross said he would defer consideration of "the issues surrounding the underlying feud between the Commissioner and ... Frank McCourt," but distinguished between McCourt and the Dodgers.
"It is clear that baseball needs and wants the Dodgers to succeed," Gross wrote, "and the debtors are best served by maintaining baseball's good will and contributing to the important and profitable franchise group under the commissioner's leadership."
Although Friday's decision does not foretell the resolution of the case, the ruling indicates that Gross will not necessarily exercise the traditional judgment that an owner can best determine what is good for his business, said Daniel Baird, a University of Chicago bankruptcy law professor.
"That's a message that's not going to allow McCourt to sleep well at night," Baird said.
The biggest winner in Friday's developments might have been Highbridge Capital Partners, the New York hedge fund that would have provided McCourt with a $150-million loan. That money is no longer owed and thus not at risk, and Highbridge still made $5.5 million in fees from McCourt.