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Bankruptcy filing changes the playing field for Frank McCourt's struggle with Major League Baseball

His risky move into Bankruptcy Court has the league pondering its options in the battle for the Dodgers.

June 29, 2011|By David Wharton and Bill Shaikin
  • Dodgers owner Frank McCourt has thrown a curveball at Major League Baseball by filing for bankruptcy.
Dodgers owner Frank McCourt has thrown a curveball at Major League Baseball… (Robert Gauthier / Los Angeles…)

The baseball season had just begun and, already, Frank McCourt was struggling to make payroll for his Dodgers ballclub. Major League Baseball executives quickly huddled to discuss strategy.

They could prevent McCourt from raising cash by selling his team's valuable broadcast rights — a deal they did not like — which might cause him to sue the league or simply surrender his team.

But they did not expect him to file for Chapter 11 protection — a high-risk move that would leave his fate in the hands of a bankruptcy judge.

"Even last Wednesday, I thought the way this was going to end was with him coming to the realization that he could not make payroll and saying, 'You've got to cover me and I'll sell the team,'" said a person familiar with league discussions but not authorized to speak publicly.

Had McCourt been willing to sell, the league would have been willing to work with him and cover his costs. Instead, he pulled his storied club into a Delaware Bankruptcy Court, prompting MLB executives to gather Wednesday evening to consider what is now, experts say, a far different set of options.

They could attempt a quick strike — arguing to a judge that McCourt, as a franchisee, should be removed because he has irreparably damaged the league's brand by violating terms of ownership.

Or they could choose a longer path that involves taking control of the team through the bankruptcy process itself.

"Once you file for bankruptcy, the judge pretty much makes the rules," said Dan Grigsby, the head of a national sports law group in Los Angeles. "They're going to have to work through the judge."

On Monday, Judge Kevin Gross cleared the way for McCourt to access $60 million in interim financing that will cover immediate bills, but put off the sale of those broadcast rights.

The case returns to court on July 20, when Gross will give McCourt and the league a chance to present competing plans for interim financing.

League executives head toward that showdown knowing they could have taken control of the team as recently as last week. But they had been wary of doing that because MLB had never staged a hostile takeover of one of its teams.

Instead, they calculated that Commissioner Bud Selig's rejection of McCourt's proposed television deal would force McCourt to miss a payroll.

McCourt secured a personal loan to cover three of the first five early-season payments, then took the Dodgers into Chapter 11, seeking the protection of bankruptcy law. That ensured all matters pertaining to the team, the league and ownership would be channeled through Delaware.

Baseball officials say they can revoke McCourt's franchise, citing an MLB rule that any owner who files for bankruptcy can lose his team. But, in legal terms, that amounts to an ipso facto clause.

"Ipso facto clauses are typically unenforceable in bankruptcy," said Douglas Baird, a University of Chicago law professor who has followed the case.

So McCourt expects to present a detailed plan for reorganizing his franchise, one that would no doubt include sidestepping the commissioner to sell those broadcast rights for an estimated $1.7 billion or more, a windfall that he says would put his team on solid footing for years to come.

But in a filing to the court this week, the league suggested a blocking strategy, citing "a decline in attendance caused by the community's extraordinary unhappiness with the club's owner."

The league could argue that, with news accounts of McCourt diverting more than $100 million in team revenues for personal use — and his club struggling on the field — he has damaged the Dodgers and MLB brands in ways that cannot be mended or repaid.

"Dodger fans might think, 'Jeez, we could have had a real bullpen if all that money stayed with the team,'" said Dan Schechter, a Loyola Law School professor. "If you lose some of those fans, that's a bell that can't be unrung."

The person close to league discussions said executives "feel confident" in their ability to challenge McCourt's ownership on issues beyond the constitution.

At least one legal expert compared the situation to a late 1990s lawsuit involving General Motors and a financially troubled auto dealer in Claremont that closed its doors for more than a week, then filed for bankruptcy.

Going dark violated franchise rules and GM eventually showed it had suffered irreparable harm — not only did it lose sales, but its brand also was tarnished and it may have lost potentially loyal customers who turned elsewhere that week.

Major League Baseball has yet to produce any evidence that McCourt should be removed on these grounds. Until that happens, Schechter and others consider the strategy — though potentially quick — a longshot.

An alternate path involves two facets of the ongoing bankruptcy procedure.

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