Tuesday, November 17, 2009

Heads I win, tails you lose.

Could it really be this simple?

Our [Boston] real estate business was highly leveraged. We had always been concerned that if our real estate development operations failed, and the creditors descended upon the business assets, something would be left as a nest egg for us and our four children. We therefore had previously agreed that title to real property that we purchased would be put in my name and would not be used as security for our business ventures.
In mid-to-late 2003, I began the process of acquiring the Dodgers, and Jamie and I were making plans to move our family to California. In Massachusetts, Jamie and I had a long-standing practice of dividing our assets so that our residential properties and various other assets were held as her separate property and my business ventures, including the McCourt Company, Inc., and its related entities, were held as my properties. In late 2003, Jamie became adamant that her assets needed to be protected under the laws and practices in California . . . . She said that she did not want to have any risk of liability if any of my present or future business ventures, including the Dodgers, led to creditor claims against me.
Even though title to real estate was in my name, Frank and I had always considered the real estate to be our property, just like the Dodgers. It was always my understanding that the document we signed in 2004, in anticipation of moving to California, would simply preserve [the protection of the real estate in case of the failure of Frank's business ventures] under California's marital property laws.
Frank's lawyers:
[Jamie] got exactly what she wanted when, in 2004, she thought it was in her best interests to secure sole ownership of prized residential real estate and other assets for herself and to insulate them from the risks associated with her husband's business ventures. She now wants to turn that reasoned decision into a "heads I win and tails you lose" agreement: hiding behind the agreement if her husband's business ventures failed, and denying the validity of the agreement if they succeeded.
By asserting that he solely owns the Dodgers, despite our mutual understanding and despite his accurate and repeated depiction to the public of us as co-owners of the Dodgers, Frank is seeking to take unfair advantage of me and blatantly abuse the trust and confidence I have always placed in him.
Let's stop for a breather here. That last line gets me a little. She had so much trust and confidence in Frank that she deliberately insulated himself in case his leveraged business ventures failed. I mean--that's how it works, which is fine, but please: call a spade a spade. Jamie was afraid of what would happen to the family wealth if the McCourt Company faltered.

That was probably a reasonable fear. If the McCourt wealth was tied up in real estate development (and not the Los Angeles Dodgers) as of Fall 2008, there would be big, big problems. But it's not. Or, at least, Frank's isn't. Is it really this simple? Did Jamie just get terribly unlucky, like millions of Americans? As Frank would have us believe, she made a decision, and a very reasonable one at the time, that her wealth was safer in real estate than in Frank's businesses. She was so certain of it that she took specific steps to ensure that her net worth was tied to the value of the real estate, not the McCourt Company and, later, the Dodgers.

On August 6, 2008, the couple's estate planning attorneys forwarded to the McCourts the documents necessary to revoke the post-nup. Two days later the Dow was at 11734.32. Two months and two days after that, on October 10, it hit 8451.19.  The market would bottom out on March 6, at 6626.94. Throughout the winter, Frank avoided the revocation of the post-nup, and for good business reasons. In April, Forbes would value the Dodgers at $722 million, nearly double what he paid to purchase the club in 2004. Meanwhile, the assets allocated by the post-nup to Jamie had likely suffered cataclysmic losses.

The market crash, caused primarily by the devastating burst of the real estate bubble, was foreseen by a number of people who truly understood the securitization of mortgages and other receivables--and the problems which would result if home prices fell. Is it that unreasonable to think that mere days before the beginning of the greatest American economic disaster since the Great Depression, Frank McCourt might have been a little wary to put his future back in residential real estate and chop his interest in the Dodgers in half?

For whatever reason, Frank McCourt decided that his marriage was not worth revoking the post-nup, which proved extremely favorable to him. Jamie got stuck in the same boat as millions of others: real estate, once a safe haven and lucrative long-term investment, tanked. Frank's assets had not suffered the same disastrous fate. It was an economic decision of the purest sort: the marriage was worth less to Frank than his assets under the post-nup minus the risk of having the post-nup invalidated in a divorce proceeding. Frank made a fortunate gamble earlier in his life, and maybe he's done the same here.

I'm not going to make a value judgment as to Frank's decision. Breaking up a marriage--especially one with four children--is a terrible thing, generally. But we just don't know enough about the factors leading to the divorce. When Frank ultimately refused to sign the post-nup, he knew he was going down a path which would likely lead to divorce. If his motivations were purely financial--that is, he realized that Jamie was screwed and this was the right time to cash out of the marriage--he sure comes off as greedy. But I'm not willing to dismiss the possibility that the marriage was broken already, and Frank just made a wise business decision to enforce the agreement Jamie had wanted in the first place.

I've defended Jamie in the past for asking for the moon in the divorce, because it's just what one has to do. I'm not going to jump on Frank yet for essentially doing the same.
I'll be on KFI AM 640 in Los Angeles this afternoon at 2:30 Pacific to talk about the McCourt divorce.


  1. Question: Jamie seems to be arguing that whatever the legal paperwork of the post-nup says, it was always their shared private view that all the assets were shared and that they were split up to protect the real estate from the failure of the other businesses. Like you say, couples do this all the time for different reasons. Sometimes, it's as Frank suggests, to protect the partner in the marriage ("Jamie became adamant that HER assets")... but Jamie is suggesting that they did it to protect the couple's SHARED assets, not to protect Jamie.

    Obviously, I'm not a lawyer and I'm splitting hairs here, but I'm wondering if that's an argument that Commssioner Gordon would be sympathetic to. If he believes that the intent of the post-nup was to protect the couple's shared assets (as opposed to protecting Jamie), would he void a post-nup that explicitly states that she's giving up her rights to the Dodgers?

    Have I been clear in my question here? Not sure I have. If I'm phrasing this poorly, please let me know.

  2. If parties acquire property during marriage, then it's community property and creditors of either spouse can reach that property to satisfy a debt. However, a spouse's separate property is (typically) not liable for debts incurred by the other spouse during the marriage.

    Jamies saying they "transmuted" community property into her separate property, but she's saying they did not "really" do that. They only did it to hide what would otherwise be community property from her husband's potential creditors.

    The problem with Jamie's argument is that she basically saying she engaged in a scheme to defraud potential creditors (property is in her name alone, but really she still co-owned it with her husband- wink, wink). That's illegal.

  3. I think the Commissioner would be less sympathetic if one of the couple was highly leveraged, and is demanding a new post nup to get more money to keep their assets afloat. (ie the culprit looks like Jamie)

    Even before the Market Collapse in Sept 2008, Credit was tightening for months beforehand. I know one developer who was having big trouble getting loans without full collateral , and open lines of credit were also drying up or demanding huge fees to keep it open.

    I think for both sides, their assets may have lost value, but unless one of the McCourt is seriously underwater, I see a Family Court Judge not expecting one of the spouses to take a 50/50 burden on some of the debt.. However, there may be a demand to raise capital to pay off some of the debt, (ie sell some of the Dodgers' ownership to a minority partner, or raise capital by hocking more for loans for revenue streams)

    The McCourts have some huge residential mortgages, besides some outrageous price listings in New England, so much of the money problems tend to point to Jamie's side, because she overpaid for her Malibu homes and for the Holmby Hills compound (houses)

  4. In response to Random Rambler...

    I don't see Jamie defrauding potential creditors. What she and Frank did in 2004 in the post nup, was put a extra legal layer to impede any creditors from taking their homes. Commercial Real Estate developers do this to protect their home from bankruptcy court or the creditors first in line after a bankruptcy. (ie What is happening to Lenny Dykstra right now)

    However, what is coming out is that Frank wasn't in trouble, (or he wasn't as much as a precarious position) as much as Jamie and her house buyings. She bought high and and the property lost value. It isn't Contra Costa County 35%-40% value loss, but my guesstimate is 10%-15% of value, whether in Holmby Hills or in Malibu, (which fared better than in other locations in Southern California) If she bought her Malibu home for $30 million, it may had loss $4.5 million in value, and she has a $16 million mortgage on the property

    Commercial Real Estate is very much a feast or famine business. Developers put all their money into development, and pray they can recover their cost, ie pay back their loans with the rental income. If they hit paydirt, they have a steady income to pay the loans and further the next development. Like any risk managment, it makes sense to impede creditors from laying their hands on an easy to liquidate like a real estate developer's home.

    What the McCourts are doing different than other Real Estate companies is their wheeling and dealing on their residential estate, rather than keep the risk on their personal property to a minimum.

    Jamie isn't defrauding creditors, unless the residential properties were used as collateral for loans for the Dodgers, which appear they weren't used for the Dodger's daily operations. However, Jamie probably was way over her head with using the residential properties for personal overhead and indulgences by using them as collateral for credit lines and short term loans.

  5. Humma--

    When sophisticated people (which most courts would say the McCourts are) reduce an agreement to writing, that writing is said to be the most compelling statement of their intent. Otherwise, how could any contract ever be enforceable? The very purpose of a writing is to document the parties' intent, and "things didn't turn out like I hoped they would" isn't enough on its own to make the contract void or voidable.

    Random Rambler--

    I think there's a big difference between saying "our house" colloquially and claiming an ownership interest. During college, I lived briefly as a tenant with my friend, who owned the house. We still referred to it as "our house" even though we knew the legal situation was much different.

    The transfer of the California properties might be within the reach of the state's laws against fraudulent transfers, but the fact that the conveyances were in furtherance of a legal agreement (the post-nup) works in favor of the transfers.


    You continue to nail it around these parts. I'm not ready to draw any conclusions, but it sure *seems* like Jamie gambled on the houses being a better bet for stable growth than the businesses--and she lost. Maybe that's what's getting lost in the shuffle here. We're so concerned with figuring out what broke in the marriage between the post-nup and August 2008. Maybe this marriage has been chilly for a while back, but stayed afloat because it was financially beneficial for both. Jamie tried to insulate herself from Frank's creditors, figuring that her wealth was safest in residential real estate. Oops.

    That's obviously just a hypothetical scenario. Still too many unanswered questions.