Wednesday, April 20, 2011

Baseball takes over. So what now?

Busy day in our little world, huh? First, we hear that Bud Selig will be appointing a trustee to run Dodgers operations for the indeterminate future. Next, it comes out that the IRS is investigating the McCourts' tax strategies. Eventually, we got a statement from Jamie McCourt herself, who expressed her approval of MLB's actions. Conspicuously silent throughout this eventful afternoon was one Frank McCourt. Why? He's likely preoccupied with figuring out just what the heck comes next. Bill Shaikin offers some thoughts:
Although Commissioner Bud Selig wrested financial control of the Dodgers from Frank McCourton Wednesday, the end of the era of McCourt ownership is neither imminent nor guaranteed.
Selig ... has anticipated the possibility of a legal response by McCourt, which could delay any ownership change for some time, according to two parties briefed on Wednesday's announcement but not authorized to discuss it publicly. Neither McCourt nor any of his representatives had issued a statement within three hours of Selig's announcement.
In addition, the divorce of McCourt and his ex-wife, Jamie, has yet to be settled. Jamie McCourt has asserted her claim of 50% ownership, based on California community property law. Those claims could take some time to resolve as well.

Bill's points are well-taken. Change isn't going to come immediately, and if we know anything, it's that Frank will rage at the dying of the light.  But let's be realistic here: Selig would not have taken the actions he has--with the likely legal and business challenges to follow--unless he was dead set against the survival of McCourt ownership in Los Angeles. He wasn't about to take over Dodgers operations, and essentially provide Baseball's guarantee that the club will meet its payroll, if he anticipated handing the keys back to Frank McCourt. 
I think it overwhelmingly likely that the team will be sold. Just not soon. And, in the immediate wake of Baseball's intervention and without much in the way of additional information, I can see a sale happening one of three ways. First, McCourt might agree to sell to a ready-to-go bidder or bidding group. We've all heard the names before. This would be, perhaps, the most painless resolution to the matter. 
Next, of course, the Dodgers could be the new Montreal Expos--a ward of the state. After being forced to bring Expos ownership and operations in-house for a variety of wacky factors--Minneapolis' successful defense to contraction of the Twins included--Baseball held the club for several years. Famously, and ominously for worried Dodger fans, the Expos did not make any September call-ups despite being tied for first place in the Wild Card lead as late as August 28, 2003. The reason? MLB decided it wasn't worth the $50,000.
Total MLB takeover is a real possibility, but I want to spend a moment talking about one not quite as publicly discussed: a sale in bankruptcy. A factor leading to bankruptcy, of course, is insolvency. I have no idea if the McCourt Enterprise's debts exceed its assets. But we have strong evidence that the Dodgers were very near the point of being unable to pay bills as they came due. MLB's intervention might keep the McCourt regime from having to declare bankruptcy, but there may come a point at which availing himself of bankruptcy protections and the opportunity to reorganize his finances might be attractive to Frank from a business standpoint.
All this, of course, doesn't really contemplate Jamie. While she's outwardly positive about Baseball's actions, she might be seeing a 9-figure payday vanish into thin air. You can count on her aggressively investigating how Frank has been handling Dodgers finances over the last several years, because there just might not be very much equity in the club once all that is to happen comes to pass.
Today was one of the most meaningful, important days in the McCourt divorce saga and for the future of the Los Angeles Dodgers. But, like so many other meaningful, important days in this mess, we're left with as many questions as answers. And, unfortunately, what has been practically our motto around these parts still holds: we're a long way from done.


  1. Forgive me, I have lots of amateur questions here:

    Can someone properly explain to me why it is legal for an owner to take equity out of a business and use it as person income, but if an employee of the the business does the same thing it is considered embezzlement?

    To me the two finances should be completely separate; is this not the case?

    I understand an owner can name his own salary, but if he is on the payroll don't embezzlement rules still apply?

    Also, doesn't an owner have a legal obligation to try and maintain the business for the sake of its employees instead of intentionality running it into the ground?


  2. Um, because employees don't "own" any equity in the business to begin with?

  3. Jamie McCourt isn’t going to see a nine figure payout vanished into thin air. She wasn’t going to get receive a nine figure payout in the first place. Both Frank and Jamie are facing huge tax bills, mainly capital gains taxes if the Dodgers are sold, besides all the loan obligations from the Dodgers and the residential property mortgages they owe.

    After all said and done, Jamie is lucky to get a seven figure payout, and it will probably be in the low seven figures. Both McCourts also have to be dealing with the IRS, which may not be a walk in the park..

  4. Josh, I don’t think Selig’s actions leave more questions than answers. The handwriting was on the wall for Frank McCourt ever since his trip to New York to the MLB offices to deal with the Dodgers Finances, and Selig’s rejection of the Fox’s loan to the Dodgers..

    Selig is forcing Frank out of major league baseball. Selig is forcing Frank McCourt to sell the Dodgers. Selig could had easily done these actions against the Wilpons and the Mets, given they may have even more financial turmoil than the Dodgers. However, Fred Wilpon is a personal friend of Bud Selig, and hasn’t circumvented a direct order from him as Frank McCourt has done by getting a loan from Fox, with little or no collateral, (ie using a future hypothetical settlement from Bingham McCutchen as the collateral)

    The end of the McCourt era as owner of the Dodgers is coming to a close. Frank only chance is rallying a majority of other MLB team owners to override the Commissioner’s office, which likely isn’t going to happened, given many like Wilpon are friends of Selig, or were handpicked to own teams like the Red Sox management and the Cubs owners.

    Selig’s actions speak loudly, the Commissioner is fed up with the McCourt’s ownership, and is forcing the Dodgers to be sold in the near future.

  5. Capital gains tax = 15% plus state taxes, not likely to eat up so great a portion of a nine figure gain

  6. @Brad B:
    I own a construction company. I have 20 employees. I want my construction company to add a room to my house. While my employees work on my house, they are not working to make me money. This is not embezzlement. This is owning a business because it's my company and I can do with it as I please.

    Or, I own a business and receive a 100K salary. However, I have to pay my son's college education so I take money out of the business to pay for it. This, too, is not embezzlement because it's my money.

  7. As a first hand observer in the California divorce process, the determination of both sides to squeeze blood out of a turnip was destined to failure, which may have been the revenge contemplated by Jamie in this "Golden Goose" fairytale. The McCourt divorce saga makes Tom Wolf's Vampires of the Vanities look like a childrens book. Our would-be Republican candidate could be next in this Grimms saga, but his fairytale might be more about "The Emperor Has No Clothes".
    Kudo's Josh

  8. Anon--I don't think Josh is saying that there are questions about whether McCourt will be able to hold onto the Dodgers, but questions about what happens in the immediate future--who becomes the trustee, what Frank might do to resist Selig's move, what effect this might have on the team itself in terms of ability to make trades, etc. Those certainly are big question marks.

  9. The MLB CBA Debt Formula has officially been violated by Frankie’s loan from Fox under either Definition (1) under GAAP or (2) collateralized by Team Assets unless Fox is an idiot and they provided an unsecured loan. The Met’s Debt does not yet rise to either definition and therefore Bud has not acted against them yet. In addition the Mets are looking for an Equity investor which Frank will never do. However if I was Frank I would join with Jamie and file an emergency action in California Family Law court to injunct MLB from transferring a marital asset in violation of California Law during the time that it is subject to the jurisdiction of the Family Law court.

  10. My own view is that this is an action designed to protect the Wilpons from the results of an inevitable sale of the Mets. My full explanation can be found here, but the bottom line is that Frank was directly threatening the valuations of every other club in baseball, and this is how Selig lined up the necessary votes to take this step.

  11. Bud & Fred's friendship with-standing. McCourt has never been interested in playing ball w/the MLB boys, his interests lie in sucking every last penny out of the operations he has leveraged into extinction. For the sake of the sport, besides the legacy of the Dodgers, McCourt can not be allowed to continue to run the franchise and Selig knows this.

  12. In response to Dean:

    I don’t think McCourt was interested in running the Dodgers organization in a ditch. However, given his history of not really building anything major in Boston or the East Coast. Gaining power by suing, and he tended to think he knew better than everyone else. McCourt just had no clue how to run a major business, or something as complex and nuance as a Major League Baseball team.

    Jamie and Frank couldn’t control their spending when they lived in Boston. They had a major credit line out from their South Boston Parking lots, that was something like $50 million taken out , (I don’t know if Fox knew this or not when they took it over)

    They continue to spend irresponsible and neurotically when they moved to Los Angeles, thinking they could pay all it back once they set up their own Dodgers cable sports channel akin to YES and NESN..

    They put money into the franchise, however that money was borrowed, and they made many bad business decisions, from taking out a $60 million or more loan against the Dodger Stadium parking lots to pay for their neurotic and expensive lifestyle, (What is with buying adjoining properties?) to getting way over their head, with their mortgages and monthly expenses.

    I think the difference between the McCourts and the Wilpons is that the Mets have debt, but they have stronger revenue streams with Sportsnet New York, a serious lawsuit that will probably be settled with annual payouts, and probably an easier transfer of ownership if the team is sold, (The Wilpons probably have to sell the Mets)

    Frank is basically on his last leg before Selig took over. He was getting loans to meet basic short term needs with no collateral, and big questions if he was going to go in default in May or June, because even Fox would stop giving him loans... (especially the collateral was the alleged payout from Bingham McCutchen)


    Take a look at Diane Pucin's article in today's L A Times. The essence of the article is that the other owners were worried that Frank had become Fox's bitch -- that his weak financial position gave Fox the opportunity to pick up the tv rights for the Dodger's at a bargain price.

    Forget about Selig's protestations that he's looking out for the fans or for the image of baseball. The bottom line is the bottom line: Frank's problems were threatening and devaluing the worth of the Dodgers for other owners.

  14. Lets put aside our feelings on Frank for a second. This is just another indication of how Selig does business which is completely arbitrary. He is a reactionary guy with no integrity in his approach. He is setting LA up here with a long lawsuit. Countless reports have shown he is not even willing to meet with McCourt to work on a compromise that might end this thing sooner. Meanwhile he endorses an owner in New York that was allegedly in bed with the worse thief of our time...Madoff, who is in worse debt then even Frank (with no looming Fox deal to bail him out) and with a straight face says the Mets are different. For years he has turned a blind eye to the small market teams that take revenue sharing and line their own pockets with it. I am all for taking a stand but there should at least be some consistency in that stand. He should either clean up all owners (not likely as they pay his salary) or he should stay the heck out of one city's affairs. People are naive if they think this move will mean a quicker resolution to LA's problems.

  15. in response to Anon on 10:18 am

    The Wilpons are probably in worst financial shape or have some serious obligations than Frank McCourt. However, they have better revenue potentials with Sports Net, they haven’t securitized all revenue stream as Frank McCourt has with ticket sales, or the parking lots..

    On the Madoff Lawsuit, they will settle with Mr. Picard and the US Gov’t, with some sort of installments. There is no point in trying to beat it, given clawback lawsuits are very difficult to win.

    Short term loans as the Wilpons was getting from MLB or McCourt has done with Fox, shows they are having problems with the banks for any sort of credit lines or any commercial paper (ie short term loans with no collateral) The difference is that the Wilpons haven’t exhausted their collateral for long term loans. Frank McCourt has pretty much exhausted all his collateral, and is pretty much living on borrowed time. He is trying to get loans to meet very basic payments. It sounds like Frank is closer to bankruptcy right now than the Wilpons, even though the Wilpons may have a bigger bankruptcy if they don’t figure out how to deal with some huge problems with their equity with the Mets, and their dealings with the Banks.

    The move that MLB did against McCourt and the Dodgers was necessary before the Dodgers couldn’t pay their bills or their payroll. It should had been done sooner than later. They also had to take control to sell the team before a long term broadcasting deal is in place, which would hamper the list of buyers, and the value of the team...

    The Mets will probably be sold to, because there are not many buyers of a baseball team, who want a part of ownership, with questions of equity in the club, and no control over direction.

  16. Your articles are always interesting and understandable. Thank you!