Tuesday, May 10, 2011

Could Frank McCourt file bankruptcy?

Bill Shaikin has an interesting, informative piece in the Times today. The topic: Frank McCourt's motives and methods for potentially putting the Dodgers into bankruptcy. Some key notes from a loaded article:
Bankruptcy could provide McCourt with the authority and funding to remain in control of the Dodgers, at least in the short term, experts said.
Alan Gover, an attorney with White and Case, the firm that represented the incoming owners of the Texas Rangers through that club's bankruptcy process last year, said, "Behind any bankruptcy filing by Mr. McCourt would be a strategy to maintain control of the club."

Bankruptcy courts need not yield to MLB rules. One high-ranking major league executive, speaking on condition of anonymity because of the potential for litigation, expressed surprise McCourt did not file for protection as soon as Selig announced his intervention.

McCourt's argument to a bankruptcy judge would be the same one he has made to MLB executives and in media interviews: The Dodgers' financial problems would be resolved with the approval of a long-term broadcast contract with Fox.

That contract has been with Selig for five weeks, even with the Dodgers in danger of missing payroll. If McCourt were able to convince the bankruptcy judge that he could repay his creditors if the Fox contract were approved, the judge could grant approval over Selig's objections.

I spent much of my day talking to experts in corporate and bankruptcy law, because this situation raises issues above my pay grade. I approached the topic by asking questions both to myself, to guide my own research and explore what I already know, and to those with decades of experience in the field. Here are some of the main questions raised by the possibility of a bankruptcy in this matter.

1. Why file bankruptcy?

The immediate benefit of filing bankruptcy is an automatic stay barring all creditor attempts--active or passive--to coerce the debtor into paying debts. If Frank runs out of cash and can't pay a bank that loaned him money, for instance, the stay would prevent that bank from seizing the collateral Frank put up to secure the loan.

As Bill notes, filing for bankruptcy might also be Frank's best method to force baseball to accept his proposed Fox TV deal. In a Chapter 11 bankruptcy, Frank would essentially propose a plan to reorganize Dodgers operations primarily by using the massive Fox pact to get back on solid ground. The creditors would be put into groups and asked to vote on the deal. If enough creditors voted to approve the deal--and that, in itself, isn't a simple process--the bankruptcy court might have the authority to approve the deal despite baseball's objection.

Now, there are all sorts of problems with that. Baseball might immediately seize all Dodgers operations the moment Frank files. Baseball might itself be a creditor of the club, and use that status to block the plan's approval. Baseball might lean on the Dodgers' various creditors to reject the plan. And baseball would certainly argue that, under its rules, it has the power to keep Frank from selling the club's TV rights. These would all be fights, and there would be more. For now, I'm just trying to get information out there.

2. What would a bankruptcy mean for Jamie?

From my vantage point, nothing good. In a bankruptcy commenced after the filing of a divorce but before the division of the marital estate's assets, all community property of the marriage is part of either party's potential bankruptcy estate. Put in English: even if Jamie, as most expect, wins a determination that the Dodgers are indeed community property, creditors of the Dodgers--and possibly Frank--would get paid before Jamie sees a dime from the division of community property.

This means the team could be sold and none of the proceeds would be due Jamie until each and every creditor has had its fill. Remember, Judge Gordon has not even conclusively ruled the Dodgers to be community property yet; all he's really done is invalidate the MPA. And Jamie would not become a creditor of Frank or the Dodgers until entry of a judgment declaring she's entitled to half the value of the assets. Basically, Jamie's options are to either prevent Frank from filing for bankruptcy or to have a filing dismissed quickly.

Jamie, according to one of Shaikin's sources, might approve a bankruptcy plan that contemplated a quick sale at auction to the highest bidder. However, Frank's motivations in pursuing bankruptcy protection would be, according to another of Shaikin's sources, focused on the fight to keep control of the Dodgers through the execution of a long-term TV rights deal. Frank has not expressed a willingness to sell the club unless no other options remain. And he's shown no qualms about scorching the earth in pursuit of his goals.

3. Would Jamie be able to stop it if she tried?

One key consideration is the actual identity of the person or entity filing for bankruptcy. There is very little Jamie could do to prevent Frank from filing bankruptcy in his personal capacity. That's unlikely, though, as it would trigger all sorts of bad things for him, both from creditors and baseball. It's far more reasonable to expect that if there is a bankruptcy in this situation, it will be filed by one or more of the entities making up the Dodgers Enterprise.

If you scroll down this page (or click here), you'll see the Dodgers organization flow chart. Everything under TMBLP, including the companies that own the Dodgers and Dodger Stadium, is a single-member limited liability entity. The process for each of those entities to file bankruptcy protection depends on the way it was set up, but it is extraordinarily likely that Frank McCourt has himself the power, on paper, to send any of those entities into bankruptcy.

Jamie has spent the last 18 months, and will perhaps spend the next 18, contending that she is a half-owner of the Dodgers Enterprise, and she would argue here that Frank does not have the unilateral authority to file bankruptcy on behalf of, say, the Dodgers. However, to block such a filing or prevent it from moving forward, she would either need to convince the state court to issue an emergency declaration that she has decision-making power, or the bankruptcy court to dismiss the filing as made in bad faith or so prejudicial to her potential rights as to be inequitable. None of these are easy.

Long story short: Frank has, on paper, the authority to file bankruptcy on the Dodgers' behalf. The long-term effect of a Dodgers bankruptcy seems unfavorable to Jamie. And her avenues to prevent that harm from coming to pass are not especially promising.

4. Can you wrap this up?

Working on it. Tough crowd.

Presuming he is unable to make the May 31 payroll, as has been reported, Frank McCourt may look to seek bankruptcy protection. This might enable him to maintain control of the Dodgers through a sale of the club's TV rights to Fox for nearly two decades and receiving cash and a stake in Prime Ticket in return. If he is unsuccesful in passing that deal through a bankruptcy, Frank would still be in a position to feed the Dodgers Enterprise's creditors before forking over half the couple's net worth to Jamie.

There's a certain symmetry to that: Frank contended all along that Jamie drove the creation of the MPA because she wanted protection from creditors in case the Dodgers failed. Well, here we are, and the Dodgers sure seem to be failing. The club now faces a severe liquidity crisis at least in part because Frank and Jamie McCourt diverted over $100 million to themselves instead of paying down debt or freeing up capital for revenue-generating projects. Having spent the better part of two years breaking up, they might now be in the uncomfortable position of working their way through the club's bankruptcy together.


  1. Josh, terrific summary. One thing though: nothing says that Fox is going to keep its TV rights offer on the table. Fox's relationship with MLB is already strained over the recent Fox loan to McCourt ... things will get more strained if the Fox deal is forced down MLB's throat in a bankruptcy. I don't think Fox will risk its relationship with MLB just to get a nice deal with one team.

    Things are getting complicated, though.

  2. One question I've always had about this debacle is where are funds coming from to pay all of the McCourt's legal fees....both current and going forward? If they're all tapped out why would these high-end lawyers continue representing them?

  3. I believe if you file for bankruptcy, the lawyers jump to the top of the list and are the first ones to be paid.

  4. That "symmetry" has an ironic flavor, because bankruptcy is only an option for Frank BECAUSE Jamie got the MPA invalidated. And almost certainly the creditors will go after the real estate, which the MPA had shielded. I have always known that was a stupid move.

    What she SHOULD have done was leave the MPA intact, walked away with the houses, and gone after Frank for cash/support/alimony based on the lifestyle and his taking away her best option for making a living by publicly firing her.

    The saddest thing about all of this is how much money has and will continue to be frittered away on utterly meaningless things. And yes, I include the lawyers among that!

  5. More interesting than the bankruptcy is the splitting of Dodger assets into the team, the stadium and the parking lots/developable areas. What happens if Bud seizes the team but can't get the stadium and the lots, and the new team owner has to pay exorbitant money to Frank? I'm betting that when Frank said he made $5M per year from sources unrelated to the Dodgers, it was this pot of money (rent on the stadium, parking etc) to which he was referring.

  6. "4. Can you wrap this up?

    Working on it. Tough crowd. "

    Dude, your posts can always be longer - there is no better resource for Dodger fans trying to make sense of these shenanigans. We need to get you paid.

  7. Let's hope the IRS finally catches up to them and if need be, puts them both in jail for tax evasion - that'll take care of this. MLB will grab the team and put it in the hands of someone with the money and smarts to run it right.

  8. I'd be interested to know how many other MLB franchises have their assets split up like the Dodgers do. Are parking lots and stadiums usually divided into separate entities?

  9. Your best article ever!

  10. If Frank declared Bankruptcy, it basically shifts the divorce battle from California Family Law court to Federal Bankruptcy Court. Jamie will be just one of creditors, probably fifth or sixth in line, given those with collateral are probably first in line. Jamie will have a Family Law Judgement in order to get her money...

    The huge risk for Frank if he files for Bankruptcy is that the Judge may order a Chapter 7 bankruptcy instead of a Chapter 11. Another problem with Bankruptcy Court is that Frank can’t stall, nor hide his assets. He has to come clean, besides Jamie has a right to the parking lots and stadium, if Frank tries to hold on to those while selling the Dodgers. It won’t be pretty.

    Why everything is such a mess at this moment is that nothing is resolved. Frank is trying to stall in the divorce, with major league baseball, with financial institutions. When Jamie filed for divorce, he should had negotiated a deal with her, which meant selling the Dodgers at a good price, all done quietly and without much fanfare. Instead he is going down with the ship, trying to get a court judgement to settle if MLB is going out of its way to take the Dodgers away from him.

    Bankruptcy Court is not the place to stall or think one can evade other court judgements like California Family Law Court, or the inevitable, which he has to sell the Dodgers..

  11. You've raised good points here Josh, filing for bankruptcy is the only saving grace left for Frank McCourt to remain in control of the Dodgers. Too bad for Jaime, she should be a able to set a deal with Frank in her favor.

  12. I guess you don't have time to comment even on the latest Shaikin news, Josh. Life must be very busy since you moved to Kansas City. Do you think you'll be able to get back to writing here when the June 22 court dates arrive, or will you have to close down Dodger Divorce? That would be a shame, for your readers.

  13. I long for the days when wearing Dodger Blue meant pride and honor, things that Frank and his old lady ( ex-ol lady ) have no idea about clueless and classless that's them just go back to the Boston rock they both crawled from under. This is all a east coast conspiracy against the left coast. These two destroyed what was once regarded as royalty among pro sports teams. Peace Iam out !

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  15. Very interesting! Thanks for post.

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