Thursday, October 13, 2011

Could Frank McCourt lose everything?

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Short answer: yes. Bill Shaikin and the Times put together an excellent article today detailing the potential for Frank McCourt to end up losing money on his (and Jamie's?) purchase of the Dodgers. Let's cut to the chase:
McCourt's intention in putting the Dodgers into bankruptcy is to keep the team, not to sell it. However, the debt load and tax liability have increased to the point where the $150-million loan assumed in bankruptcy funding could wipe out much — if not all — of whatever profit he would make if he is ordered to sell the team.
[...]
In case of a sale, McCourt would have to pay off taxes as well as debts. In July, McCourt told the divorce court that "a sale would result in … the incurrence of between $80 million and $200 million in tax liabilities."
That tax bill could rise with penalties. In a divorce court filing in August, Frank McCourt's accountant noted that the 2006, 2007 and 2008 tax returns for Frank and Jamie McCourt "as well as certain entities that allocate income to them" are currently being audited "by federal and state taxing authorities," with any liability yet to be determined.
So what's behind that ticking tax time bomb? Basically, Frank McCourt has held substantial loss carryforwards dating back to those halcyon parking lot days, and that bill--which I have been assured is over $100 million--would come due upon sale of the Dodgers. Add that to the team's debt load, and all the sudden Frank must sell the club for damn near a billion dollars to make a profit.


And, of course, there's the very real chance that whatever equity remaining in the Dodgers will have to be split with Jamie. Granted, just about every single person who reads this site would kill to even be only "very wealthy," so Frank's potential descent from "obscenely wealthy" won't be the cause of much sympathy.


But what happens if Frank can't satisfy the debt and tax obligations following a potential sale? Both Frank's most admirable and most troublesome trait is his perseverance, or perhaps stubbornness. He's made a pretty fabulous life operating on a "damn the torpedoes" basis, but this might be the most accurately aimed one yet. The last few years have seen the fall of numerous personal financial empires. Is the owner of one of the most storied franchises in American sports next?


As is often the case, it's probably wise to temper expectations of such an extreme outcome. After all, baseball desperately wants Frank out of the game. You have to figure that, should Frank become convinced he can't win the right to sell off the club's TV rights, he'd finally go to baseball and try to cut a deal.


That'd be the prudent thing to do. Right?
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116 comments:

  1. The word "prudent" and the name "McCourt" do not belong on the same page.

    ReplyDelete
  2. I think you misunderstand the loss carryforward. That is a loss that has not yet offset taxes and would allow $100mm of gain to be potentially sheltered assuming the character of the income is appropriate

    ReplyDelete
    Replies
    1. we cannot know whats going to happen so you must have a insurances and one of that you should have a online travel insurance.

      Delete
  3. Anon 2 - very well said.

    JF Might want to rewrite paragraph 2.

    Between the unreasonable compensation, the violation of IRC 482 transfer pricing, the possible basis boost strategy, and the high level of distributions that reduce basis yes Frank and Jamie have a lot of income tax, interest and penalty exposure. Maybe Bud was the whistleblower!!

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  4. Clearly, Frank is playing very high stakes poker here. This is totally in character.

    I'm sure he expects that MLB and Jamie are unwilling to see the Dodgers bankrupt. He is likely right about Jamie. I think Selig hates Frank enough that the losing of the Dodgers as an MLB franchise is worth it.

    Perhaps anticipated Dodger problems are part of why Selig has been allowing the "Los Angeles Angels of Anaheim" to encroach.

    IMHO Selig is becoming as despicable in this situation as Frank and Jamie.

    BTW .. that loss carry-forward is an asset, not a liability .. it will reduce the taxes owed, not increase them.

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  5. I think the comment regarding "loss carryforward" is a really a "deferred tax liability". A loss carryforward is a deferred tax asset.

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  6. I'm sure he expects that MLB and Jamie are unwilling to see the Dodgers bankrupt.

    Um, too late.

    I would like to hear Joshua's opinion of the poster named Anthony Forkush, who repeatedly shows up at the end of all these McCourt stories lately, and spins a yarn of McCourt somehow retaining ownership of the Dodgers. I don't see how it happens, but then, I don't know the law, either.

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  7. This comment has been removed by the author.

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  8. From day one I have not balked from my prediction that Frank will retain control of the ballclub. This has absolutely nothing to do with any loyalty, fealty, devotion or worship of this man. I have been predicting his retention as owner because I have been deeply involved and almost obsessed with these legal proceedings, including attending large swaths of the divorce trial. To be clear, I still strongly assert that, at the end of the day, he will remain owner of the Los Angeles Dodgers, or should I say SOLE owner of the Los Angeles Dodgers, which is clearly, perhaps for the first time, literally his title after today's divorce settlement. I cannot overestimate how critical this capitulation by Jamie is. It removes a massive obstacle to the Bankruptcy case, creates a unified front with no wedge, and places Frank McCourt squarely in the center of his ownership. It allows for rapprochement between the former spouses, allowing for openness to each other's legal strategies and briefs, not to mention the gargantuan legal minds of Jamie's team. This decision, however, did not come randomly, nor out of the blue, as it were. Those following the Delaware case closely will be reminded that Judge Gross quietly and secretly ordered the involvement of a mediator. This is no accident. As the hearing date inexorably moves closer, the possibility of Bud Selig testifying under oath becomes greater. I predict he will never allow this to happen and we will never see the actual case occur. Quietly and without fanfare, all sides will settle the matter before All Hallows Eve. Frank will retain control of the team, Judge Gross will approve the $3 billion FOX contract with Selig agreeing, claiming it is in "the best interests of Baseball" for this to end. These are my predictions based on failure of the press to properly guide and educate us as to what may or may not happen. If they don't know, they must say such. If not, then they will show themselves untenable after the dust settles. These opinions are extrapolated solely from my reading of the tea leaves and desire to see this end. I have no vested interest whatsoever in the outcome other than reporting my own ideas and beliefs as a lay person teaching myself as I go.

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  9. In response to Tony...

    First, the Fox TV contract that was proposed in May/June of this year was not $3 billion, it was more like $1.7 billion, with a bunch of riders, a joint venture company that FOX Sports and the Dodgers would run, and could or could not give Frank some more value. It is a bad deal, both for the major sports team in the second largest media market in the US, and for MLB in general.

    Second, Bankruptcy Judges are going to focus on first on the creditors. Can they be paid? if so, how. What is coming due now and in the future. Federal Bankruptcy Judges aren’t lackeys for debtor. From the rulings already made, the Bankruptcy Judge has kept the focus on current status at hand instead of making widening the case to include all 29 other MLB teams financing.

    Selig wants McCourt out of MLB baseball. He has the power to strip McCourt of the Dodgers. McCourt’s problems didn’t start after the divorce with Selig and MLB, it started from January 2004. The McCourts were firing people left and right, and through their years with the Dodgers they had a huge rate of turnover in front office positions.

    The press has been pretty subdued about some of the outrageous crap that the McCourts have done to buy the Dodgers and run the team. The media has underestimated the loans that McCourts took out against the Dodgers equity by around $80 million. (It was estimated around $80 to $100 million, now the best figure is that the McCourts looted around $180 million dollars out of the Dodgers’ equity for the past seven years)

    The media has been very subdued by the very loans that the McCourts took out to purchase the club, some of their private placement loans that have some $25 million in interest payments annually, besides the reports that the McCourts and the Dodgers have been turned down for more loans..

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  10. Besides the divorce settlement is stipulated that Frank has to pay Jamie by Spring 2012 all of the $130 million, or else the Dodgers have to be put up for sale. The Divorce settlement just buys more time for Frank, but it also puts more nails in the coffin on his ownership of the Dodgers. The Bankruptcy Judge could order the sale, Selig can order the sale of the Dodgers besides stripping McCourt of ownership, and placing a trustee in charge of day to day operations, and now Jamie can force a sale if she is not paid in full in four to five months.

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  11. Frank's only hope is to have the Judge rule the existing contract with Fox to be an executory contract 11 U.S.C. Sec. 365, null and void not in the best interest of the creditors, and immediately call for a tv deal auction to be signed prior to the day that Jamie is due her 130 mil. A nonrefundable, fully taxable, signing bonus of $300 mil will due the trick. If the restructured Dodger contracts provide the level of income for the Dodgers to pass the MLB CBA DEBY-EBITDA formula then Bud can do nothing. The idea of a minority partner is moronic unless Frank gives them exclusive rights to all development projects for 15-20 years.
    Can Frank get all of this done by opening day?

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  12. The figures related to the FOX contract have been debatable since they were first announced, with MLB claiming a diminution of the total value and McCourt asserting the higher value. My understanding is that it is a bad deal for everyone involved as it "devalues the media rights" for the market and the league as future revenue value increase over the years with this contract locking in the liquid. Agreed as to the creditors being the priority. However, a TV auction settles those concerns and allows for restructuring, and while Gross is not Frank's lackey, as it were, the presumption still remains on Selig to convince the judge why Frank should NOT be allowed to restructure. This is where the problems for Selig, however, become quite real as he prepares to take the stand, where Frank's legal team will pepper him with questions related to the other teams and the debt service crisis. While not technically allowable, this will no doubt cause more than a bit of consternation from Bud with the dangle of perjury above his dome. The idea that Selig will unilaterally and arbitrarily remove the Dodgers from the league is preposterous, and is nothing more than desperation to avoid the TV auction. It is so absurd that it is almost not worth discussion. MLB removing one of its key franchises with three million built in attendance and the largest brand name draw on the road in the game, not to mention merchandising and food service and advertising revenue. Absolutely ludicrous. The most eye widening comment, however, Anonymous, is the idea that the press, which has been nothing but pure press proxy for MLB, has been restrained or "subdued" toward the McCourts. Huh? I can count and send you the articles that have been on one hand. The $180 Million figure is disputed vehemently by Frank's team as well.

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  13. This is a crazy situation. When I went through my own divorce my attorney helped me a lot but it was still tough. There are a lot of problems in life for everyone, even for the rich.

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  14. This is an interesting read, though not fully understandable by the 99% of us who are not attorneys.

    This much I do know, both parties involved in this are covered with an oleaginous slick that has created a stench not likely to clear for years. Selig's culpability is unequivocal - he let the rats in the door. The McCourts were obviously underfunded from the beginning and didn't have a clue how to manage the operations of a baseball team. They have been and remain an embarrassment to all of baseball. Why Frank doesn't just sell remains a mystery to me, but then, lawsuits and questionable dealings are his history. Maybe all owners are this unctuous, but at least their laundry isn't flying at full mast for all to see.

    The real losers in all of this are the Dodger fans. I have been a fan since '59, but am done with the Dodgers as long as Frank McCourt remains owner.

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  15. I wonder if Met fans are saying the same thing about Fred Wilpon, whose actions are far worse than McCourts, in my opinion, for knowingly involving himself with Madoff.

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  16. The $300 million upfront might have been good a few months ago, but there's no way now that the judge allows this T.V. auction with Fox threatening to sue for damages. Those damages will be more than enough to wipe out the sure thought that the creditors are guaranteed to be paid.

    So let's recap:

    Fox lawsuit + $150 million loan suppied by MLB + Jamie's $130 million + Attorney's fees + creditors + possible Brian Stow lawsuit = too much owed.

    No way Frank gets his auction with that much debt. Of course I could be wrong but he'll need an upfront payment of $750 million. Good luck with that.

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  17. If the bankruptcy judge agrees, I as all my friends will be heartbroken. I have been a Dodger fan since 75 and bleed Dodger Blue. But if he does remain the owner of the franchise, I will be done with baseball. I can not give one more penny to that money hungry b@stard. Wilpon is a different animal all together. He actually puts money into scouting, development as well as signing big time free agents. Take out deferred payments and we had a 80 million dollar payroll, the least spent of drafting and developing of talent in all the major leagues. The reason why we are still afloat is our scouting, especially considering how Frank has cut that back to the point that every miss is magnified. He does not deserve our beloved Dodgers, he never did. I wish he would just let us all enjoy the game we love. Now he and his x wife know that the only way to get a penny is to sell the broadcast rights. That will scr@w the dodgers for the next thirty years. So those of you who cheer on Franky need to take a look in the mirror. He has never been loyal to anyone and will not start now. Fox gave him life, you see how he repays them. His wife stood by his side and did all of this to shelter what they had agaist creditors, he tried to get it all. Ask any former biz associates, he is despised. I wish us all luck that this ends soon. God bless the Dodgers and curse the McCourts

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  18. In response to Tony..

    Okay, Tony, if the $180 million dollar mark is wrong, even though MLB put in a legal brief for the Bankruptcy Case, what is the true figure that the McCourts took out in loans against the Dodgers Value to fund their lifestyle? The loans on the parking lots were alone around $60-75 million..

    Even if the loans were less than $100 million, (and they were not) the McCourts couldn’t control their spending.

    ReplyDelete
  19. I have personal knowledge of how the McCourt's treat people. A close family member worked for them. The work he and his partner did was not perfect. It was however substantially compliant with what a reasonable employee would have done. An honorable person would have paid them 80-90% of what they asked for while gently pointing out their mistakes. The McCourt's refused to pay them while pointing out their mistakes with a magnifying glass. They wanted my family member and his partner to destroy all the work they had done and start over, providing the McCourt's with a perfect work product. They of course were supposed to do that at their own expense. My family member and his partner walked off the job instead. Because my family member did not get paid for at least six months of work he suffered severe financial hardship. I have had to subsequently provide him with significant financial help. So personally I would be delighted if Frankie and Jamie lost everything. The greedy arrogant pigs deserve it.

    ReplyDelete
  20. The official creditors' committee asked U.S. Bankruptcy Judge Kevin Gross to deny the Dodgers their proposed television rights auction, arguing that the prospect of a lawsuit from Fox Sports and opposition from Major League Baseball could jeopardize the money available to repay creditors.

    "The committee cannot gamble the 100% recoveries of its constituents on such a risky proposition," lawyers for the committee wrote in a court filing.

    Instead, the committee said, "A prompt sale of the team is the most prudent course of action."

    ReplyDelete
  21. It's all about the creditors. They are the highest priority in bankruptcy, and as of today even they are adamantly against the media rights auction. I guess they figured out the math just doesn't add up. There's too much debt and uncertainty to a point where they can't be guaranteed to be paid should this media auction happen.

    To see the judge go against the one group he must prioritize and allow the media auction is VERY unlikely.

    ReplyDelete
  22. With the creditors now on the side of MLB and Fox Sports, all Bud Selig and his attorneys have to do next week is focus on the numbers. From there it'll be easy for the judge to understand why Selig denied the media rights extension and why the proposed auction is a bad idea for the creditors and everyone involved.

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  23. Tony Forkush said...

    From day one I have not balked from my prediction that Frank will retain control of the ballclub. This has absolutely nothing to do with any loyalty, fealty, devotion or worship of this man. I have been predicting his retention as owner because I have been deeply involved and almost obsessed with these legal proceedings. Are You still sure Tony?

    ReplyDelete
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  29. The Dodgers case really shows how divorce can lead to "burn everything to the ground"

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