An Avid Baseball Fan — and Veteran Delaware
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FEATURE Jeffrey M. Schlerf At Bat in Bankruptcy Court An avid baseball fan I have seen a full array of issues put before the Delaware Bankruptcy Judges. Companies of various shapes, sizes and notoriety including Marvel Enter- — and veteran tainment,1 Napster, Zenith, Smith Corona, Montgomery Ward, Washing- Delaware bankruptcy ton Mutual, Tribune, TWA, Continental Airlines, Phoenix Steel, Tower Records and Solyndra have filed here. However, as a sports fan, and most lawyer — shares particularly a devout follower of Major League Baseball and the Philadel- phia Phillies, there has not been a case more fascinating than the LA Dodg- insights on the battle ers’ bankruptcy filing during the 2011 baseball season. over control of hortly after that filing, I was re- That first hearing was a precursor the LA Dodgers. tained as Delaware counsel to the of things to come. It was important Commissioner of Baseball, Bud for the Dodgers to immediately ob- S Selig. Our legal team was imme- tain “debtor-in-possession” financing. diately preparing for a court hearing to The team was low on liquidity and had object to proposed bankruptcy financ- various payroll obligations coming due ing negotiated by the Dodgers’ belea- at the time it filed, including amounts guered owner, Frank McCourt. Soon I due to former players including Manny was welcoming top MLB executives at Ramirez.2 At the hearing the team did our offices prior to that hearing. Dur- obtain interim approval for $60 million ing breaks at the hearing I listened as in financing from Highbridge, a Gold- Mr. Selig’s top lieutenants called him to man Sachs affiliate. discuss strategy. MLB ended up not pressing its ob- 22 DELAWARE LAWYER WINTER 2012/2013 jection but fully reserved its rights re- specific issues with McCourt relating garding final approval. The proceeding to his 2004 acquisition of the team, was a warm-up for the final hearing on By most accounts undisclosed transactions that followed approval of $150 million in total financ- involving team assets, and deficiencies ing several weeks later. Before delving the team’s situation in team operations. The League had an into that fight, some background on overriding concern that McCourt ap- McCourt’s deteriorating relationship began to unravel when parently did not have any independent with the League will be helpful. source of wealth or income other than The Dodgers were a proud franchise. McCourt and his wife the Dodgers and the team’s related real As recently as the 2008 and 2009 sea- estate assets. sons, the team experienced success, Jamie separated after MLB believed that during his tenure reaching the National League Cham- as owner, McCourt had “siphoned off” pionship Series both seasons (but los- the 2009 season more than $180 million in direct and ing to my beloved Phillies!). By most indirect cash distributions from team accounts the team’s situation began to and subsequently revenues.6 The League was concerned unravel when McCourt and his wife about the cumulative effect of that. Jamie separated after the 2009 season commenced divorce Other major areas of concern included and subsequently commenced divorce the Club’s ability to fund planned capi- proceedings. proceedings. tal expenditures, including $360 mil- As the McCourts’ marriage unrav- lion in planned renovations of Dodger eled, so did the Dodgers’ performance, Stadium.7 as they failed to make the playoffs the In April 2011, the first month of the ing revenues available for 2011. Disputes following season. The divorce proceed- new season, MLB concluded its initial with the League regarding the team’s ing languished. The media frenzy in LA investigation and announced the ap- media rights would continue. worsened over time. Stories came out pointment of a monitor, Ambassador J. MLB also asserted that during that about the McCourts’ lavish lifestyle and Thomas Schieffer. The League viewed offseason McCourt caused the Dodgers an alleged affair involving Jamie that led the Club’s situation as serious. Fan and to pay rent four months in advance to an to the divorce. But what really sensa- media scrutiny of team ownership was entity of his which owned the stadium tionalized the divorce was the revelation at its peak, while the team’s on-the-field parking lots in order to fund McCourt’s that Jamie was claiming she owned 50% performance and attendance were in marital support obligations. MLB be- of the team. More on that later, but the further decline. lieved that McCourt personally had cumulative effect of all this was instabil- Notwithstanding the Monitor’s relatively modest personal assets outside ity for the team. presence at team headquarters, he was of his Dodgers ownership in relation to As the on- and off-the-field distrac- excluded from critical decisions. First, his personal expenses and marital obli- tions from the divorce continued into a deal was announced in which a Mc- 3 the offseason after 2010, the team’s gations. Purportedly his “only” source Court entity would receive a substantial finances worsened. What surfaced in of income was $5 million per year ob- $385-million advance in exchange for press reports was a strategy by McCourt tained through lease payments made by Fox’s broadcasting rights being extend- to address that issue. One potential the Dodgers. ed for 17 years. The Commissioner’s source of liquidity was leveraging an There was not much optimism Office reviewed this new deal, and on increasingly valuable asset of profes- among the Dodgers faithful as the 2011 June 20, denied approval.8 sional sports franchises – so-called “me- season got underway, and matters only Additionally, while negotiations dia rights.” The Dodgers had negotia- worsened. On Opening Day at Dodg- with Fox took place and as the Dodgers tions with Fox Sports Net West2, LLC ers Stadium, Giants fan Brian Stow was were waiting for MLB’s decision, unbe- (“Fox”), the regional television network brutally attacked by Dodgers fans in knownst to the Monitor the team was broadcasting most of its games. The the stadium parking lot. Very negative making preparations for a momentous Dodgers would agree to an amendment publicity followed this incident. The back-up plan – a chapter 11 filing – and of their existing agreement whereby Fox team was accused of having lax security McCourt was negotiating bankruptcy would advance $25 million in fees pay- and poor lighting in their parking lots.4 financing.9 The team did file in Dela- able for the 2011 season. Criticism of McCourt as communicated ware one week after the League denied MLB had concerns with this transac- in the media reached a new low.5 approval, becoming the second team in tion (besides that it had not been sub- Relations with the League were a year to file for chapter 11 (the Texas mitted for its approval). The advance reaching a tipping point at this time. Rangers being the other). represented a large share of the Dodg- MLB had already commenced an in- With this backdrop, it would be an ers’ telecast rights fees for the 2011 sea- vestigation of the Dodgers’ manage- understatement to say relations were son (greater than 70%), thereby reduc- ment. In early 2011, MLB had raised strained between McCourt and the WINTER 2012/2013 DELAWARE LAWYER 23 FEATURE League as the battle over final approval approval process for the sale was not of bankruptcy financing ensued. Mc- contentious. Court had a choice of two lenders. MLB MLB argued that McCourt, however, funded the pur- was willing to provide financing as an chase by incurring a significant amount alternative to Highbridge, McCourt’s McCourt could not use of debt, much of it borne by the team preferred lender. MLB’s terms were itself. MLB anticipated this debt load clearly more favorable.10 The League bankruptcy to avoid would be reduced over time, which argued the Dodgers would not be prop- did not happen. Additionally, after the erly exercising business judgment by re- the MLB Constitution sale, assets were transferred away from fusing to accept their better offer. The the team to affiliates of McCourt. One Dodgers argued the League was seeking and various other example was the Dodgers’ parking lots control. Expedited discovery followed. being transferred to a McCourt entity A one-day trial was held before Chief contractual obligations and then leased back. 17 Another exam- Judge Kevin Gross. While generally ap- ple was the rights to sales of Dodgers proval of debtor financing is subject to entered into when tickets being transferred to a McCourt a business judgment standard, MLB ar- entity named Dodgers Tickets LLC. gued that the Dodgers were not entitled buying the team MLB contended that these transactions to that protection. Since McCourt was had not been disclosed to the league at personally subject to a $5-million fee – the time and required its approval. not previously disclosed to the Court – in 2004. These issues were percolating in the payable to Highbridge if that financing years following McCourt’s acquisition was not approved, his personal interests of the team, but as described above his “Debtors not only failed to attempt to rather than the debtor’s best interests relationship with the League started obtain unsecured financing [as required were driving the decision. MLB pointed unraveling during his divorce from his by statute], they refused to engage out that the Dodgers were seeking ap- wife Jamie.18 Things got even more Baseball in negotiations because, they proval of financing on clearly less favor- interesting when it was learned Jamie explained, Baseball has been hostile to able terms and were refusing to negoti- claimed a 50% ownership interest in the Debtors.”15 ate with the League.