LCB_18_2_Art_2_Grow (Do Not Delete) 8/26/2014 6:25 AM INSOLVENT PROFESSIONAL SPORTS TEAMS: A HISTORICAL CASE STUDY by Nathaniel Grow* The U.S. professional sports industry has recently witnessed a series of high-profile bankruptcy proceedings involving teams from both Major League Baseball (“MLB”) and the National Hockey League (“NHL”). In some cases—most notably those involving MLB’s Los Angeles Dodgers and the NHL’s Phoenix Coyotes—these proceedings raised difficult issues regarding the proper balance for bankruptcy courts to strike between the authority of a professional sports league to control the disposition of its financially struggling franchise’s assets and the rights of the debtor team to maximize the value of its property. However, these cases did not mark the first time that a court was called upon to balance the interests of a professional sports league and one of its insolvent teams. Drawing upon original court records and contemporaneous newspaper accounts, this Article documents the history of two long-forgotten disputes in 1915 for the control of a pair of insolvent franchises in the Federal League of Professional Base Ball Clubs (specifically, the Kansas City Packers and the Indianapolis Hoosiers). In the process, the Article contends that despite the passage of time—and the different factual and procedural postures of the respective cases—courts both then and now have adopted similar approaches to managing litigation between professional sports leagues and their insolvent franchises. Moreover, the Article discusses how the history of these 1915 disputes helps explain why U.S. professional sports leagues have traditionally disfavored public franchise ownership. Introduction ........................................................................................ 346 I. The Federal League of Professional Base Ball Clubs ....... 348 II. The Federal League Insolvencies of 1915 ............................. 356 A. The Prelude to Litigation ........................................................... 356 B. Federal Baseball Company of Kansas City, Missouri v. Federal League of Professional Base Ball Clubs ................... 359 Assistant Professor of Legal Studies, Terry College of Business, University of Georgia. This research was supported by a Junior Faculty Research Grant from the Willson Center for Humanities and Arts at the University of Georgia, as well as a Terry-Sanford Research Award from the Terry College of Business. Professor Grow has written a related book documenting the history of the 1922 Supreme Court case of Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922). Baseball on Trial: The Origin of Baseball’s Antitrust Exemption (2014). 345 LCB_18_2_Art_2_Grow (Do Not Delete) 8/26/2014 6:25 AM 346 LEWIS & CLARK LAW REVIEW [Vol. 18:2 C. Pliny W. Bartholomew v. The Federal Base Ball Club of Indianapolis ............................................................................ 372 D. The Eventual Demise of the Federal League ................................. 374 III. Lessons from the Federal League Insolvencies of 1915 ..... 376 A. Common Approaches to Adjudicating Cases Involving Insolvent Professional Sports Teams .......................................................... 376 B. The Potential Risk of Publicly Owned Professional Sports Franchises ................................................................................. 383 Conclusion ............................................................................................. 384 Introduction The U.S. professional sports industry has recently witnessed a series of high-profile bankruptcy proceedings involving teams from both Major League Baseball (“MLB”) and the National Hockey League (“NHL”).1 Over the past five years the Chicago Cubs,2 Texas Rangers,3 and Los An- geles Dodgers of MLB,4 as well as the Phoenix Coyotes5 and Dallas Stars6 of the NHL, have each entered the bankruptcy process, primarily to help facilitate the sale of the franchise to a new ownership group.7 In some cases—most notably the Coyotes and Dodgers proceedings—these bankruptcies were opposed by the teams’ respective league, thus raising difficult issues regarding the proper balance to strike between the au- thority of a professional sports league to control the disposition of its struggling franchises’ assets versus the rights of the debtor team to max- imize the value of its property.8 These recent bankruptcies do not mark the first time that a court was called upon to balance the rights of a professional sports league and an insolvent team. Nearly 100 years ago, a fledgling professional baseball league and two of its franchises engaged in what were, at the time, high profile disputes for control of the teams. Although largely forgotten to- 1 See, e.g., Kevin R. Schulz, Bankruptcy of a Professional Sports Franchise and the Implications for the Franchise and Its Players, 8 DePaul J. Sports L. & Contemp. Probs. 143, 143 (2012) (“A number of professional sports teams have filed for bankruptcy in recent years in connection with the sale or potential sale of the franchise.”). 2 See Richard Sandomir, Bankruptcy Judge Gives O.K. to Sale of the Cubs, N.Y. Times, Sept. 25, 2009, at B12, available at http://www.nytimes.com/2009/09/25/sports/ baseball/25bats.html. 3 In re Texas Rangers Baseball Partners, 431 B.R. 706 (Bankr. N.D. Tex. 2010); In re Texas Rangers Baseball Partners, 434 B.R. 393 (Bankr. N.D. Tex. 2010). 4 In re Los Angeles Dodgers LLC, 457 B.R. 308 (Bankr. D. Del. 2011). 5 In re Dewey Ranch Hockey, LLC, 406 B.R. 30 (Bankr. D. Ariz. 2009); In re Dewey Ranch Hockey, LLC, 414 B.R. 577 (Bankr. D. Ariz. 2009). 6 In re Dallas Stars, L.P., No. 11-12935, 2011 WL 5829885 (Bankr. D. Del. Nov. 18, 2011). 7 See Schulz, supra note 1, at 143 (noting that the Cubs, Rangers, Coyotes, and Stars all filed for bankruptcy in connection with the sale of the franchise). 8 See infra notes 222–54 and accompanying text. LCB_18_2_Art_2_Grow (Do Not Delete) 8/26/2014 6:25 AM 2014] INSOLVENT PROFESSIONAL SPORTS TEAMS 347 day, in 1915 both the Kansas City Packers and the Indianapolis Hoosiers of the Federal League of Professional Base Ball Clubs (“Federal League”)—a short-lived rival to the American and National Leagues— were effectively insolvent as the upcoming season approached. As a re- sult, the Federal League attempted to first transfer the Packers, and then the Hoosiers, to new, better capitalized owners over the objection of both franchises’ existing shareholders, who ultimately resisted these ef- forts with varying degrees of success.9 Specifically, the Kansas City Packers filed suit in Illinois state court seeking an injunction to prevent the league from selling its franchise to a new ownership group.10 The Federal League defended its actions by arguing that it had the authority to seize the team under its constitution due to the franchise’s insolvency.11 Although the court indicated that it would place considerable weight on the Federal League’s constitution and bylaws, it nevertheless avoided having to resolve the dispute itself by successfully encouraging a settlement between the parties. Following the settlement of the Kansas City suit—under which the Federal League agreed to drop its plans to transfer the team to new owners—the league turned its attention to the Indianapolis club. Although the Hoosiers’ owners also threatened legal action—with one investor actually going so far as to briefly file suit to protect his investment—the team’s sharehold- ers ultimately agreed to sell the club to the league to relieve their mounting debt.12 Drawing upon both original court records and contemporaneous newspaper accounts, this Article documents the history of both disputes by first briefly introducing the Federal League of Professional Base Ball Clubs, and second providing a detailed account of the legal battles for control of the league’s Kansas City Packers and Indianapolis Hoosiers franchises. Finally, the Article compares these litigations to the more re- cent disputed professional sports team bankruptcies, in the process re- vealing that despite the passage of time—and the different factual and procedural postures of the respective cases—courts have adopted similar approaches to managing litigation between a professional sports league and one of its insolvent franchises. In particular, both then and now, courts have generally granted some level of deference to the league’s in- ternal rules, while at the same time encouraging the parties to amicably settle the dispute. Along the way, the Article will also discuss how the Kansas City and Indianapolis franchises’ organizational structures—both were corporations with numerous local shareholders—contributed to their financial struggles, helping to explain why U.S. professional sports 9 See infra Parts II.B and II.C. 10 See infra notes 90–99 and accompanying text. 11 See infra notes 108–14 and accompanying text. 12 See infra Part II.C. LCB_18_2_Art_2_Grow (Do Not Delete) 8/26/2014 6:25 AM 348 LEWIS & CLARK LAW REVIEW [Vol. 18:2 leagues have traditionally disfavored public ownership of their fran- chises.13 I. The Federal League of Professional Base Ball Clubs The Federal League was formed as a six-team circuit in 1913 with franchises located in Chicago, Cleveland, Pittsburgh, Indianapolis, St. Louis, and Covington, Kentucky (a suburb of Cincinnati, Ohio).14 The league did not compete directly with the two established major leagues—the American League and National League—for