Bankruptcy filing changes the playing field for Frank McCourt's struggle with Major League Baseball

By David Wharton and Bill Shaikin

June 29, 2011 12 AM PT

The baseball season had just begun and, already, Frank McCourt was struggling to make payroll for his Dodgers ballclub. Major League Baseball executives quickly huddled to discuss strategy.

They could prevent McCourt from raising cash by selling his team’s valuable broadcast rights — a deal they did not like — which might cause him to sue the league or simply surrender his team.

But they did not expect him to file for Chapter 11 protection — a high-risk move that would leave his fate in the hands of a bankruptcy judge.

“Even last Wednesday, I thought the way this was going to end was with him coming to the realization that he could not make payroll and saying, ‘You’ve got to cover me and I’ll sell the team,’” said a person familiar with league discussions but not authorized to speak publicly.

Had McCourt been willing to sell, the league would have been willing to work with him and cover his costs. Instead, he pulled his storied club into a Delaware Bankruptcy Court, prompting MLB executives to gather Wednesday evening to consider what is now, experts say, a far different set of options.

They could attempt a quick strike — arguing to a judge that McCourt, as a franchisee, should be removed because he has irreparably damaged the league’s brand by violating terms of ownership.

Or they could choose a longer path that involves taking control of the team through the bankruptcy process itself.

“Once you file for bankruptcy, the judge pretty much makes the rules,” said Dan Grigsby, the head of a national sports law group in Los Angeles. “They’re going to have to work through the judge.”

On Monday, Judge Kevin Gross cleared the way for McCourt to access $60 million in interim financing that will cover immediate bills, but put off the sale of those broadcast rights.

The case returns to court on July 20, when Gross will give McCourt and the league a chance to present competing plans for interim financing.

League executives head toward that showdown knowing they could have taken control of the team as recently as last week. But they had been wary of doing that because MLB had never staged a hostile takeover of one of its teams.

Instead, they calculated that Commissioner Bud Selig’s rejection of McCourt’s proposed television deal would force McCourt to miss a payroll.

McCourt secured a personal loan to cover three of the first five early-season payments, then took the Dodgers into Chapter 11, seeking the protection of bankruptcy law. That ensured all matters pertaining to the team, the league and ownership would be channeled through Delaware.

Baseball officials say they can revoke McCourt’s franchise, citing an MLB rule that any owner who files for bankruptcy can lose his team. But, in legal terms, that amounts to an ipso facto clause.

“Ipso facto clauses are typically unenforceable in bankruptcy,” said Douglas Baird, a University of Chicago law professor who has followed the case.

So McCourt expects to present a detailed plan for reorganizing his franchise, one that would no doubt include sidestepping the commissioner to sell those broadcast rights for an estimated $1.7 billion or more, a windfall that he says would put his team on solid footing for years to come.

But in a filing to the court this week, the league suggested a blocking strategy, citing “a decline in attendance caused by the community’s extraordinary unhappiness with the club’s owner.”

The league could argue that, with news accounts of McCourt diverting more than $100 million in team revenues for personal use — and his club struggling on the field — he has damaged the Dodgers and MLB brands in ways that cannot be mended or repaid.

“Dodger fans might think, ‘Jeez, we could have had a real bullpen if all that money stayed with the team,’” said Dan Schechter, a Loyola Law School professor. “If you lose some of those fans, that’s a bell that can’t be unrung.”

The person close to league discussions said executives “feel confident” in their ability to challenge McCourt’s ownership on issues beyond the constitution.

At least one legal expert compared the situation to a late 1990s lawsuit involving General Motors and a financially troubled auto dealer in Claremont that closed its doors for more than a week, then filed for bankruptcy.

Going dark violated franchise rules and GM eventually showed it had suffered irreparable harm — not only did it lose sales, but its brand also was tarnished and it may have lost potentially loyal customers who turned elsewhere that week.

Major League Baseball has yet to produce any evidence that McCourt should be removed on these grounds. Until that happens, Schechter and others consider the strategy — though potentially quick — a longshot.

An alternate path involves two facets of the ongoing bankruptcy procedure.

McCourt’s interim finance deal — the one that allowed him to meet the next payroll — comes with at least a 10% interest rate and a hefty fee. On July 20, the league is expected to argue that for the good of all involved, it should be allowed to replace that loan with a comparable one at 7% interest.

The deal would keep McCourt as owner but would give baseball more control of the team during bankruptcy.

Allowing both sides to present interim financing proposals was an unusual move, experts said, and it could pave the way for an even bigger MLB victory.

League executives could ultimately persuade Gross that their plan for reorganization is better than McCourt’s in terms of the team and its creditors. They could paint McCourt as a risky prospect.

“They could say, Judge, this guy ripped off the Dodgers,” Schechter said. “We can’t trust him to run the company. Therefore, we should take control of the Chapter 11 process.”

With league executives at the controls, they could engineer a sale to new owners. It would be a slow process, but one that experts say could be the most likely to succeed.

There may be some legal precedent suggesting that Major League Baseball could prevail in Bankruptcy Court.

Two years ago, the owner of the Phoenix Coyotes hockey team filed for bankruptcy hoping to sell to a buyer who would move the franchise to Ontario, Canada. The National Hockey League contested the sale.

The case weighed bankruptcy laws against the power that all major professional leagues try to maintain over their franchises. The Arizona Bankruptcy Court agreed that the NHL could control where its teams played.

“Can the creditors force you to sell to the highest bidder?” Grigsby asked. “Or does the league still have some rights in its contract to approve an owner?”

The NHL ultimately succeeded in stopping the sale, acquiring the Coyotes and keeping them in Phoenix.

“A lot of people watched that case,” Grigsby said. “It turned out the league did have some say.”

If the Dodgers’ bankruptcy follows a similar course, McCourt still might have an ace up his sleeve. He could appeal any decision — again, through Bankruptcy Court — claiming the league has treated him unfairly and demanding information on concessions made to other financially troubled owners in the past.

That could pry open the league’s secretive inner workings for all to see, including any deals with the New York Mets and their controversial owner, Fred Wilpon.

“Major League Baseball could argue to seal the record,” Schechter said. “But certainly I would be worried if I were them.”

Legal experts believe, however, that the league still holds a strong position as the franchisor of a major entity. They compare the Dodgers to a McDonald’s that wants to add Tabasco to the secret sauce on Big Macs.

“The Dodgers have basic obligations to Major League Baseball and they have to play by the rules,” Baird said. “None of that changes because they’re in Bankruptcy Court.”

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