News broke today that the Los Angeles Dodgers have filed for Chapter 11 Bankruptcy – what does that mean for baseball, the Dodgers, and fans? I have no idea, but here is a little additional information to (hopefully) clarify future news reports for Bucs Dugout readers.
What is bankruptcy? Title 11 of the U.S. Code is a Federal law protecting individuals (Chapter 7 or 13; “chapter” refers to sub-sections of Title 11), municipal governments (Chapter 9), and businesses (Chapter 7 or 11) that can’t pay their debts. Rather than throw individuals into debtor’s prisons or force corporations to abruptly collapse, bankruptcy law provides for either an orderly liquidation of debt (Chapter 7) or re-organization of a business (Chapter 11).
How does bankruptcy work? A Federal judge, assisted by a Trustee in large cases, oversees all disputes between debtors and creditors to ensure that the debtors don’t hide or siphon off money and to ensure that all creditors are treated fairly (although perhaps not equally). In this case, the debtors are the Dodgers, in whatever corporate form they exist, and several related companies. The debtors are NOT Frank McCourt and his wife. The creditors are the people or businesses who are owed money; they fall into three broad categories, paid roughly in this order....
1) Expenses incurred by the trustee (a lawyer) overseeing the bankruptcy and lawyers which represent the debtor. (What did you expect? The law was written by lawyers.)
2) Secured claims – i.e., money owed to people that is secured by a lien on property. For example, the bank financing your car has a lien on that car, so its loan is “secured.” If the debtor owes more than the property is worth, the remainder of that debt is “unsecured.”
3) Unsecured claims – i.e., money owed to people that isn’t secured by a lien on an actual object (think of credit cards). For a company, unsecured claims include wages owed to employees, employee benefit plans, and taxes. Since there is often much debt (money owed) than capital (money on hand), the unsecured creditors often have to accept pennies on the dollar – for example, a credit card company that is owed $10,000 might only receive $2,000. The list of unsecured creditors owed money by the Dodgers includes Manny Ramirez and Vin Scully.
The Dodgers filed for Chapter 11 bankruptcy, which allows them to continue operating while any previously-incurred debts are organized and paid off, under the supervision of the Trustee and the Bankruptcy judge. New deals that might be made (e.g., a TV contract or agreeing to terms with a player) also have to be reviewed by the Trustee and the court to ensure that no funds are siphoned off – for example, by signing a McCourt grandchild to a $20 million dollar minor league contract.
What does it mean for the Dodgers, for baseball, and for fans?
Good question. Federal (bankruptcy) law trumps private agreements (e.g., the agreement between the baseball owners that gives Bud Selig the authority as commissioner). So in any conflict between Bud Selig’s decisions and the Bankruptcy court’s decisions, the bankruptcy court wins. Does that mean that Frank McCourt wins? Probably not, because:
1) The Bankruptcy judge and the Trustee are neutral, looking out for the interests of all parties concerned. They are not obligated to approve business decisions because they will benefit the McCourts – in fact, such a decision would likely be disapproved, as the court is looking to the interests of the Dodgers.
2) The McCourts have now exposed even more of their prior business decisions to scrutiny by the courts. The Bankruptcy court may be able to order the McCourts to return money improperly funneled to them to the Dodgers corporation, for future re-distribution to the creditors. As principals of a bankrupt corporation, the McCourts are low on the list of creditors, entitled only to what they can fairly claim as wages or employment reimbursement.
3) The Bankruptcy court does not have to “approve the TV contract” so the Dodgers can pay off their creditors (presumably in full) if doing so would injure the long-term help of the corporation. The unsecured creditors aren’t entitled to full compensation even if they have so-called “guaranteed” contracts. The Bankruptcy Judge and Trustee will likely consider that the value of the TV contract is seen as below what could be obtained in the eyes of those with expertise in this matter (Bud Selig). Even if the court approves the TV contract as proposed by Frank McCourt, the Court and a creditors committee – not Frank McCourt – will determine how that money gets distributed.
4) Frank McCourt has taken an action that – by the terms of the agreement he entered into when he purchased the Dodgers – is grounds for the involuntary termination of the Dodgers’ rights and privileges of being a member of Major League Baseball. The Major League Constitution specifically identifies filing for bankruptcy as a grounds which allow a team to be thrown out of the league.