Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
Nov. 9 — Bankruptcy in Major League Baseball (MLB) is relatively rare, almost as rare as the Cubs winning the World Series. Bloomberg BNA counts four Major League Baseball teams that have sought bankruptcy court protection since the Chicago Cubs’ prior 1908 championship.
Although bankruptcy is similar for professional baseball teams as for other businesses, in that it gives the teams the chance to operate while they reorganize, recent filings show major league clubs using bankruptcy to alter MLB rules for the sale of their teams.
The list below shows that some owners have been able to accomplish in bankruptcy what they could not have achieved directly with MLB.
As everyone now knows, the Chicago Cubs won the World Series last Wednesday, defeating the Cleveland Indians in seven games to win their first World Series championship since 1908.
Seven years earlier, in 2009, the Cubs filed for Chapter 11 bankruptcy protection as a way for their owner, the Tribune Co., to speed the team’s sale to the current owners, the Ricketts family, for $845 million. The brief 48-hour stay in bankruptcy served to protect the new owners from potential claims from creditors.
The Tribune had filed its own bankruptcy in December 2008, shortly after having been acquired by Sam Zell in a highly leveraged deal. The Cubs were not included in the Tribune’s bankruptcy.
The Cubs’ bankruptcy was a friendly undertaking, with the Major League Baseball owners unanimously approving the sale.
Thirty-nine years prior to the Cubs’ bankruptcy, the expansion Seattle Pilots filed for bankruptcy protection under the Bankruptcy Act of 1898.
After just one season in Seattle (64-98), the Pilots and their managing partners, looking to move the team to Milwaukee, put the team into bankruptcy after the American League failed to approve the transfer. The bankruptcy allowed the owners to sell the team to Bud Selig (MLB’s commissioner from 1992-2015), who moved the team to Milwaukee and renamed them the Brewers.
The Pilots’ bankruptcy provided an early example of how filing for bankruptcy protection can have a major impact on the Major League Baseball agreement entered into by all major league teams. Subsequent bankruptcy filings by the Rangers and the Dodgers demonstrate owners learning from the Seattle experience to accomplish what they could not have achieved directly with MLB.
While the Texas Rangers made it to the World Series in 2010, losing (4-1) to the San Francisco Giants, behind-the-scenes financial turmoil of owner Tom Hicks had so affected the team’s financial operations that Hicks sought to sell the team to Nolan Ryan and Chuck Greenberg.
When secured creditors refused to approve the team sale, the Rangers filed for bankruptcy on May 24, 2010.
With the support of MLB, the team proposed a sale of its assets to Ryan and Greenberg for roughly $300 million, as part of a prepackaged plan.
However, Judge D. Michael Lynn of the U.S. Bankruptcy Court for the Northern District of Texas required an auction, stating the court would authorize and approve the sale of the team to the bidder that the court determined to have made the highest and best bid. Lynn is editor-in-chief of Bloomberg Law: Bankruptcy Treatise.
While MLB took the position it could veto any purchaser other than the Ryan group, stating “it reserves its rights in the event multiple bidders participate in the auction,” MLB negated any potential controversy by accepting the bid approved by the court.
With the winning bid, Greenberg and Ryan paid $590 million at auction, outbidding a partnership of energy magnate James Crane and Dallas Mavericks owner Mark Cuban. They paid approximately $290 million more than what had been initially proposed and accepted by MLB.
The Dodgers filed for Chapter 11 bankruptcy protection on June 27, 2011, after Commissioner Bud Selig blocked a $3 billion media contract with Fox Sports. Owner Frank McCourt sought bankruptcy protection to stave off the seizure and sale of the club under the authority of MLB.
The Commissioner blamed the Dodgers’ financial situation on McCourt’s “excessive debt and his diversion of club assets for his own personal needs.” At the time of the bankruptcy filing, the Commissioner alleged that the divorce court documents of Jamie and Frank McCourt revealed that the McCourts had siphoned off more than $100 million of Dodger funds for personal use.
Here again, MLB argued it was the sole arbiter of who would be an acceptable owner and that its decision to reject McCourt’s attempts to bid-out broadcast rights was not reviewable by any court under the contractual restrictions McCourt had agreed to when he acquired the team. The Dodgers sought bankruptcy court approval for auctioning its broadcast rights.
MLB, the Dodgers and Fox eventually reached settlements contemplating sale of the team and negotiation of future broadcast rights. The bankruptcy culminated in an auction of the team at a sale price of $2.15 billion to an investment group that included Magic Johnson.
Like an intentional walk, these cases showed how the major league clubs could take the bat out of MLB’s hands by turning to the Bankruptcy Code. The teams were allowed to pitch around the rules governing their sale.
With assistance from Daniel Gill in Washington.
To contact the reporter on this story: Deborah Swann in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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