SBJ/July 11-17, 2011/Franchises

Dodgers case tests MLB’s power

A federal bankruptcy judge is unlikely to let MLB seize the Los Angeles Dodgers franchise, legal experts said last week. But at the same time, the court will almost surely not allow owner Frank McCourt to personally reap a windfall from a potential sale of the team’s media rights.

With now bitter rivals MLB and the team preparing for next week’s court hearing in Wilmington, Del., on the immediate future of the club, it seems unlikely the league will be able to seize the franchise if it tries.

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Dodgers owner Frank McCourt was thwarted by MLB in his efforts to sell the team’s media rights.
“MLB won’t be allowed to run the Dodgers. Seizure won’t fly,” said Bill Siegel, a partner in the firm Cowles & Thompson. While MLB might point to its own rules that the Dodgers allegedly broke as a basis for franchise seizure, federal bankruptcy law generally trumps those, he explained.

MLB executives last week declined to comment on speculation they would seek to seize the Dodgers, but industry sources close to the league said MLB still considered seizure “a live option.”

The case, beyond deciding the future of one of sport’s most hallowed brands, is shaping up as a test of a sports league’s powers within bankruptcy. Last year similar issues were raised when the Texas Rangers were sold during a court-ordered bankruptcy auction. But MLB’s preferred bidding group, led by Chuck Greenberg and Nolan Ryan, won, negating a standoff with the court had the league turned down the rival group led by Mark Cuban.

Now the issue of MLB’s powers in bankruptcy is again coming to the fore. MLB on June 20 turned down McCourt’s bid to sell his team’s media rights to Fox Sports Net, saying too much of the proceeds were flowing directly to the owner, who needs the money to fund his divorce from his estranged wife, Jamie. The Dodgers contend MLB Commissioner Bud Selig is unfairly targeting the club out of personal animus, arguing last week that other fiscally troubled teams such as the New York Mets have received “velvet-glove treatment” from the league.

The Dodgers on June 27 filed for bankruptcy protection, a move seen in baseball circles as a method of circumventing the commissioner’s decision, as well as the league’s constitution. The team tried to include in its proposed debtor-in-possession financing an agreement to sell media rights, but the provision was stripped out because of MLB objections.

Now, the only way for McCourt to sell the club’s media rights is to ask the court for permission. Selig in his June 20 decision said the rights, which are worth billions of dollars, should not be sold until the current deal expires in 2013.

“A bankruptcy judge will be very loath to overrule the commissioner of baseball,” said Ken Rosen, head of Lowenstein Sandler’s bankruptcy practice. Judge Kevin Gross is going to ask himself, Rosen continued, “‘Am I going to open up a door that any baseball team that dislikes what the commissioner of baseball has done is going to be able to use the bankruptcy court as a court of appeals effectively?’ And bankruptcy judges do not allow themselves to be treated as courts of appeals.”

Gross will hear arguments next week on whether the Dodgers should be able to continue to borrow from a hedge fund, Highbridge Capital Management, that has already lent the club $60 million. MLB plans to offer its own financing instead, which the Dodgers have argued is a way for the league to take over the team.

Gross last week ruled in favor of MLB on a key discovery issue, denying the Dodgers’ attempt to compel the league to produce an array of documents relating to the club, other financially troubled franchises such as the New York Mets and five years’ worth of local television deals, among other matters. The Dodgers sought the large discovery to show an alleged pattern of mistreatment by Selig. But Gross in his ruling said, “This is clearly in my mind not an appropriate occasion to turn this hearing into a trial on the commissioner.” The ruling also canceled out nearly all of a series of depositions the Dodgers planned for senior MLB executives, including Selig.

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