Bloomberg News

Dodgers Didn’t Have Authority to File Bankruptcy, MLB Says

June 28, 2011

(Updates with hearing in seventh paragraph.)

June 28 (Bloomberg) -- Los Angeles Dodgers owner Frank McCourt didn’t have authority to put the baseball team into bankruptcy, according to Major League Baseball, which hopes to replace the team’s proposed rescue loan with a cheaper one.

The Dodgers were required to first obtain the consent of a monitor appointed by Major League Baseball to oversee the team before filing for bankruptcy, MLB said in a court filing today.

Without MLB’s consent, “the case will engender significant litigation” over the legitimacy of the bankruptcy, according to a court filing in U.S. Bankruptcy Court in Wilmington, Delaware.

“These cases were commenced in an attempt by Mr. McCourt to circumvent the club’s obligations under its constituent, governing documents, and to have this court approve additional debt financing and sale of key assets in violation of those documents,” the filing said.

Major League Baseball has asked the bankruptcy court to determine who should run the team during bankruptcy, McCourt or the MLB monitor now in charge.

McCourt said in a filing today that MLB’s proposal for alternative financing for the team is a “thinly veiled” attempt to take it over. A hearing on the matter is taking place today before U.S. Bankruptcy Judge Kevin Gross.

At the hearing, Gross approved motions to pay Dodger employees and critical vendors. A lawyer for the Dodgers asked for a break about 2:20 p.m. so the team’s attorneys could talk with Major League Baseball’s.

The Dodgers would command a record $1 billion in a sale, said sports bankers including Gordon Saint-Denis, president of Katonah, New York-based Major League Sports Consulting LLC. Forbes magazine values the team at $800 million, third-highest in baseball after the New York Yankees and Boston Red Sox.

Highbridge Loan

The Dodgers, which filed for bankruptcy yesterday in what the baseball team called “a perfect storm,” are scheduled to seek court permission to draw on a $150 million loan from JPMorgan Chase & Co.’s Highbridge Capital Management LLC, to support operations while in bankruptcy. The Highbridge loan carries a 10 percent interest rate, 3 more than MLB.

Major League Baseball opposes the financing and is offering its own loan that it says is “less expensive and otherwise superior.” Baseball’s proposal eliminates fees, reduces the interest rate and doesn’t impose “an artificial timeline” for selling broadcast rights.

The Dodgers, which need cash to make payroll in two days, proposed using the bankruptcy financing to support operations while trying to complete a television-rights deal, according to court documents.

Baseball Commissioner Bud Selig last week rejected a proposed deal with News Corp.’s Fox Sports, leaving the Dodgers unable to make payroll, the team said. McCourt said the 17-year agreement, valued by him at about $3 billion, would have assured the team’s financial stability.

Interim Loan

At today’s court hearing, the Dodgers are scheduled to ask U.S. Bankruptcy Judge Kevin Gross for permission to borrow $60 million on an interim basis, according to court papers.

The team “is now on the verge of running out of cash, the result of a perfect storm of events,” the Dodgers said in court papers filed yesterday. McCourt said the bankruptcy was triggered by Selig’s refusal to approve the deal with Fox.

“He’s turned his back on the Dodgers, treated us differently, and forced us to the point we find ourselves in today,” McCourt said in a statement yesterday.

Selig said the bankruptcy “does nothing but inflict further harm to this historic franchise.”

“We have consistently communicated to Mr. McCourt that any potential solution to his problems that contemplates mortgaging the future of the Dodgers franchise to the long-term detriment of the club, its loyal fans and the game of baseball would not be acceptable,” Selig said in a statement.

TV Rights

The Dodgers will pursue a sale of the TV rights while in bankruptcy, the team said in court papers. The Fox Sports agreement included a $385 million loan, of which $211.5 million was to go toward the team’s operations and working capital, according to court papers.

William Snyder, who acted as chief restructuring officer during the bankruptcy of the Texas Rangers last year, predicted McCourt will be successful in selling the TV rights. The Rangers were sold at auction to a group that included Hall of Fame pitcher Nolan Ryan.

“He is taking a good approach in auctioning the rights so no one can point a finger,” Snyder said.

McCourt put the Dodgers into bankruptcy as a way to hold on to the team, said Thomas Salerno, an attorney with Squire, Sanders & Dempsey who represented the Phoenix Coyotes hockey team during its Chapter 11 case. Bankruptcy blocks Major League Baseball from taking over and selling the team to a preferred buyer, said Salerno, who isn’t involved in the case.

“The presumption in Chapter 11 is that he does in fact maintain control,” Salerno said of McCourt.

Monitor

In April, Selig said he was appointing a representative to oversee the team’s business and day-to-day operations because of “deep concerns regarding the finances and operations of the Dodgers.” He later named Thomas Schieffer, former president of the Texas Rangers, as the team’s monitor.

Baseball said it was withholding approval until completing an investigation into the club and its finances. On June 20, Selig said he was rejecting the transaction, saying in a statement that it “would have the effect of mortgaging the future of the franchise to the long-term detriment of the club and its fans.”

The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).

--With assistance from David McLaughlin and Michele Steele in New York. Editors: Stephen Farr, John Pickering

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net; Dawn McCarty in Wilmington at dmccarty@bloomberg.net; Michael Bathon in Wilmington at mbathon@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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