The Los Angeles Dodgers + Bankruptcy= Double Trouble for Baseball

When I served as the Commissioner of baseball back in the day we worried about the unpredictable consequences of a club going into bankruptcy. Now the Los Angeles Dodgers have filed for court protection in bankruptcy and we will soon find out whether our concerns were sensible. One thing seems reasonably certain—these are largely uncharted waters.

Baseball takes pride in its ability to regulate the ownership of the various clubs. The existing owners working with the Commissioner police the process of transferring ownership of a club and there are elaborate rules any putative owner must follow.

Obviously the twin concerns are financial strength and character. But as former Houston owner John McMullen once commented wryly, “Any new owner, even seriously flawed, can only raise the level of the rest of us.”

In fact, baseball can be proud of the many new owners who have come into the game since I left and the control the Commissioner exerts over the business depends in large measure on the willingness of each owner to accept participation in the unusual governance system that pertains in baseball. The reason a bankruptcy of a club like the Dodgers is so disconcerting is the threat of court participation in the parochial business world of baseball.

The bankruptcy procedure is fully spelled out in the Federal Bankruptcy Code and, with the filing, absolute control of the Dodgers now passes to a Federal Bankruptcy Judge. Virtually nothing can be done without court approval. It is that judge and not the Commissioner who will begin to issue the commanding decrees. The Commissioner will be an interested party and any judge will listen to him, but his control is now subject to a higher authority.

There are several types of bankruptcy. One has to assume this one will be conducted as a “reorganization” under Chapter 11 in which the effort is to restructure the debts of the bankrupt and thus permit the Dodgers to emerge from court protection with a rational and bearable debt burden.

Generally speaking secured creditors come out best with unsecured creditors and equity holders likely to have their interests reduced or eliminated. One potential issue for the baseball owners and Commissioner will be the likelihood the team will be sold in a process the Court will dominate and in which the baseball interests will be sublimated to the creditors’ desire to maximize the sales price.

In the recent Texas Rangers case, the club was an asset of the debtor and did not go into bankruptcy and yet even there the transfer of the club involved tensions between creditors and the Commissioner.

This current situation involves the same sort of potential problems. Any time a baseball club comes under the legal control of a court there are risks the baseball interests will be considered subordinate to the interests of the creditors.

The highest bidder for the club may not be the entity preferred by the Commissioner. In court, high bidders do very well.
An additional concern of the bankruptcy process is the public aspect of the proceedings. With the baseball club as the debtor, the financial details of its operations will be visible and there may be awkward dimensions of that kind of disclosure. The court has authority to protect trade secrets and competitive data but there will be aspects of the business that will have to become public to protect the creditors. Again, the process will likely involve challenges to expenditures by creditors and some of the information that emerges may not be pretty.

After the heat of the exchanges of the past month or so between the Commissioner and Mr. McCourt, the Dodgers owner, this filing is not a surprise. The owner now has a court to evaluate his grievances against baseball, and the Commissioner now has a court with power to make decisions binding on the owner. From the Commissioner’s viewpoint, this filing may not be the end of the battle, and it may not even be the beginning of the end, but to paraphrase the great Winston Churchill it is surely the end of the beginning.

Fay Vincent is a former CEO of Columbia Pictures Industries and from 1989-92 served as the Commissioner of Baseball.