Dodgers Declare Bankruptcy

This story was interesting. Suffering cashflow problems, the Dodgers filed for bankruptcy.

There's a clause in the MLB franchise agreement, saying that the league can take over a franchise that files for bankruptcy. However, bankruptcy court rules take precedence over that. If MLB insists, they probably could force a sale of the team to MLB-approved new owners, or the league could buy the team until suitable new owners are found.

The ownership of the Dodgers was split due to Frank McCourt's divorce. His now-ex-wife owns 50%, but Frank McCourt maintains control. His ex-wife may prefer a sale, so she can cash out her half of the team's value.

Frank McCourt had signed a long-term TV contract with Fox. This contract included a huge signing bonus, to help the Dodgers with their cashflow problems. MLB commissioner Bud Selig rejected that TV contract.

Consider an extreme example. Suppose the Dodgers signed a 20 year TV contract, with a signing bonus of $300M and an annual fee of $1. That would give a short-term cashflow boost, but cripple the team financially in the long-term. The MLB commissioner would have a valid reason to veto such a contract, because it would decrease the value of the Dodgers and the value of the league overall.

Frank McCourt had a similarly front-loaded contract with Fox. It would have provided a cashflow boost, but had a long-term negative effect. Bud Selig was right to veto that contract.

There were other irregularities. Frank McCourt had recently divorced. His wife had 50% equity in the team, but he still controlled it. This led to perverse incentives. If Frank McCourt were 100% owner, he'd be wasting his own money. As half-owner, he's wasting half his money and half his ex-wife's money.

For example, suppose Frank McCourt hired his friends for $2M. That was only costing him $1M but costing his ex-wife $1M. That shows the fallacy of being a minority shareholder. With only 50% ownership but no vote on management, his ex-wife was cheated as minority shareholder.

This also led to problems with the IRS. If you hire someone at a way-above-market salary, that can cause problems with the IRS.

When the Texas Rangers declared bankruptcy, A-Rod and others were owed deferred compensation. They lost out in bankruptcy. Similarly, many players are owed deferred compensation by the Dodgers. That shows the risk of a deferred compensation agreement. There could be bankruptcy and a default.

The Dodgers bankruptcy had some interesting points. If you're owed deferred compensation, you may be cheated in bankruptcy. If you're a minority shareholder, you may be cheated by the majority shareholder. When Frank McCourt had cashflow problems, he signed a front-loaded long-term TV contract with Fox. Bud Selig correctly vetoed that contract, because it sacrificed long-term value for a short-term cashflow bonus.