This month marks the five year anniversary of the Los Angeles Dodgers’ chapter 11 filings. As a changeup from the world of oil and gas, we’ve prepared a light lookback to the ball club’s bankruptcy.
Five years ago, the Los Angeles Dodgers were a mediocre baseball team. They finished the season with an 82-79 record, good for the seventh best record in the National League. Today, the Dodgers are a mediocre baseball team. Their current (as of June 6, 2016) 31-27 record has them with the sixth best record in the National League. Off the field, however, much has changed. Five years ago, the Dodgers could not meet their payroll obligations and filed for chapter 11 protection. Today, the Dodgers – with their record $8.35 billion television contract – have no difficulty meeting their payroll obligations (which at over a quarter of a billion dollars, are the highest in American professional sports). This post recaps the Dodgers’ 2011 chapter 11 filing and how it spurred the franchise’s financial rebirth.
The Dodgers’ First Day Declaration describes the liquidity crunch that necessitated the franchise’s chapter 11 filing as “the result of a perfect storm of events.” The most prominent of these were (i) the over $20 million in deferred compensation owed to players, (ii) a significant decline in attendance, and (iii) Major League Baseball Commissioner Bud Selig’s rejection of a multi-billion dollar media deal with Fox Sports. Selig, in an open letter to Dodgers then-owner Frank McCourt, explained that the proposed long-term deal, with an accelerated upfront cash payment being diverted to McCourt to pay off his personal debts (including those relating to his ongoing divorce) and fund his lifestyle, was not in the best interests of the Dodgers or MLB.
Upon filing their chapter 11 petitions, the Dodgers sought the court’s approval of a $150 million secured DIP financing from Highbridge Senior Loan Holdings. Major League Baseball objected to the Highbridge financing on the grounds that MLB’s proposed $150 million unsecured DIP financing was a significantly better offer. Indeed, the terms of the MLB loan were far superior. In addition to being unsecured, MLB’s proposal had a lower interest rate, no fees, and a later maturity date. The Dodgers, however, refused to negotiate with MLB on the grounds that the MLB loan was a pretext for it seizing control of the team.
Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware denied the Dodgers’ motion to approve the Highbridge financing. He explained that the business judgment rule did not apply because McCourt was not disinterested when selecting the Highbridge financing, as evidenced by McCourt being personally liable to Highbridge for $5.25 million if he did not seek court approval of the Highbridge financing. The court, therefore, reviewed the Dodgers’ selection of the Highbridge financing under the “entire fairness standard,” which required the Dodgers show fair dealing and a fair price. Given the clear superiority of the MLB loan, Judge Gross held that the Highbridge financing was not a fair deal, and ordered the Dodgers to negotiate with MLB. The Dodgers and MLB subsequently agreed to a $150 million DIP loan which did not incorporate the onerous default terms from MLB’s initial proposal.
Seeking another infusion of cash, the Dodgers filed a motion requesting court approval to market and license the team’s telecast rights. MLB objected, arguing that McCourt was once again acting in his own interests, rather than those of the Dodgers’ estate, by pursuing a front-loaded television deal similar to the one MLB rejected prior to the bankruptcy. MLB also moved to terminate the Dodgers’ exclusivity period for filing a plan of reorganization, arguing that the only path to emergence was through a sale of the Dodgers. In response, Judge Gross ordered the Dodgers and MLB to take part in a mediation before Joseph Farnan, Jr, a former Delaware District Court Judge.
The mediation resulted in a settlement which satisfied most of MLB’s demands. Pursuant to the agreement: (i) together with their investment bankers, The Blackstone Group, the Dodgers would conduct a sale process of the Dodgers baseball team, and would retain control of the team until it was sold; (ii) the Dodgers were prohibited from selling their telecast rights until the team was sold; (iii) Frank McCourt and his family were barred from the day-to-day operations of the Dodgers, including the sale process; and (iv) the sale of the team would be consummated by April 30, 2012, the day that Frank McCourt’s $130 million divorce settlement came due.
The sale process culminated in Guggenheim Partners and former Los Angeles Laker, Magic Johnson, purchasing the team for $2 billion, the highest ever sale price for a professional sports team. On April 13, 2012, Judge Gross approved the sale and confirmed the Dodgers’ plan of reorganization. Under the plan, holders of existing equity were the only impaired class of claimants. Nonetheless, they accepted the plan because they received all sale proceeds remaining after the other creditors were paid in full.
Notwithstanding the Dodgers’ slow start to this season, the Guggenheim and Johnson partnership has invigorated the franchise. Under their watch, payroll has more than doubled, and the team has made the playoffs three consecutive seasons. Moreover, in 2013, the Dodgers entered into a television contract that was well worth the wait: a record $8.35 billion, twenty-five year agreement with Time Warner Cable. Unlike five summers ago when all eyes in Dodgerland were on the Bankruptcy Court, this summer all eyes will be on the field where the Boys in Blue pursue their first World Series championship in twenty-eight years.