Unless you’re not a sports fan or simply don’t follow Major League Baseball (MLB), you probably know that the Los Angeles Dodgers filed a chapter 11 bankruptcy petition on Monday, June 27, 2011. (Delaware Bankruptcy Court, Case Number 11-12010.) According to Forbes magazine, the Dodgers are one of the most valuable baseball franchises in America. Nevertheless, the franchise hit hard times and filed for bankruptcy.

Before the filing, the Dodgers had, essentially, been taken over by MLB because of the league’s concern over the finances of the franchise. The owner, who was not happy with the takeover, tried to fix the team’s finances and regain control of the team by selling TV rights to Fox Sports. However, the Dodger’s agreements with MLB required the league to approve the sale of the TV rights, which they did not. As a result, the owner had a problem. He needed money, and the league was blocking the sale.

The owner countered by filing a chapter 11 bankruptcy petition. The idea is that the Bankruptcy Code will allow the Dodgers to get around the various franchise agreements between MLB and the Dodgers so that the franchise can sell the TV rights without MLB’s approval. Currently, the Dodgers have received approval from the bankruptcy court to enter into a $60 million dollar financing deal to keep the franchise running while they are in bankruptcy. And if all goes according to the franchise owner’s wishes, the next step will be to shop the TV rights and get approval from the bankruptcy court to sell them to the highest bidder.  

Although the protections of the Bankruptcy Code may provide an opportunity for the owner to fix all of the franchise’s financial woes, the bankruptcy filing could also be a potential nightmare for the owner. Not only is there inherent uncertainty throughout the bankruptcy process, but the owner has given up some of the control of the franchise to the Bankruptcy Court by filing the chapter 11 petition. It is possible that the owner’s plans could work perfectly. He could secure Bankruptcy Court approval to sell the TV rights, fix the financial problems facing the franchise and retain ownership of the Dodgers. Or it could all go sideways. He could potentially lose the team entirely if the Court decides – at the insistence of the various creditors – that the best outcome for the creditors would be a sale of the team as a going concern.  

For a franchise – or for any business – there are both potential benefits and serious risks to filing a bankruptcy petition. The biggest benefit to filing bankruptcy is the opportunity to slow down or stop creditors from taking any actions against you while you attempt to restructure your finances. The biggest risk is the potential loss of control to the Bankruptcy Court. Special attention should be paid – by both debtors and creditors – to the potential effects of a bankruptcy filing as early as possible. For instance, what effect would a potential bankruptcy filing have on pre-existing contracts, i.e., franchise agreements?  

In the Dodgers situation, the potential upside of the filing is that the owner can try to sell the TV rights and get the necessary cash to ease MLB’s concerns about the franchise’s finances. The potential downside for the owner is that the Bankruptcy Court could auction off the team to the highest bidder.