December 01, 2011 9:56am PT by Eriq Gardner
What Fox's Litigation With Frank McCourt Means for the Dodgers and Other Teams (Analysis)
Assuming no further delays and no last-second breakthroughs in mediation sessions, a federal bankruptcy judge will hold a key hearing on December 7 that will help determine whether the Los Angeles Dodgers can go ahead with its plan to auction future media rights in advance of a team sale. The intense in-fighting and legal maneuvers that have put one of baseball's most historic franchises into such a mess has been well documented, and one might wonder whether anything like this could ever happen again.
Unfortunately, MLB commissioner Bud Selig won't have to give any clues at next week's hearing. On Wednesday, U.S. Bankruptcy Judge Kevin Gross denied a motion from Fox to have Selig and Dodgers owner Frank McCourt testify at the hearing.
As a result, the two won't have to personally explain the various decisions that have led to the proposed auction, which Fox argues is merely meant to benefit McCourt. It also means that as about a third of all MLB teams are in violation of the league's debt services rules, putting them precariously close to similar bankruptcies, Selig won't have to face tough questions about whether he thinks the proposed auction is in the best interest of the team, not to mention all the other teams with similar TV contract situations.
The Dodgers mess is certainly unique in some regards, stemming from a messy divorce between the McCourts that left the owner in dire financial shape. Frank McCourt put the team in bankruptcy, a move seen by many lawyers and insiders as an attempt to prevent Major League Baseball from exercising its rights to take over the team.
As part of the bankruptcy plan, McCourt sought approval to market their future telecast rights, among various measures, as a way to pay back creditors.
The plan met strong opposition from Fox, whose cable channel Prime Ticket holds current TV rights and has an exclusive negotiating window on a future deal. It was also initially opposed by MLB, which feared that McCourt wasn't long for his position as owner of the team.
Then, about a month ago, MLB and McCourt came to an agreement to sell the team to a new owner. Afterwards, the plan to auction future media rights was deemed as enhancing the team's value going into a franchise sale.
But does it?
Fox is currently suing the team for breaching its telecast agreement. As part of its arguments for why a bankruptcy judge shouldn't allow McCourt to go ahead with an action on future media rights, Fox says that if a court eventually rules in its favor, the team would be liable for substantial damages. The liability could impact the team's sale price. In short, Fox believes that both the bankruptcy process and the auction are only being used for the benefit of McCourt's short-term goals. If the franchise really wants to enhance its value, Fox says that putting the parking lots up for sale would be a better option.
And MLB's position on this?
The league is now standing back on the matter with MLB lawyer Glenn Kurtz saying his client won't take a position on the sale motion.
This appears be a change from the league's old stance and movement in McCourt's favor. In June, the Dodgers struck a new 14-year deal with FSN Prime Ticket only to have it blocked by the commissioner. Now, the league is seemingly happy to move McCourt out of its fold as quickly as possible, even if it potentially means allowing a financially struggling team to mortgage its future.
The fact that Selig won't testify next week allows MLB to get away with some neutrality here, but it leads to some mystery about what's going to happen if a situation like this arises again.
Right now, the Dodgers aren't the only team in terrible financial shape. The New York Mets are also experiencing troubles thanks in large part to team owner Fred Wilpon defending lawsuits brought on by the Bernie Madoff ponzi scheme scandal. And in June, the Los Angeles Times reported that seven other teams -- the Orioles, Cubs, Tigers, Marlins, Phillies, Rangers, and Nationals -- were in violation of the MLB debt service rules.
And that was before the MLB made its debt service rule even tougher as part of the recently negotiated new collective bargaining agreement between owners and players. As part of the pact, teams are now only allowed 8 x debt leverage on EBITDA instead of 10 x EBITDA under the old rules. The withering allowance of debt has moved at least one more team, the Houston Astros, out of debt compliance.
The modified rule seems to be a measure in part to prevent another mess like the Dodgers situation, although Selig is stretching credibility by denying it. But the change signals MLB intends to step in sooner and exercise more control when teams don't have their financial acts in order. Whether or not the league intends to get more involved in team TV rights deals for the broader interest of the baseball league is unclear. To the bitter disappointment of Fox, one of MLB's strongest traditional partners, there won't be any immediate answers from the league on that issue next week. That's the price for getting rid of McCourt.