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A Delaware bankruptcy judge Friday voided Dodgers owner Frank McCourt‘s $150 million debtor-in-possession (DIP) bankruptcy loan with Highbridge Capital and ordered him to negotiate a similar-sized loan with Major League Baseball, which had publicly offered better terms than Highbridge.
Judge Kevin Gross said he was issuing the ruling on “narrowest ground possible,” but it hints at McCourt’s difficult legal position going into an August 18 hearing on the sale of future television rights to Dodgers games.
Companies in bankruptcy typically secure DIP loans to allow them to continue operating during the legal process. After being turned down by traditional lenders, McCourt secured a loan with Highbridge Capital, a hedge fund, on fairly onerous terms.
MLB offered a significantly cheaper loan with fewer conditions. McCourt rejected it, arguing that MLB was a hostile lender intent on using the loan to remove him as owner.
Judge Gross rejected the Highbridge Loan on technical grounds and ordered McCourt to negotiate a deal with MLB. Gross said the loan was “not a vehicle for Baseball to control” the Dodgers, but he did order the removal of any clauses that McCourt believed would make it easier for the league to use a default on the DIP loan as a pretext for taking over the team.
This ruling sets the stage for a hearing on August 16 about the sale of future Dodgers TV rights. The Dodgers’ current deal with Fox Sports runs until 2013 and negotiations for a new contract were not supposed to take place until 2012. But McCourt got Fox to agree to replace the final three years of the current contract with a new seventeen-year agreement that provided him a $385 million up front advance. McCourt planned to use $173.5 million to fund his divorce from wife Jamie and the rest to get the Dodgers out of immediate financial jeopardy.
MLB commissioner Bud Selig, who has to approve all TV contracts, rejected the new deal as not in the best interests of baseball since it diverted so much of the advance to McCourt’s personal use. During the hearing on August 18, McCourt will ask Judge Gross to overrule Selig and approve some sort of TV rights sale setting up a collision between bankruptcy law and the well-established legal power of the commissioner.
Most legal experts with knowledge of sports law think the bankruptcy court is likely to defer to MLB’s judgment and not allow McCourt to sign a TV contract that provides money for his divorce.
While this ruling does not necessarily have any legal bearing on the August 16 hearing, Judge Gross’ text foreshadows McCourt’s difficult legal position.
Gross seemed to place the blame for the bad blood on the Dodgers owner. “McCourt’s belief that the commissioner is hostile toward him is an unhelpful distraction which obfuscates the uncontroverted testimony” from other team officials “that Baseball is not hostile to” the Dodgers.
Later in the ruling, Gross suggested that the Dodgers’ membership in MLB and the team’s need to defer to its rules will factor into his final judgment. “It is unclear to the Court how [McCourt and Dodgers officials] think they can successfully operate a team within the framework of Baseball if they are unwilling to sit with Baseball to . . . negotiate” a favorable loan under court supervision.
Read the full text of the ruling at the Los Angeles Times.
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