The Dodgers Debacle

Posted on Categories Public, Sports & Law

Straight out of Hollywood, in what has turned into a long-running soap opera, is Major League Baseball’s own “War of the Roses.” MLB’s version, featuring the divorce of the Los Angeles Dodgers owners Frank and Jamie McCourt, is being played out in court venues across three states and in a sundry of court proceedings and legal maneuverings involving numerous areas of law as well as MLB’s rules.  This is not “Dodgers Baseball”; instead this tragedy has thrown “one of the most prestigious teams in all of sport” into the depths of despair, financial ruin, legal turmoil, and fodder for the tabloids.

The story begins with Frank McCourt’s purchase of the Los Angeles Dodgers in January 2004 after a failed attempt to purchase his home town team, the Boston Red Sox.  Soon thereafter, he and his wife Jamie headed out to the “Wild Wild West.”

And for the first few years of the McCourts’ ownership of the team, the prospects looked good.  In October 2004, the Dodgers won the National League West but lost the Divisional Series.  Frank, as the Dodgers’ Chairman, named Jamie president of the team in August 2005.  In October 2006 the Dodgers played in the National League Divisional Series, losing to the Mets.  In March 2008, a crowd of 115,300 set an attendance record for any baseball game as they watched the Dodgers play the Boston Red Sox in an exhibition game at the Los Angeles Coliseum.  In October 2008, the Dodgers reached the National League Championship Series.  In March 2009, Frank named Jamie CEO of the Dodgers.  In October 2009, the Dodgers won the National League West, swept the National League Divisional Series, but lost in the National League Championship Series.

That same October, during the pinnacle of the Dodgers’ recent successes, the McCourts’ “California Dreamin’” came to an abrupt end as, on the eve of the NLCS, the McCourts announced their separation.  Concurrently, Frank announced that he was the sole owner of the Dodgers. Jamie refuted Frank’s announcement, claiming she had half ownership.   A week later, the Dodgers were out of the series. The day after the Dodgers’ exit, Frank fired Jamie as CEO, and less than a week later Jamie filed for divorce, ending their nearly 30-year marriage.  And with that, the “Field of Dreams” came crashing down.

The first pitch in the McCourts’ divorce trial was thrown on August 30, 2010.  In November, their marital status was changed to “divorced,” but the battle of “McCourt vs. McCourt” was just heating up as proceedings over their shared assets continued, the ownership of the Dodgers, the stadium, and the surrounding property at stake.  The Dodgers quickly transformed from being
one of the crown jewels of MLB to the crown jewel of the McCourts’ assets.  California is a community property state and under community property laws Jamie is entitled to half of Frank’s shares of the Dodgers and half of his personal assets, unless there is a written agreement to the contrary.  Frank thought he had the bases covered when he and Jamie entered into a post-nuptial marital property agreement in March 2004.  The McCourts agreed that the post-nuptial agreement placed the couple’s properties in Jamie’s name in order to protect them from creditors should Frank’s business ventures fail; however, they disagreed that the post-nuptial agreement provided Frank with sole ownership of the Dodgers.  Moreover, there were two conflicting versions of the document.  Three of the six copies of the agreement signed by the McCourts included language stating that the Dodgers were “inclusive” of Frank’s separate property and three stated that the Dodgers were “exclusive” of his property, indicating that the team was shared marital property.  Meanwhile, the attorney who drafted the agreement, from the Boston law firm Bingham McCutchen, testified during the 11-day trial that when he noticed the error in the three copies that stated “exclusive” he replaced those pages to correspond with the copies that read “inclusive.”  Both parties also employed forensic scientists to determine the validity of the agreement.  Ultimately, in November 2010, the judge in the McCourts’ divorce case threw out the agreement based on his finding that there was no requisite “meeting of the minds” to form a contract and, therefore, the post-nuptial agreement was not valid under California marital property law.  Frank argued against the call but his objections were overruled in January 2011.

The McCourts’ lavish lifestyle and alleged pilfering of the Dodgers were exposed as part of the acrimonious divorce proceedings.  For example, the McCourts own (although they are in Jamie’s name) seven properties estimated anywhere between $65 million and $84 million with a reported cost of $568,000 per month in mortgages and related expenses. They racked up a reported $6.8 million in flight expenses on a private jet in 2008 and 2009.  Meanwhile, Jamie had her own private hair stylist and make-up artist.  Then there were also the country club memberships, vacations, and expensive dinners. Most of their personal expenses were paid by the Dodgers and its various entities.  In fact, it has been alleged that the McCourts diverted more than $100 million dollars from the Dodgers to fund this lavish lifestyle.

Amid the divorce drama, the Dodgers were striking out financially.  Frank re-negotiated the Dodgers’ television rights with Fox Sports in order to work out a long-lasting solution to the Dodgers’ financial problems.  Fox’s current broadcast rights agreement expires in 2013 and provides Fox with the exclusive right of first negotiation until 2012.  On April 15, 2011, Frank presented the estimated $3 billion deal to MLB for its approval, as required.  In the midst of leveraging the broadcast rights, the Dodgers struggled to pay “The Help.”  It was able to meet its April payroll obligations with a $30 million personal loan to Frank by Fox.  It is rumored that Fox’s assistance came shortly after Fox learned that Frank put a squeeze play on it by approaching Fox’s broadcast rival Time Warner for a loan.  And since the loan was a personal loan to Frank and not a loan to the Dodgers, the loan did not have to be approved by MLB. However, after MLB learned of Fox’s loan to Frank, it seized control of Dodgers, taking over its day-to-day operations on April 20, 2011.

Back in Los Angeles Family Court, Jamie requested that the Dodgers be sold in order to maximize the proceeds and divide them accordingly.  Frank requested a ruling from the judge thatJamie had no standing to be involved in the television rights deal with
Fox.  As the motions were proceeding, Frank and Jamie reached a property division settlement on June 17, 2011, that was contingent on MLB approving the Dodgers’ television rights deal with Fox.  On June 20, 2011, the settlement was thrown out when MLB vetoed the Dodgers’ re-negotiated television rights deal with Fox.  MLB.com reported that the deal called

for an up-front payment of $385 million, with $173.5 million going to the McCourts and their attorneys.  Additionally, $80 million would have repaid debt, $23.5 million would have repaid a personal loan from Fox . . ., $10 million would be for legal fees, $10 million would have gone to the McCourts and $50 million could have gone toward a $100 million payment to Jamie if the club ultimately was ruled Frank’s property through the divorce proceedings.

In rejecting the deal, Bud Selig, the Commissioner of MLB, announced that the “proposed transaction would not be in the best interest of the Los Angeles Dodgers franchise, the game of baseball and the millions of loyal fans of this historic club.”

A week later the Dodgers were running out of cash and could not meet payroll obligations.  Instead of facing the possible takeover of the team by MLB, McCourt pinch hit and filed for Chapter 11 bankruptcy protection in Delaware on June 27, 2011.  Under MLB’s constitution, Frank may be stripped of his ownership rights by filing for such protection although it has been asserted that the bankruptcy court and its proceedings trump MLB’s rules in such circumstances.  As part of the proceedings, Frank arranged a $150 million debtor in possession financing from a hedge-fund, which arrangement was opposed by both MLB and Jamie.  The bankruptcy judge approved the arrangement on an interim basis in order to meet payroll but at a later hearing rejected it and ordered Frank to work out financing with MLB.  Earlier this month Frank and MLB agreed on a $150 million loan to the Dodgers in order to fund its operations through the end of the season.  Under the terms of the loan MLB cannot seize the team if it defaults on the loan, however, MLB did not waive any claims for past or future violations of MLB rules and regulations that the Dodgers might have, including filing for bankruptcy protection.

As the Dodgers continued to bleed red and not Dodger Blue, Frank balked on his television rights deal with Fox and announced that the Dodgers would attempt to resolve its financial crisis through the sale of its television rights with the bankruptcy court’s approval.  By selling the rights while in bankruptcy protection the Dodgers do not need MLB approval.  With this play, Frank is
essentially asking the court to abrogate the existing media rights deal with Fox prior to its expiration.  Fox filed a motion challenging the rights sale and it is expected that MLB and Jamie will do the same.

In between Frank’s maneuvering for sole ownership and control of the Dodgers and dodging financial ruin, his former law firm Bingham McCutchen preemptively filed a lawsuit in Massachusetts hoping to ward off a malpractice lawsuit.   Bingham is seeking a declaratory judgment finding that it acted within the proper standards of care in drafting the McCourts’ voided post-nuptial marital agreement and should not be liable for any losses Frank suffered.  Bingham followed that suit with a separate request for declaratory judgment from an arbitrator relying on a 2006 settlement agreement between the firm and McCourt.  That settlement agreement requires any disputes relating to Bingham’s acquisition work for McCourt related to his taking over the Dodgers be submitted to arbitration.  Earlier this month Frank’s motion to dismiss the lawsuit was heard in Massachusetts Superior Court.  In the motion Frank argued that Bingham committed malpractice and that it was forcing him to choose when and where to bring his malpractice suit.  He further argued that the lawsuit could force him to waive attorney-client privilege as
well as prejudice his other on-going legal battles.  Lastly, Frank requested that Bingham not be permitted to pursue the arbitration proceeding claiming that the 2006 settlement agreement did not cover the post-nuptial agreement.

Another lawsuit stepped up to the plate in May 2011 when the family of the Giants fan that was severely beaten on opening day filed a lawsuit against Frank, the Dodgers, and 12 other related companies owned by Frank.  The lawsuit asserts that the McCourts’ lavish lifestyle and messy divorce depleted the Dodgers of the necessary funds to operate adequately and properly which caused a drastic reduction in security staff at the stadium and surrounding parking lot and defective facilities, all of which contributed to the beating.  The lawsuit alleges nine causes of action that include: negligence, premises liability, negligent hiring, retention, and supervision, negligent infliction of emotional distress, loss of consortium, assault, battery, false imprisonment, and intentional infliction of emotional distress.  Similar to his other legal proceedings, Frank did not take a walk on this one either.  Frank and the Dodgers initially filed a motion to remove the judge assigned to the case, which motion was granted.  Next they filed documents with the court asserting that the bankruptcy proceedings should stay the lawsuit.  And, most recently, they filed a motion asking the court to strike much of the lawsuit, including any references to McCourts’ “purported financial status, assets, and lifestyle.”  In doing so Frank’s attorneys alleged that “this is a premises liability case.  It is not a corporate fraud action or shareholder derivative suit . . . [and] allegations relating to [Frank’s] finances, his use of funds, the corporate structure of his assets or his lifestyle have no place here.”

Like the sands of the hourglass, the McCourt battle drags on and truly puts them and their tenure as the owners of the Dodgers in “A League of Their Own.”  Meanwhile, the Dodgers and its fans are “The Biggest Loser” thus far.  The Dodgers are mired in the bottom of the National League West and it seems the fans no longer want to watch the implosion on the field or off it.  The Los
Angeles Times
estimated that the Dodgers will lose $27 million in ticket, parking and concessions, representing a 9.4% revenue decline and about 8,000 fewer fans per game.  It appears that the Dodgers’ fans have spoken and the “The Verdict” is in.  They want the game called and the McCourts’ “L.A. Story” to be completed.  However, barring a “Miracle at Chavez Ravine” it appears that they will have “Unanswered Prayers” for the foreseeable future.

2 thoughts on “The Dodgers Debacle”

  1. In the past, I have frequently disparaged Walter and Peter O’Malley who ran the Dodgers from 1950 to 1998. In retrospect, they were just astute businessman who understood better than most how to exploit a sports monopoly. In contrast, Murdoch and the McCourts have turned the franchise from a powerful diesel locomotive into a wrecked pleasure boat.

  2. Are the Dodgers really one of the most prestigious teams in sport? If so, it’s based on past reputation and not actual results on the diamond.

    Between 1988, when they won the World Series, and 2003, the year before the McCourts bought the team, they made the playoffs only twice and failed to win a single playoff game. Since 2004, they made the playoffs five times and won a total of three games.

    While the McCourts’ excesses have been revealed because of their divorce, I doubt what they are doing is much different than many other baseball teams.

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