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Moral Hazard And The Dodgers Bankruptcy Bailout

Reported by Forbes.com
Thursday, June 30, 2011
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By Roger Groves, Forbes.com

The theory of moral hazard is that when a company financially fails due to its own ineptness, a bail out is morally reprehensible because the action rewards a company for its own failures.

Frank McCourt, flailing owner of the Los Angeles Dodgers, has now filed for federal bankruptcy protection. It is one of several ways McCourt desperately attempts to keep the once-highly valued franchise. The type of bankruptcy filing was under Chapter 11 – a reorganization.

This allows the debtor to get the court to force creditors to receive less than what they are owed and the debtor often keeps all or some of the ownership interests. So instead of liquidating (taking my ball and going home and giving up on the company), McCourt is asking for the chance to keep his Dodger ball team in play, and forcing others to go home if they want full payment for what McCourt owes them.

Why do we even have bankruptcy laws to protect bad business people? The underlying policy is that we are a country that favors giving people and companies a second chance. Sometimes that turns into a third and fourth chance. Why should McCourt be able to take advantage of it?

That is the question the MLB Commissioner Bud Selig is asking. A bankruptcy judge could conclude McCourt does not yet belong in bankruptcy court. The judge could state MLB can decides whether someone else should take over the team or the conditions under which new business deals can be undertaken by the team. I am with the Commissioner on this one.

McCourt essentially claims, “If Selig would have allowed a lucrative Fox TV deal, with $385 million up front, I could have paid my operating expenses.” I say Selig is correctly given the authority by the group of teams to say, “ We should not allow a team to depend on TV rights for a few years just to make payroll, especially when a divorce could cause half of the team to go to someone the League did not authorize.” The TV tail is already wagging the dog more than it should. If we authorize that behavior for the Dodgers, it is a sticky precedent for the next team – like the struggling Mets – for the same opportunity. We have a legal phrase for that too – “Most Favored Nation” status.

In this fight between an individual team owner, and the leader of all the team owners, the interests of the entire league should be prioritized. The Commissioner is the collectively-decided leader for the greater good and just like a board of directors that acts as a fiduciary for the corporation, that potent authority should not be sterilized. Bankruptcy Court has the potential for such sterilization. The judge does not have the primary interests of the League as his or her legal priority. The judge does not have to consult the team owners or be governed by their judgment. The judge has a wide array of laws specifically designed to give the judge great flexibility. That flexibility is often used to give that debtor a second chance.

But at the same time I think MLB should be held accountable for even allowing McCourt to own the team in the first place. How to hold the Commissioner or the League accountable is the hard part. Maybe there should be a special statutory provision in bankruptcy or any other court that becomes the venue of last resort for sports franchises. Somehow the interests of the fans and the “industry” of the sport should be both prioritized over the second chance interests of the debtor.

And then there are the creditors. Venerable announcer Vince Scully is owed over $ 150, 000. Former player Manny Ramirez is owed over $20 million and star player Andrew Jones is owed about $11 million. Let MLB subsidize the operation to make sure fans do not have higher ticket prices. Let MLB make sure McCourt pays those that McCourt was contractually obligated to pay or pay it from MLB funds. But don’t make the fans or the players or even the poor concessionaires like the American taxpayer when we collectively rescued the institutions deemed “too big to fail”. The McDodgers are not that big.

*** “Roger M. Groves is a Professor of Law at Florida Coastal School of Law, teaching business and sports courses. Visit Roger at http://center4players.com/ and follow him at Twitter@rgroveslaw.

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21/09/2014 20:06Sydney, Australia. 21 September,2014
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