FEATURE: The Sports Blawg with the Fordham Sports Law Forum
The Fordham Sports Law Forum is dedicated to bringing interesting issues in sports law to the Fordham legal community. Each week, in conjunction with the Intellectual Property, Media & Entertainment Law Journal, members of the Fordham Sports Law Forum write posts about current sports law issues and events.
There’s No Dodging Selig: Bankruptcy in MLB and the New CBA
On Tuesday, November 22, 2011, Major League Baseball (“MLB”) players and owners signed a new Collective Bargaining Agreement (“CBA”) expiring in 2016. At a time when labor disputes have disrupted the NFL and the NBA, the MLB proudly, and loudly, boasted that this agreement marks 21 years of labor peace in baseball. While this achievement should not be belittled, provisions in the new CBA reveal that the MLB is not quite as healthy as it may seem. During the 2010-2011 season, nearly one third of MLB teams faced serious financial problems and were in violation of the league’s debt service rules. This means that these teams had outstanding debt exceeding ten times their annual earnings.
The most publicized of these struggling franchises was the Los Angeles Dodgers and their monumental decline into the depths of bankruptcy. Frank McCourt, the Dodgers’ soon-to-be-former owner, was accused by the MLB of siphoning more than $180 million in revenue and racking up an enormous amount of debt by borrowing against league facility funds. This led Commissioner Bud Selig to exercise the inherent powers of his office to regulate privately owned franchises and to take over the franchise.
The struggle over control of the Dodgers set of an on-going legal battle. In June, Mr. Selig continually blocked attempts by McCourt to raise short-term capital. These tactics forced the Dodgers to file for bankruptcy as McCourt fought to keep ownership of the Dodgers. By the beginning of November, however, Mr. Selig was able to pressure McCourt into a settlement agreement, ending litigation, and calling for a court-supervised sale of the team and its media rights.
Unsurprisingly, concerns surrounding the financial stability of certain teams became an important issue in negotiating the new CBA. The new CBA includes changes to the debt service rules, lowering the permitted debt to earnings ratio from 10 to 8. This means that teams will not be allowed to carry debt that is more than eight times their earnings. The CBA also added a provision stating, “[t]he debt of a Club’s owner or related party will be covered by the Debt Service Rule if the debt is serviced, in whole or in part, using Club funds or assets.” This new rule has affectionately been dubbed the McCourt Rule.
The financial woes of the Dodgers provide an unfortunate example of the legal complexities involved in navigating between the law of the land and the law of the league. Throughout his dealings with the Dodgers, Mr. Selig demonstrated the unfettered extent of his power over individual teams and their finances. Mr. Selig dominated the legal proceedings and negotiations from the very beginning, with the clear objective of removing McCourt as owner of the Dodgers. With the stricter financial oversight provided by the CBA and the ability of the Commissioner to take over a team and kick out its owner, MLB is sending a clear warning to struggling organizations around the league: follow the rules or risk the consequences.