July 1 (Bloomberg) -- The Los Angeles Dodgers warned the monitor appointed by Major League Baseball to oversee the team not to interfere with its operations, saying in a letter he would be violating a bankruptcy court order, a person familiar with the document said.
The letter cited a routine order in all bankruptcy cases known as the automatic stay, which temporarily halts lawsuits while a company tries to reorganize under court protection, according to the person, who has seen the letter and wasn’t authorized to speak publicly about it.
In April, Baseball Commissioner Bud Selig said he was appointing a representative to oversee the team’s business and day-to-day operations because of “deep concerns regarding the finances and operations of the Dodgers.” He later named Thomas Schieffer, former president of the Texas Rangers, as the team’s monitor.
The Dodgers filed for bankruptcy on June 27 after Selig rejected owner Frank McCourt’s proposed television-rights deal with News Corp.’s Fox Sports. The team may start trying to find a buyer for their future cable TV rights “very soon,” Dodgers attorney Bruce Bennett said yesterday in an interview.
A successful auction of the future rights would keep McCourt in control of the team and allow it to exit bankruptcy, said attorney Thomas Salerno, who represented the Phoenix Coyotes in its bankruptcy court fight with the National Hockey League.
The bankrupt team’s current contract with Fox includes an agreement that the Dodgers “shall not solicit offers from or negotiate with any person or entity (other than Fox Sports) for cable television rights with respect to any future games at any time preceding Nov. 30, 2012,” according to court records. In court papers the current owner of cable rights is known as Fox Sports Net West 2 LLC.
The contract with Fox “could be a stumbling block,” Douglas G. Baird, a University of Chicago law professor specializing in bankruptcy, said in an interview. “It’s going to be something they have to navigate around.”
The Dodgers “will endeavor to avoid breaches and mitigate damages” related to the current Fox Sports agreement, Bennett said in an interview June 28. An auction overseen by the U.S. Bankruptcy Court will not necessarily breach the Fox agreement, Bennett said.
Fox Sports considers their current television-rights deal confidential, attorney Paul Laurin told U.S. Bankruptcy Judge Kevin Gross June 28 during the Dodgers’ first bankruptcy court hearing. Laurin didn’t return a call for comment. Chris Bellitti, a spokesman for Fox, did not return a call for comment.
Holding an auction and entertaining competing bids without support from Fox Sports may be difficult, bankruptcy attorney Bryan Krakauer, with the law firm Sidley Austin LLP, said in an e-mail.
“If the debtors presently have positive net worth, it may be difficult to justify any breach of the Dodgers’ existing media contract, which would create a large damage claim and possibly wipe out equity and dilute general creditor recoveries,” Krakauer said.
Krakauer represents the bankrupt newspaper publisher, Tribune Co., and helped design the sale of that company’s controlling stake in the Chicago Cubs baseball team.
Major League Baseball will argue that it has a right to approve a new TV contract under its rules, Salerno said. Similar legal arguments were made in the cases of the Phoenix Coyotes and the Texas Rangers, the only other teams to fight their leagues in bankruptcy court, he said.
In the Coyotes case, the National Hockey League won, convincing a judge to reject a sale that would have moved the hockey team to Canada. In the Texas Rangers case, the judge approved a sale to MLB’s preferred buyer, although he issued an important warning that could apply to the Dodgers case, Salerno said.
U.S. Bankruptcy Court Judge D. Michael Lynn in Fort Worth, Texas, ruled that he had authority to overrule the league should the owners fail to consider a competing bidder in “good faith.”
That good faith standard would apply to the league’s opposition to a sale of the Dodgers TV rights, Salerno said.
A successful auction would fix the Dodgers’ temporary cash crunch and provide money McCourt can use to try to settle a battle with his ex-wife, Jamie McCourt, for control of the team. The Dodgers said in court papers that the original Fox Sports deal would have provided $55 million of the $100 million Jamie McCourt had agreed to accept should she lose her divorce court fight for half the team.
“A trial on ownership rights actually might expedite the reorganization as Ms. McCourt has made it clear that the club should be sold and she likely will have an ally in MLB if things move in this direction,” bankruptcy attorney Kristopher Hansen said in an e-mail.
Laura Davis Jones, a lawyer for Jamie McCourt, declined to comment.
On June 28, the Dodgers won court approval to use as much as $60 million of a bankruptcy loan after agreeing to remove a deadline that would have required an auction within six months. Major League Baseball opposed the deadline.
The league’s main goal at the hearing was to stop the Dodgers from trying to auction the broadcast rights, MLB lawyer Tom Lauria said. Baseball Commissioner Bud Selig on June 20 rejected a proposed deal with News Corp.’s Fox Sports, leaving the Dodgers unable to make payroll, the team said.
McCourt said the 17-year agreement, valued by him at about $3 billion, would have assured the team’s financial stability.
Although the deadline has been removed from the loan terms, the team still has the right to propose an auction while under court protection, Bennett said.
The rejected Fox Sports agreement included a $385 million loan, of which $211.5 million was to go toward the team’s operations and working capital, according to court papers.
Baseball said it was withholding approval of a new TV contract until completing an investigation into the club and its finances. On June 20, Selig said he was rejecting the transaction, saying in a statement that it “would have the effect of mortgaging the future of the franchise to the long-term detriment of the club and its fans.”
The legal fights mean the Dodgers can’t be certain about their future, Hansen said.
“Due to the pressure that Ms. McCourt can exert over Mr. McCourt” and the non-bankrupt holding companies, the Dodgers “may not have enough time to play out the auction option,” Hansen said.
“I don’t know that the Dodgers know what the endgame to their case is,” he said in an interview.
The Dodgers listed assets of as much as $1 billion and debt of as much as $500 million in a Chapter 11 petition filed in U.S. Bankruptcy Court in Wilmington, Delaware.
The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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