July 23 (Bloomberg) -- The Los Angeles Dodgers cannot borrow $150 million from a JPMorgan Chase & Co. unit for its bankruptcy and must hold talks with Major League Baseball on its rival loan offer, a judge said.
U.S. Bankruptcy Judge Kevin Gross sided with baseball yesterday after a 10-hour hearing on July 20 where the two sides attacked each other’s motives related to the competing loans. MLB contended its proposal carried a lower interest rate and lower fees than the loan the Dodgers sought from JPMorgan’s Highbridge Capital Management LLC.
“A comparison of the Highbridge loan and the proposed Baseball loan clearly shows the substantial economic superiority of the Baseball loan,” Gross wrote in his eight-page opinion in Wilmington, Delaware. The team is “directed to negotiate with Baseball cooperatively and in good faith,” he said.
The judge rebuffed the typical practice of deferring to the Dodger’s “business judgment” in deciding which loan was best because McCourt didn’t make a “disinterested or independent decision” regarding the loan.
Evidence shows that if the Dodgers, controlled by Mr. McCourt, “did not seek court approval for the Highbridge loan, Mr. McCourt would personally owe $5.25 million to Highbridge,” Gross said in the decision. He further added that “such potential personal liability clearly compromised” McCourt and the Dodger’s decision.
The Dodgers initially rejected the MLB loan, saying Commissioner Bud Selig is biased against the team and owner Frank McCourt. Gross on June 28 gave the team interim approval to borrow $60 million from Highbridge after the Dodgers agreed to changes in the loan terms.
“A short-form unsecured credit agreement with MLB, when combined with other sources of revenues, should provide the Dodgers with ample liquidity to meet team payroll and other expenses,” Bruce Bennett, a lawyer for the Dodgers, said in an e-mailed statement. The team will proceed “with the objective of emerging from the Chapter 11 process before the end of 2011,” he said.
Baseball attorney Tom Lauria didn’t immediately return an e-mail seeking comment on the judge’s decision.
MLB has agreed to drop the provisions the team considered “problematic,” Bennett said in a telephone interview today. Bennett doesn’t think the league’s loan will have any effect on the Dodgers’ plan to auction off the team’s TV rights. “We expect this credit agreement will not, in any way, restrict our reorganization strategy,” the lawyer added.
MLB said in a July 14 filing that it would be willing to provide “unsecured financing” to the team that wouldn’t require any collateral to guarantee repayment. The so-called debtor-in-possession loan would fund the Dodgers’ operations during the bankruptcy.
The next phase of the case will center on control of the Dodgers and how best to reorganize the team. In bankruptcy, the DIP lender can have more influence over the direction of the case than other creditors, especially when there are no other large, secured debts.
The MLB loan must be “independent of and uncoupled from Baseball’s oversight and governance of the Dodgers,” Gross said in his ruling. He added that he didn’t view the loan as “a vehicle for Baseball to control” the Dodgers.
Both sides agree that selling assets, especially the rights to show games on cable television, would pay creditors and allow the Dodgers to exit bankruptcy. The Dodgers filed for bankruptcy on June 27 after Selig rejected a proposed cable-TV rights deal McCourt negotiated with News Corp.’s Fox Sports.
The Dodgers plan to begin a sale process for the TV rights next month. Selling those rights is the main goal of the bankruptcy, Bennett has said.
Lauria previously said that Selig hasn’t yet decided what the Dodgers should do while under court protection from its creditors.
Disputes over who should control the Dodgers and what the team should do in bankruptcy will be more intense than the fight over the loan, Gross said at the end of the July 20 hearing.
“I suspect it is going to be a little bit more of a bare-knuckled affair than what it has been,” Gross said.
The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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