Judge rules against Dodgers' financing plan
McCourt ordered to negotiate loan 'in good faith' with MLB
LOS ANGELES -- A bankruptcy judge denied owner Frank McCourt's request to use hedge-fund financing he arranged for the Dodgers during bankruptcy and ordered him to negotiate a loan "cooperatively and in good faith" with Major League Baseball.
The Friday ruling in a Delaware bankruptcy court by Judge Kevin Gross, following a hearing on Wednesday, reverses the court's interim approval of the $150 million loan from JP Morgan's Highbridge, which MLB had argued was inferior to terms it could provide.
The judge agreed, citing the "substantial economic superiority" of the MLB terms and the fact that the Dodgers refused to negotiate with MLB.
Among the reasons Gross cited for reversing the interim decision: McCourt had a previously undisclosed financial stake in the Highbridge financing that "compromised" his judgment. Because of that, the judge indicated, the court considered the loans strictly on their financial terms.
However, Gross also made it clear that the loan must be "independent of and uncoupled from" MLB's oversight and governance of the Dodgers, addressing the club's claim that MLB's ultimate goal in offering the loan is to seize the club and sell it.
"We are pleased that the court has agreed with our position with respect to providing the [debtor-in-possession] financing and shares our long-standing view that the proposal put forth by Major League Baseball is the best option for the Los Angeles Dodgers franchise," Rob Manfred, MLB's executive vice president for labor relations and human resources, said in a statement to The Associated Press. "Major League Baseball remains committed to serving the best long-term interests of the Dodgers and their fans."
Dodgers attorney Bruce Bennett issued a statement that indicated the club will work out financing with MLB but continue attempts to resolve its financial crisis through a sale of television rights.
"The debtors will propose, and, to the extent authorized by the court, implement procedures that are designed to promote a competitive sale process of exclusive cable television rights, while at the same time giving due consideration to the Fox telecast agreement," Bennett said. "The Dodgers expect that a sale or license of exclusive cable television rights will fully resolve all of the Dodgers' financial challenges ...
"From the Dodgers' perspective, 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, as the Dodgers proceed forward with their business plan, with the objective of emerging from the Chapter 11 process before the end of 2011."
The bankruptcy protection was necessary as McCourt was unable to meet payroll obligations last month of about $40 million. As part of the bankruptcy, McCourt arranged a $150 million debtor-in-possession financing from the hedge fund. MLB offered alternative financing at a lower interest rate.
The Dodgers objected to MLB's offer, citing "an adverse relationship." The judge approved the hedge-fund financing on an interim basis to meet payroll until this week's hearing could be held to determine a binding solution.
The original terms of the hedge-fund loan, according to the MLB filing, would have had McCourt pay 10-percent interest and fees of almost $10 million to obtain it. The hedge fund recently reduced the rate to nine percent and also adjusted some of the fees. The MLB offer called for a seven-percent interest rate and no fees.
The judge wrote that McCourt had an undisclosed financial stake in the Highbridge loan -- a $5.25 million fee he would owe personally if he did not seek court approval of the Highbridge financing. Because of that conflict of interest, the court ruled, the Dodgers did not negotiate with MLB.
In court documents, MLB blamed the bankruptcy on McCourt's mismanagement, of his siphoning more than $100 million of club funds for personal use and extreme leveraging and that it was done without the permission of Commissioner Bud Selig or the monitors put in place to oversee the business operations of the organization, in violation of MLB rules.McCourt said the bankruptcy was caused by Selig's refusal to approve a $3 billion media contract with Fox that McCourt said would have afforded the Dodgers immediate and future financial stability. Selig ruled the deal was not in the best interests of baseball, the Dodgers or their fans, and further explained that it would leave the Dodgers at a competitive disadvantage because some of the upfront payment would not go to club operations. The rejected Fox 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 used to meet last month's payroll, $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 McCourt, Frank McCourt's ex-wife, if the club ultimately was ruled Frank McCourt's property through their divorce proceedings.