The Latest Weapon in the Pro Sports Playbook: Bankruptcy

A nasty bout of bankruptcies is racing through the sports world as four North American franchises have taken the unusual step of filing for Chapter 11 in the past three years -- a startling increase from the just six filings in the previous 40 years.

The Los Angeles Dodgers became the latest victim to succumb to the bankruptcy bug as the storied baseball team took the Chapter 11 plunge this week despite being one of the richest and most profitable franchises in all of sports.

But before you blame the sluggish economy for the rash of filings, realize debt-ridden owners and prospective buyers are increasingly using the bankruptcy courts as a vehicle for getting what they want and dodging edicts from league commissioners.

This is something that has happened with increasing frequency in sports. It didnt used to happen much at all, said Robert Boland, a professor at NYU and a lawyer. Owners and potential buyers are definitely using it as a strategy because it might put them in a better situation than the rules of the league.

The rise in bankruptcy filings in the sports world stands in contrast to a decline in the corporate realm. According to government statistics, business bankruptcy filings in the U.S. declined 7.5% in 2010, while Chapter 11 filings tumbled 14%.

Bankruptcy as a Maneuver

The intriguing decision by Dodgers owner Frank McCourt to file for bankruptcy appears to be a thinly-disguised strategic move aimed at buying time to reach a television contract and prevent Major League Baseball from taking over the team. MLB has accused McCourt of funneling more than $100 million of club revenue for personal use.

The Dodgers maneuver follows in the footsteps of recent bankruptcies filings by the Chicago Cubs and the Texas Rangers.

It is rather alarming that for probably 30 years, the only bankruptcies were sporadic and in the National Hockey League, said an industry source, who asked not to be named. The disturbing thing is its not the small-market teams that are blowing up. Its very strange.

Bankruptcy courts tend to offer team owners and prospective buyers a different playing field that may help them skirt the wishes of league front office.

Thats because bankruptcy judges must take into account whats best for the creditors, such as a higher acquisition price. On the other hand, league rules, Boland said, are set up to enhance the value of all the franchises. Sometimes the interest of an individual franchise might come into conflict with those rules.

Four Filings in Three Years

For example, the Phoenix Coyotes filed for Chapter 11 in 2009 after the National Hockey League blocked a $212.5 million deal to sell the team to Jim Balsillie, the billionaire co-CEO of BlackBerry maker Research in Motion (NASDAQ:RIMM). Balsillie had stated his desire to ship the team to Hamilton, Ontario, which may be too close for comfort for the Buffalo Sabres and Toronto Maple Leafs.

While the financial troubles were triggered by the tough economy and the Coyotes playing in a questionable market for hockey -- the team never made a profit in the 14 years since it moved from Winnipeg -- the actual filing appeared to be part of an effort by then-owner Jerry Moyes to get around the wishes of NHL Commissioner Gary Bettman.

The effort failed, as the court ruled the Coyotes could not use bankruptcy to skirt the rules and the NHL ultimately acquired the team for about $140 million. This week, Chicago investor Matt Hulsizer abandoned his $170 million offer to buy the franchise from the league.

The decision to send the Cubs to bankruptcy court in 2009 also appeared to be a strategic one aimed at speeding up the sale of the Lovable Losers from bankrupt Tribune Co. to Joe Ricketts, the founder of TD Ameritrade (NASDAQ:AMTD). The hefty $845 million price tag indicates the filing had little to do with economic troubles.

That brings us to this weeks filing by the Dodgers. Its important to remember L.A. is not exactly poor. According to Forbes, the team is worth about $800 million, more than double the $355 million purchase price when McCourt acquired it in 2004. And the team generated nearly $33 million in profits last year -- the third highest in baseball.

McCourt, who has drawn the ire of MLB Commissioner Bud Selig, seems to be hoping the bankruptcy court will approve a $3 billion TV contract with FOX that would solve his cash problems but has been repeatedly rejected by MLB. (FOX is owned by News Corp. (NASDAQ:NWSA), which is also the parent of FOX Business).

The Dodgers filing is an attempt to restructure, but most importantly to strong-arm the entities that control the sport itself from taking over the franchise, said Scott Peltz, head of the national corporate recovery practice at consulting firm McGladrey.

However, McCourts move may backfire. According to The Associated Press, MLB will probably file a motion to seize the Dodgers from McCourt by citing a clause in baseballs constitution that gives the league the right to take control of a team that files for Chapter 11.

Lack of Buyers for Sports Teams

On the other hand, the 2010 bankruptcy filing by the Texas Rangers did not appear to be a purely strategic move. That filing was caused by heavy debt -- the team was carry a whopping $575 million of debt -- and a 2009 default on a $525 million loan by the clubs parent company, Hick Sports Group, which still owns the Dallas Stars.

While Tom Hicks, the CEO of HSG, reached a $570 million deal to sell the Rangers to a group of investors led by former pitcher Nolan Ryan, a key lender opposed the deal, creating a stalemate which led to the bankruptcy filing in May 2010. A public auction drew another bidder, led by Houston businessman Jim Crane and billionaire Mark Cuban, but the Ryan group ultimately prevailed.

Thats not to say the slow economic recovery has had no role in these bankruptcies. Due to the tough environment, there has been a dearth of willing buyers for teams on the market that the leagues will approve, creating the need for creative bankruptcy filings.

The paper appreciation of these franchises may be greater than a buyer is willing to pay, said Boland.

Given the heavy debt load of many clubs and the lack of buyers, it seems likely the Dodgers bankruptcy wont be the last one.

It would not be a surprise to see more of these, said Peltz.

Before the bankruptcy of the Cubs in 2009, there had been just two Chapter 11 filings over the past four decades in baseball: the Baltimore Orioles in 1993 and the Seattle Pilots in 1969. While the Orioles stayed in Baltimore and have flourished financially under new owner Peter Angelos, the Pilots were sold to a then-obscure Milwaukee businessman.

The mystery man who bought the Seattle franchise? Bud Selig.