While star-studded, roots of Dodgers’ bankruptcy familiar

Originally appears in the Lee's Summit Journal

On Monday, the Los Angeles Dodgers Holding Company LLC filed for Chapter 11 Bankruptcy protection in the District of Delaware (I will let the irony of the L.A. Dodgers filing in Delaware wash over you for a moment). With assets listed in excess of $500 million, debts over $1 billion, the famous names at the top of the creditor list (Manny Ramirez, Vin Scully), and the active opposition of Major League Baseball (MLB), it might appear that this bankruptcy has no relevance to the financial struggles of more regular folks. However, the actions that led to the bankruptcy are the same symptoms that lead many of my clients into my office, just written on a much larger financial scale (I don’t handle any billion dollar cases, though I am told the fees are pretty nice).

Last year, the Texas Rangers filed a bankruptcy case, but that one was much different than the Dodgers promises to be. First, the Rangers had already been placed under control of MLB, since its previous owner had defaulted on debts. The Rangers’ bankruptcy was designed to facilitate a quick sale of the team, and even with all the wrangling that followed (such cases are never simple), the entire process took a little over three months. The Dodgers’ filing is designed to prevent such a forced sale by MLB and one of the interesting legal dynamics will be the interaction of MLB’s anti-trust exemption (which gives it tremendous power over the individual teams) and the bankruptcy code’s provisions for self-management and reorganization. The Dodgers’ owner, Frank McCourt, wants the bankruptcy court to force MLB to allow him to sign a TV contract the league had the right to reject, and to accept further financing in violation of MLB rules. The MLB would like to force McCourt to sell the team, and soon, and they have the power to force such a sale if need be (outside a bankruptcy court).

But why are the Dodgers in bankruptcy in the first place? In short (and oversimplified), for two reasons many people are in bankruptcy: Divorce and a failure to adjust lifestyle in the face of changed economic circumstances.

Frank McCourt and his wife Jamie are in the midst of a high-profile divorce, the kind that only seems able to occur in California and on Tabloid Television. Ownership of the team is in dispute in the divorce, which has limited the ability of the Dodgers to field a winning and profitable product. Typically, when a couple divorces, the total living expenses required to support all the family members rise (multiple households), and there isn’t extra income to cover it. For most Americans, who live so close to the edge of their means to start, this means there isn’t enough money left to pay all the creditors, and often one or more of the couple will end up filing a bankruptcy. The McCourts exacerbated this issue by maintaining their lavish lifestyle, including buying two neighboring million dollar homes, in the face of their split, and taking an alleged $100 million out of the Dodgers to use on personal expenses. This “withdrawal” left the Dodgers short on cash for meeting their obligations, and got MLB interested in the financial matters of the team.

While my sympathy for two millionaires fighting for control of a profitable Major League Baseball franchise and refusing to downgrade their lifestyle to just below mind-bogglingly lavish is severely limited (okay, non-existent), the parallels are easy to draw down to those of us who live on planet earth. If you are going through a divorce, it is vital that you examine the financial ramifications of the dissolution. Finances are not a good reason to remain in an unhealthy marriage, but both parties should be able to take a sober look at the realities created by separate households, from extra rent/mortgage payments to added child care costs, insurance and ten other items that if not attended to will invariably lead you to my door. Sometimes, even careful planning won’t avoid a bankruptcy, and a bankruptcy can occasionally make a divorce a bit less painful. But understand that any life change requires with it a life finance adjustment.