|Friday, July 12
Updated: July 14, 10:24 PM ET
Big difference between liquidation and reorganization
By Darren Rovell
Unlike other businesses, for whom a bankruptcy rumor would be a public relations nightmare, Major League Baseball has gone out of its way to make sure people know that some of its franchises are on the verge of going out of business.
In May, commissioner Bud Selig said six to eight teams could close up shop within 18 months. This week, Selig said that one team faced the possibility of missing payroll and another might not last the season.
But completely shutting down a team is significantly different from filing for reorganization. No team in one of the four major leagues -- MLB, NBA, NFL or NHL -- has ever filed for Chapter 7 bankruptcy. Unlike a Chapter 11 filing, Chapter 7 would dissolve the team's assets into cash for the creditors and the team would fold.
It's an important point to make in light of Selig's recent statement that "if a club can't make it, I have to let them go."
Baseball officials already have said they want to eliminate teams through contraction. If arbitrator Shyam Das denies MLB the right to unilaterally contract teams, perhaps the only way the league can gain the upper hand in labor negotiations with the Players Association is to have the threat of a Chapter 7 bankruptcy become real.
"To create the kind of chaos associated with shutting down a team or two would finally create the leverage that baseball has been seeking," said Chad Dale, a bankruptcy lawyer with Gadsby Hannah, a Boston-based firm that represented Pittsburgh Penguins owner Roger Marino in his Chapter 11 filing in 1998. "They would salivate for that to happen."
In a Chapter 7 filing, the team's assets would be liquidated and player contracts voided, effectively rendering all the team's players free agents.
Fans and media have had a hard time believing the cries of poverty, and many players won't believe it until the free-agent market is flooded with players as a result of a complete liquidation.
"It's sort of like Chicken Little," said Richard Brown, who served as president of the California/Anaheim Angels from 1990-1996. "People won't believe the sky is falling until it starts falling."
While John McHale Jr., baseball's executive vice president of administration, said that a couple of teams going out of business "would have an enormous effect on the future of the game," he said that no plan is in the works to pressure team owners to give up.
"Having teams go out of business is not part of our planning," McHale said. "In fact, that prospect is unpalatable to us. Doing that would be like trying to fix a hangnail by amputating your arm."
However, if MLB is serious about contraction, then having a team file Chapter 7 bankruptcy would serve the same purpose. The team simply would disappear. If MLB in fact wants teams to survive but perhaps under new ownership or in a new location, having the team file Chapter 11 would be preferable.
At that point, the franchise's value becomes important. The owner of a struggling franchise is more likely to salvage some of his investment by filing Chapter 11 and selling the team in bankruptcy court than by filing Chapter 7 and liquidating.
Five owners of four teams have filed for Chapter 11 bankruptcy, or reorganization, since 1970, when Selig bought the Seattle Pilots out of bankruptcy for a reported $10.8 million. And each time a team filed for Chapter 11, there were buyers ready to step in.
While potential owners are scarce and new cities to which to relocate might be moreso, it's unlikely an available team would have no serious bidders.
"I'd be surprised to see a Chapter 7 bankruptcy," said Richard Wynne, a partner with Kirkland & Ellis who has lectured on sports franchises and bankruptcy law. "The owner would at least have to make the effort to sell the team."
But Brown says efforts could come up short given the game's economics.
"If there's a team that's just not profitable and shows no potential -- perhaps simply because of the market that it is in -- to make money in the future, it's very possible a Chapter 7 could happen," Brown said.
If a team files for Chapter 11 reorganization and ultimately becomes available for purchase, it could wind up lowering the value of the Montreal Expos, which MLB bought for $120 million in February when owner Jeffrey Loria became the owner of the Florida Marlins.
The Expos are playing above-.500 ball, contending in the NL East and recently acquired Bartolo Colon and Cliff Floyd, all of which contribute to increased franchise value. Should the league decide to sell the team -- say, to investors in Northern Virginia -- rather than contract it, the league could realize a significant profit.
Rodney Fort, a Washington State University sports economist, said he believes the league can do that with other teams as well.
"Why would an owner bother to go through a bankruptcy court," Fort said, "when he can just abandon it and give it to Major League Baseball, which will buy it for cheap and sell it for $150 million or more?"
Darren Rovell covers sports business for ESPN.com. He can be reached at firstname.lastname@example.org.