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Bankruptcy, MLB's Right to Choose, and Misconceptions on Franchise Law

In the wake of MLB's threats not to approve anyone other than the Greenberg/Ryan group if Judge Lynn were to order, as part of the bankruptcy proceedings, that someone else should be awarded the team, we've seen some backlash against MLB for their supposed disregard for the law.

A couple of examples...Sports by Brooks, which is really more TMZ than BP when it comes to baseball analysis, offers this:

That’s right, MLB would shut down the Rangers if a bankruptcy judge did not allow them to give the team to Ryan and Greenberg. In other words, if you make Bud Selig & Co. actually follow the letter of the law, they’ll just take their ball and go home.

Rather than give the team to the current highest bidder, the bankruptcy judge now plans to put the club up for auction on August 4. The club’s creditors, like J.P. Morgan bank, think the team could ultimately fetch nearly $1 Billion,* but with auction deadline just two weeks away and MLB threatening to "terminate" the franchise if its cronies aren’t gifted the team, can you see an outsider trying to crash Selig & Co.’s private club?

If Ryan and Greenberg do end up with the team, that’s good news for small market clubs who have less money to spend on payroll. But is end-running lenders out of hundreds of millions of dollars by manipulating the legal system really the way to make that happen?

*  This is the first I've seen of the team supposedly being able to "ultimately fetch nearly $1 Billion," and I'd take that number with a grain of salt.

Craig Calcaterra opined similarly:

The daily blow-by-blow of the legal battle involving the sale of the Texas Rangers has gotten so technical and boring that it's understandable if you've tuned out by now.  But the big picture is still a fascinating one.  Perhaps the most fascinating aspect of it all is that, at its heart, the Rangers sale is all about Major League Baseball insisting and expecting that it be allowed to act differently than just about any other business in America.

As the New York Times' Richard Sandomir and Ken Belson report in a nice 10,000-foot view article today, baseball doesn't expect its owners to sell to the high bidder and it doesn't expect to have to explain why the lower bidder should win.  Except now it's in federal court, and federal judges are decidedly hostile to anyone who expects them to uphold and apply self-interested and economically illogical policies like that.

Here's the problem with the high-and-mighty recriminations of baseball acting above the law...

I don't know that MLB is acting any differently than any other franchisor would be acting, should one of its franchisees declare bankruptcy.

If Joe PizzaGuy owned a few Domino's pizza restaurants through JoePizzaGuy Inc., and the business borrowed a bunch of money it couldn't repay, ended up in bankruptcy court, and had to sell the franchises, would anyone reasonably argue that the Domino's head office folks back in Detroit wouldn't be able to have any say in who would end up owning those franchise?

As I have made crystal clear before when discussing this issue, I am not a bankruptcy lawyer.  I'm not qualified to opine on bankruptcy law. 

However, just Googling the issue brings up some articles on the subject.  Here's one from a few years back, discussing franchisee bankruptcies:

If the franchisor does not effectively terminate a franchise agreement before a franchisee’s bankruptcy filing, the agreement will become part of the bankruptcy estate. A franchise agreement that is operative at the time of the bankruptcy filing is known in bankruptcy parlance as an "executory contract." Overriding contractual provisions to the contrary, the Bankruptcy Code authorizes a debtor or bankruptcy trustee to assume (keep) and assign executory contracts. This often is true even though the debtor is in default under the franchise agreement at the time of the bankruptcy filing, so long as the agreement has not been terminated prior to the filing. In some instances, the franchisor may not have any meaningful input on the acceptability of an assignee.

The Bankruptcy Code does, however, provide certain protections for franchisors that face the situation of having a "live" franchise agreement in a bankruptcy proceeding:

  • In order to assume and assign a franchise agreement, the debtor or trustee must first cure all defaults under the agreement. The cure amount is determined by adding all damages resulting from the breach, including reasonable attorneys’ fees (assuming the franchise agreement provides for them). The cure requirement also applies to non-monetary defaults. In some instances, the debtor may not be able to cure a non-monetary default, and might be prohibited from assuming the franchise agreement.

  • The debtor or trustee must assume the entire agreement, not only those elements that the debtor or trustee finds favorable. The debtor or trustee must also provide the franchisor with adequate assurance of future performance under the agreement. Adequate assurance is not defined in the Bankruptcy Code, and can take many forms. Generally, adequate assurance is considered something less than a personal guarantee and is assessed on a case-by-case basis.
  • The Bankruptcy Code has a useful exception to the general rule regarding executory contracts: a bankruptcy trustee may not assign an executory contract where a specific federal or state law excuses a party to the contract from accepting performance from, or rendering performance to, an assignee if that party does not consent to the assignment. This exception could be useful for franchisors in states where a franchise statute restricts a franchisee from transferring the franchise without first obtaining the franchisor’s consent. For instance, in In re Pioneer Ford Sales, Inc., 729 F.2d 27 (1st Cir. 1984), the court relied on a Rhode Island statute that prohibited the assignment of an automobile dealership without the reasonable consent of the manufacturer to prevent a trustee from assigning an automobile dealership.

So...I would be interested in hearing more from someone who knows more about this than I do. 

But it seems like MLB isn't acting any differently than any other franchisor would be acting, should a franchisee declare bankruptcy.  Franchisors have, from what I understand, a lot of power to decide who is and isn't going to be given a franchise.  And I question whether a franchisor can be forced to accept a franchisee the franchisor doesn't approve of.

Or, to use the "club" analogy Sports by Brooks you think if a member of Augusta Country Club were to declare bankruptcy, and his assets were to be sold, the Augusta membership could be auctioned off to whatever Tom, Dick or Harry might want to buy it, without regard to whether or not the country club approves?

It is a rare thing when I find myself defending Bud Selig and MLB, but in this case, they seem to be acting well within their rights, and not "above the law."