The Dodgers’ bankruptcy filing is titillating, involving big time sports, a feud between team owner McCourt and baseball commissioner Selig, and the messy divorce centered around the Dodgers as marital property. We’ll all get a primer on Chapter 11’s as we watch the first day motions and the motions to incur enough additional debt to make payroll this week.
But the issue that has me intrigued is the report that the team owners the McCourts borrowed as much as a $100,000,000 from the Deodger entities for their personal use. Now, in bankruptcy the Dodger management is a fiduciary for its creditors as a debtor in possession. A DIP owes its loyalty first to the creditors and the integrity of the bankruptcy process. In my mind, that puts the propriety of those loans in question.
Might the Dodgers as DIP find themselves suing the McCourts to unwind those loans? Did the McCourts live up to their responsibilities as corporate officers when the loans were made?
If this issue sees the light of press coverage, it will reinforce a point I make for small business folks who come to me with a failing corporation and want to file bankruptcy for the entity: when a corporation files bankruptcy, it invites a trustee into its books to examine the dealings between the debtor and its owners. Between preference and fraudulent transfers, or other forms of self dealing, the result for the shareholders is seldom comforting.
The corporate bankruptcy filing is often superfluous if the shareholders must file bankruptcy as well. In most small corporations, either intentionally nor by inadvertence, the shareholders have liability for a significant portion of the corporate debt. The corporation is not going to get a discharge and the insiders can often liquidate the assets to better effect than the trustee. Further, under state law in California, the officers can pick and choose among the corporate creditors as to who gets paid with the proceeds of liquidation. Not so in a Chapter 7 liquidation.
So, I’m going to be watching the Dodgers in the bankruptcy court (as well as on TV falling to my team, the Giants). What complications arise from using your corporate business as your personal piggy bank when the ” bank” goes bankrupt?
Image licensed under Creative Commons, courtesy of LWY