I. Introduction
In the struggling economic climate, many corporations have sought bankruptcy relief. Numerous financial institutions such as the automobile industry and electronic corporations have become accustomed to seeking such restructuring aid and most recently, even the sports world is no longer immune. In October 2009, the Chicago Cubs organization became yet another victim in this economic downturn as the Tribune Company filed Chapter 11 bankruptcy for the baseball team. Although many companies have sought relief due to monetary struggles, “‘You don’t have to be insolvent to be in bankruptcy [. . .] All you need is a legitimate business reason.’” [1] The Chicago Cubs seek reprieve as a way to sell the organization in a tight credit market to an eager buyer, not willing to take on the debt of the parent corporation to its creditors. Through the sale of the Chicago Cubs, the organization can look forward to new ownership, ward off all creditors to the parent corporation, and possibly one day shed their “lovable loser” status. [2]
II. Chicago Cubs Bankruptcy Filing
In the history of baseball, only three teams have filed for bankruptcy. In 1969, the Seattle Pilots, later renamed the Brewers and moved to Milwaukee, in 1993, the Baltimore Orioles after owner Eli Jacobs filed for Chapter 11 bankruptcy, and finally on Monday October 12, 2009, the Chicago Cubs have etched their names on this short list of Major League Baseball teams [3]. The Chicago Cubs are “notorious for not having won baseball’s championship, the World Series, for 101 years, making it the longest title drought in U.S. sport.” [4] Owned by the Tribune Company, which also owns the Chicago Tribune and the Los Angeles Times in addition to the Chicago Cubs, filed for bankruptcy protection in December. [5] At the time of this company filing, the Tribune Company did not include the Cubs franchise in the bankruptcy proceeding. [6] In order for the Tribune Company to make the sale of the Chicago Cubs to the Ricketts family that has been pending for over two and a half years, filing within Chapter 11 will help to relieve the organization of its obligations prior to the Rickett’s takeover. [7]
III. Chapter 11 Bankruptcy Filing
The Chicago Cubs filed under Chapter 11 bankruptcy, which allows for a rehabilitation of the debtor. [8] Although a successful Chapter 11 bankruptcy filing reorganization is only around 10%, the Chicago Cubs will most likely be successful in their reorganization due to the ease of this filing, quick approval by Major League Baseball, as well as the new buyer already in place. [9] In order to file under this chapter in general, a petitioner must be any partnership, corporation, or limited liability entity, except a governmental unit. [10] Within Chapter 11 bankruptcy, the debtor generally retains possession of their assets and continues to operate their business under the supervision of the court and for the benefit of their creditors. [11] Additionally, under this chapter, the petition for bankruptcy may be filed voluntarily by the debtor or involuntarily by the creditors who meet certain requirements. [12]
As a debtor in possession, a company within Chapter 11 bankruptcy does not put the personal assets of the stockholders of the company at risk other than the value of the investor’s investment in the company’s stock. [13] In fact, the goal of filing under Chapter 11 is to allow the business to continue in some regard and as a debtor in possession of retaining assets; the debtor retains the rights of a bankruptcy trustee. [14] Therefore, in filing under Chapter 11, § 1107 of the Bankruptcy Code “places the debtor in possession of the a fiduciary, with the rights and powers of a chapter 11 trustee, and it requires the debtor to perform of all but the investigative functions and duties of a trustee.” [15]
Only after filing under Chapter 11 can a debtor submit a plan of reorganization within 120 days of the commencement of a bankruptcy case. [16] When creating a plan of reorganization, the United States Trustee appoints one or more committees to represent the creditors and their interests as well as the interests of the stockholders. [17] When developing a plan of reorganization and working with the company in trouble, certain steps are followed to ensure its success: (1) Debtor company develops a plan with committee (2) Company prepares a disclosure statement and reorganization plan and files it with the court (3) SEC reviews the disclosure statement to be sure it’s complete (4) Creditors (and sometimes the stockholders) vote on the plan (5) Court confirms the plan, and (6) Company carries out the plan by distributing the securities or payments called for by the plan. [18] In certain cases, a bankruptcy court has the ability to “cram down” a plan over the objection of creditors, and although creditors may again object, these objections are generally limited to the technical requirements of Chapter 11. [19] Once objections cease, however, confirmation of the plan for reorganization as a discharge of debts, filed or not, excluding those specified as not dischargeable elsewhere in the Bankruptcy Code can result and a successful reorganization may commence. [20].
IV. Legal Ramifications of the Chicago Cubs Filing for Bankruptcy
The proposed sale to Joe Ricketts, founder of TD Ameritrade, will cost around $845 million and in addition to the ownership of the baseball team, this price tag also includes the rights to Wrigley Field as well as the Tribune’s twenty-five percent ownership of Comcast Sports Net Chicago. [21] The sale of the Chicago Cubs organization would “dispose of one of the Tribune’s principal assets and represent a substantial step in Tribune’s Chapter 11 reorganization.” [22] “The filing by the Cubs will be intended to ensure that the sale proceeds with court approval, that the Cub’s assets are transferred free and clear of all liens and claims, and that contracts can be assumed and assigned to the new entity formed to control the Cubs.” [23] In fact, “Section 363 of the federal bankruptcy code allows a company to sell assets ‘free and clear’ of a lender’s lien and without the creditors’ consent under certain circumstances.’” [24]
The sale of the Chicago Cubs would bring the Tribune creditors approximately $740 million. [25]The largest of these creditors includes JPMorgan, Chase Bank NA, Major League Baseball, and Merril Lynch Capital Corporation. [26]. In addition to corporation organizations acting as creditors, at least two former Chicago Cubs baseball players, Luis Vizcaino and Shawon Dunston have monetary claims against the organization as well. [27] Due to the fact that Major League baseball has already signed off on this team’s sale, as soon as the filing and restructuring is approved and the court upholds this reorganization, the Ricketts can begin to enjoy their ownership and the creditors can enjoy receiving compensation. [28]
Having the Chicago Cubs file for Chapter 11 Bankruptcy serves as a legal maneuver to absolve the team from any possible future liability that the Tribune Company’s bankruptcy proceedings could bring. [29] In fact, this move serves more than a stepping stone to relieve creditors of their worry of compensation because a guarantee of ridding of the Tribune Company’s creditors exists as soon as the Cubs’ reorganization would begin. [30] However, since the Chicago Cubs have filed for Chapter 11 bankruptcy, it must adhere to the rigid rules that the courts provide. [31] Operating outside of the bankruptcy courts would have allowed the Cubs to side-step the checks and balances of the court. [32]
Possible problems that the Chicago Cubs could face come at a price that the organization might feel more heavily than any tug on the pocketbook. “Including the Cubs in the filing could hamper the team’s ability to pursue expensive free agents, manage its farm system and quickly make deals without going a bankruptcy judge for approval.” [33] However, due to the fact that the Tribune Company filed separately from the Chicago Cubs organization, the team should be clear from such action. [34]
V. Conclusion
The Chicago Cubs filing for bankruptcy is part of a larger bankruptcy transaction that allowed for their parent corporation, the Tribune Company, to relinquish ties with the baseball team in order to relieve the creditors of obligations before transferring ownership to the Ricketts family. Although this Chapter 11 filing had little to nothing to do with a dire financial state, the restructuring of the team will allow the Ricketts to take over on a clean slate and start the new baseball season next spring with a fresh face behind the organization. Despite the fact that the Chicago Cubs did not file due to financial matters and therefore will be little affected by the reassigning of management, other teams who file for fiscal issues may face additional consequences that could affect the team through a more stringent reorganization process monitored by the bankruptcy courts.
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[1] Greg Bensinger & Gadi Dechter, Chicago Cubs Bankruptcy Looms as Way to Finish Sale by Tribune, Bloomberg, July, 13, 2009, available at www.bloomberg.com/apps/news.
[2] Matt Egan, MLB’s Chicago Cubs Could File for Bankruptcy, Fox News, July 13, 2009, available at www.foxbusiness.com/story/markets/industries/entertainment.
[3] Chicago Cubs Team Files for Bankruptcy, CBS News, Oct. 12, 2009, available at http:cbs11tv.com/sports/Chicago.cubs.bankruptcy.2.1242788.html.
[4] Chicago Cubs in bankruptcy move, BBC News, Oct. 13, 2009, available at http://newsvote.bbc.co.uk/mpapps/pagetools/print/news/bbc.co.uk.
[5] Andrew Ross Sorkin, Chicago Cubs Now in Chapter 11 Bankruptcy, N.Y. Times, Oct. 12, 2009, available at http://dealbook.blogs.nytimes.com/2009/10/12/chicago-cubs-now-in-chapter-11-bankruptcy.html.
[6] Id.
[7] Cubs in Bankruptcy to Speed Team’s Sale, Wall St. J., Oct. 13, 2009, available at http://online.wsj.com/article/SB10001424052748704107204574469.html.
[8] Phillip L. Kunkel et. al., Bankruptcy: Chapter 11 Reorganization, University of Minn. Extension, 2009 available at www.extension.umn.edu/distribution/businessmanagement.
[9] Moran Law Group, Bankruptcy in Brief, Feb. 3, 2009, available at http://www.moranlaw.net/chapter11.html.
[10] Phillip Kunkel et al., Bankruptcy: Chapter 11 Reorganization.
[11] Moran Law Group, Bankruptcy in Brief.
[12] Chapter 11: Reorganization Under the Bankruptcy Code, U.S. Courts, available at http://uscourts.gov/bankrtupcycourts/bankruptcybasics/chapter11 (last visited 10/25/2009)(quoting 11 U.S.C. § 301, 303).
[13] Id.
[14] Phillip Kunkel et al., Bankruptcy: Chapter 11 Reorganization.
[15] Chapter 11: Reorganization Under the Bankruptcy Code, U.S. Courts.
[16] Phillip Kunkel et al., Bankruptcy: Chapter 11 Reorganization.
[17] U.S. Securities and Exchange Commission, What Every Investor Should Know, available at http://sec.gov/investor/pubs/bankrupt.htm (last visited 10/25/2009).
[18] Id.
[19] Phillip Kunkel et al., Bankruptcy: Chapter 11 Reorganization; Moran Law Group, Bankruptcy in Brief.
[20] Id.
[21] Gerelyn Terzo, Chicago Cubs Strike Bankruptcy Deal, IDD Magazine, Oct. 13, 2009, available at http:www.iddmagazine.com/news/Chicago-cubs-strike-a-bankrtuptcy-deal.htm.
[22] Pepper Hamilton Law, Proposed Sale of Chicago Cubs- Delaware Bankruptcy Code Approves Expedited Procedures to Sell Assets Before Filing, Sept. 28, 2009, available at http://www.pepperlaw.com/publications_updateaspex?ArticleKey=1605.
[23] Id.
[24] Greg Bensinger & Gadi Dechter, Chicago Cubs Bankruptcy Looms as Way to Finish Sale by Tribune.
[25] Steven Church, Cubs File Bankruptcy, Plan Sale to Ricketts Family (Update3), Bloomberg, Oct., 12, 2009, available at www.bloomberg.com/apps/news.
[26] Id.
[27] Id.
[28] Mary Ellen Podmolik, Bankruptcy Court Approves Sale of Chicago Cubs, WGN Radio, Oct. 13, 2009, available at wgnradio.com/business/chi-buzz-chicago-cubs-sale-oct13,0,2053799.story.
[29] Greg Bensinger & Gadi Dechter, Chicago Cubs Bankruptcy Looms as Way to Finish Sale by Tribune.
[30] Id.
[31] Cubs sale may be helped by bankruptcy, ESPN, Dec. 9, 2008, available at http://sports.espn.go.com/espn/print?id=3758112&type=story.
[32] Id.
[33] Id.
[34] Matt Egan, MLB’s Chicago Cubs Could File for Bankruptcy.