Dodger Bankruptcy

Posted by Kevin on June 29, 2011 under Bankruptcy Blog | Be the First to Comment

The Dodgers filed Chapter 11 in the Bankruptcy Court in Delaware.  The case has a lot of intrigue.  An expensive and messy divorce involving the owners, allegations of misuse of funds by the baseball commissioner, court maneuvers, hedge funds, you name it.  But the one thing that caught my eye was a list of creditors.  It seems that the Dodgers owe players, like Manny Ramirez, millions of dollars in deferred compensation.

So, big deal.  A contract is a contract, right?  Well, maybe not.  The bankruptcy code allows a debtor to reject an executory contract.  That term is not defined in the Bankruptcy Code, and there has been much litigation, both in bankruptcy court and other courts, as to what constitutes an executory contract.  Generally speaking,  an executory contract is a contract where there has not been complete performance- one party or both still have to do something under the contract.

So what happens if the debtor in possession (that’s what the debtor is called in a Chapter 11 until a trustee is appointed by the court) rejects Manny’s contract as part of the Chapter 11 plan.  Well, first, the Plan has to be voted on by all the creditors and then approved by the Court.  But, if the Plan is approved, Manny may find himself  getting just a percentage of the $21 MM that he is owed.

As a consumer or small businessman, what does this mean for you.  Well, let’s say that you have a retail shop.  You entered into a lease a $25 per square foot, but the market now is $15 per square foot.  If you file a Chapter 11 or 13, you can reject the lease.  If the plan is a 10% plan, the old landlord gets $0.10 on the dollar.  Of course, you have to make sure that you have a new place to move before you reject the old lease.

I advise all my readers to follow the Dodger bankruptcy.  It will be in the news and it will be interesting.