Bankruptcy: financial situations that lead a party to seek relief by basically saying, “We
have no money right now.” We hear about this all the time, whether on social media or late at
night on the local news. JC Penny, Blockbuster, even President Donald Trump have all made the
headlines over the years after filing for bankruptcy. Essentially, bankruptcy’s popularity has
grown as it generally allows an entity to alter existing contractual rights and restructure its
operations to fight the financial crisis that led to the bankruptcy filing in the first place.
Interestingly, even the wide world of sports isn’t immune to the financial hardships that are
associated with the path back to the positive side of the balance sheet.
Professional sports organizations operate highly lucrative businesses and sometimes seek
bankruptcy protection through bankruptcy, specifically Chapter 11. For reference, since 1990
eight major professional sports teams have sought relief through some sort of bankruptcy
proceeding—including the Los Angeles Kings (NHL), Pittsburgh Penguins (NHL), Buffalo
Sabres (NHL), Phoenix Coyotes (NHL), Texas Rangers (MLB), and, most recently, Los Angeles
Dodgers (MLB). 1 In many situations, bankruptcy serves as a viable option for a team unable to
meet its financial obligations, allowing it to secure additional financing to reorganize and thrive
in the future. It is curious to see how basic business and legal principles intersect in the
competitive and dynamic industry of professional sports. Learning from the way sports
properties and personalities handle bankruptcy is a great way to gain a better understanding of
what exactly bankruptcy is, how it works, and the overall effects that will occur when the
financial dust settles.
Understanding bankruptcy law means first understanding that there are several different
types of bankruptcies that provide relief to specific sets of debtors. The debtor is the entity or
1 In re Los Angeles Dodgers LLC, 457 B.R. 308 (Bankr. D. Del. 2011).
person that has entered into bankruptcy. Beginning with Chapter 7 offers an important starting
point as this is by far the most common type of bankruptcy. Chapter 7 allows for the liquidation,
or the sale of assets to provide for payment to creditors, for individuals and companies that have
property or reside in the United States. Chapter 9 deals with the bankruptcies of big cities and
municipalities. Chapter 11 provides for the reorganization of entities, but individuals may try to
benefit from this form of bankruptcy as well. Chapter 11 also involves bankruptcies under its
Subchapter 5, which deals with small businesses more specifically. An important note is that
companies do not have to be formed in the in the United States to be a Chapter 11 debtor. 2 Under
this section, a Chapter 11 debtor may be a railroad, a debtor under Chapter 7, and in rare
instances an individual. 3 Within the same definition, it is made clear that banks, insurance
companies, and stockbrokers cannot use Chapter 11, as they are explicitly excluded from
classifying as Chapter 7 debtors. Finally, Chapter 13 bankruptcies involve debtors with a steady
income, act as a way for these individuals to create repayment plans, and is the preferred chapter
in many Texas jurisdictions.
Before continuing forward down the complicated path of bankruptcy, it is important to
get a general understanding of some key terms, major players, and events that take place. For
example, the time before an entity has become a debtor is known as the “pre-petition” period,
while the “post-petition” period refers to the time during which the debtor is in a Chapter 11
bankruptcy case. Another special term that is useful to know is “confirmation,” which refers to
the approval of the reorganization plan by the judge overseeing the Chapter 11 case. Moving to
the major players, Chapter 11 cases are overseen by federal judges, normally bankruptcy judges
with significant experience in this area of the law. In large bankruptcy cases, the bankruptcy
2 11 U.S.C. § 109
3 Id. at (d).
court may even appoint an examiner to conduct appropriate investigations into the debtor’s
affairs. 4 Normally, the examiner’s role is to investigate allegations of fraud, dishonesty,
misconduct, or mismanagement by the debtor. 5 The Bankruptcy Code also provides that a
committee of unsecured creditors may be appointed in Chapter 11 cases, known simply as the
creditors’ committee. The committee should consist of a set of seven diverse creditors, such as a
landlord, vendor, employee, or trustee. Finally, it is worth mentioning the most important event
in any bankruptcy: the automatic stay. To put it simply, creditors must stop taking actions to
collect of debts the moment an entity files for bankruptcy, and this occurs in every bankruptcy
case regardless of which chapter it is classified under. 6 However, the automatic stay does not stop
any criminal actions against the debtor. 7
A final concept that is fundamental in the understanding of bankruptcy law in general is
the “bankruptcy waterfall” method of distribution to creditors. This payment plan is also referred
to as the “absolute priority rule,” as referred to above. It is important to keep in mind that this is
more of a general guide, rather than a strict method that should be applied to all cases. In normal
bankruptcy cases, the distribution of assets is first given to secured creditors. 8 Secured creditors
are given the highest priority, as they are first in line and given the present amount of the value
of their collateral. This is why ensuring that the proper steps are taken to become a secured
creditor is such an important action. Secured creditors are followed by administrative creditors,
which include those parties associated with the costs of administering the bankruptcy, lawyers
for the debtor, and other various trustees. 9 Next are employees, claims for employee benefits,
4 11 U.S.C. § 1104(c)
5 Id.
6 11 U.S.C. § 362(a)
7 11 U.S.C. § 362(b)(1)
8 https://www.toptal.com/finance/bankruptcy/chapter-11-bankruptcy-what-is-it
9 Id.
and, for cases involving individuals, child support and other family claims. 10 Finally, at the end
of the line are any unsecured claims. 11 Unfortunately, unsecured creditors are rarely given the
total value of their collateral, and as a result end up not seeing any repayment. Once again, this
dramatic difference between secured and unsecured creditors highlights the importance of proper
transactions. Finally, if there is any money or assets of the debtor left after unsecured creditors
are satisfied would be any subordinate debt, and then the equity holders (owners of preferred
stock and/or common stock). 12
10 Id.
11 Id.
12 Id.
