Blame Owners, not Players
target=”_blank”>CNN’s StoriesNEW YORK (CNN/Money) – If running a sports team was the money loser claimed by most owners, the line of sports teams at bankruptcy courts would be longer than the line at any stadium’s beer vendor.
But when the Buffalo Sabres and Ottawa Senators hockey teams filed for bankruptcy court protection within a week of each other recently, they joined a relatively small group of teams that have visited bankruptcy court in the last four decades. For those two teams, along with most of the other bankrupt teams, it was their ownership structure, not the players’ payroll, that was responsible for their seeking protection from their creditors.
On the ice, the Senators are actually one of the National Hockey League’s model franchises, with one of the league’s best records despite one of its lowest total payrolls. The $30.3 million team payroll is less than half of the nearly $67 million paid by the last-place New York Rangers.
The Buffalo Sabres haven’t had the Senators’ on-ice success (they’re in last place), but they do have a similar payroll (just under $30 million). The teams’ financial problems can be traced to the management by former owners, the Rigas family, who for years raided their cable company, Adelphia Communications, to cover the team’s losses rather than dealing with them on an ongoing basis.
With the bankruptcy of Adelphia and the indictment of the Rigas family last year, the bankruptcy by the Sabres was probably inevitable. The filing Monday is seen as a way of clearing the way for new financing and new ownership of the team that has been run by the league since the early summer.
Most other sports bankruptcies are also caused by problems other than team payroll. The Baltimore Orioles went into bankruptcy following the baseball team’s most financially successful season — the inaugural season at Camden Yards in 1992 — when Orioles owner Eli Jacobs was forced into involuntary bankruptcy by other financial problems.
Ownership’s financial problems also prompted bankruptcies involving the NHL’s Los Angeles Kings in 1995 and the National Football League’s Philadelphia Eagles in 1969. A tax lien prompted the NHL’s Pittsburgh Penguins’ first bankruptcy in 1975, and baseball’s expansion Seattle Pilots filed for bankruptcy as a way of getting out of a lease on an inadequate park after the team’s first season in 1969, when player salaries were a small fraction of today’s level.
The Penguins made a second trip to bankruptcy in 1998 due partly to deferred payments due some of its players, including the then-retired star Mario Lemieux. But those payments, and active players’ payroll, weren’t the only reason for the filing, said Eric Schaffer, a Pittsburgh bankruptcy lawyer who represented Fox Sports in the Penguins’ 1998 bankruptcy.
Schaffer said the team owners also thought they could move the team to a more attractive market with a better arena deal by getting the bankruptcy court to void a stay-put clause in their lease with the city. When the court rejected that request, leaving the team in Pittsburgh, it ended up in Lemieux’s control.
Schaffer and other sports bankruptcy experts say the reason teams don’t turn to Chapter 11 more often is the courts really can’t be used to get teams out of bad players contracts, and other contracts — with stadium authorities or broadcasters, are usually pretty advantageous to the team.
“The team executives say to themselves, ‘Can we reject a broadcast agreement and if so can we get a better one? Can we reject a lease and if so can we get a better one?'” said Schaffer. “There are real limitations on what a sports franchise can accomplish in bankruptcy.”
There probably isn’t a major pro team without at least one player contract they regret as too high, and most have far more than one such lemon. But the teams can’t use bankruptcy to just void the bad contracts and hang onto the good ones.
“It’s one thing for United Airlines to reduce wages of its pilots or mechanics through a bankruptcy filing. That doesn’t help you out very much in the sport world,” said Richard McLaren, bankruptcy law professor and sports arbitrator for University Western Ontario. “You need the star athlete paid the big bucks to be happy and part of the team. And particularly in a situation where there is a collective bargaining agreement, you can’t cherry pick. If you do something (voiding player contracts), you’d have to do it across the board.”
Bankruptcy may work for Senators, Sabres
The Senators’ $50 million expansion fee from entering the league in 1992 and a $160 million stadium the team could never really afford left it with debt it couldn’t handle. The Senators might well get the relief they need in bankruptcy court by restructuring the team’s debt.
Adding to the Senators’ financial woes is a relatively small market and the weak currency exchange rate, which forces teams to pay players in U.S. dollars while collecting ticket revenue in Canadian dollars worth only two-thirds as much.
Still, even with the problems stacked against it like the ultimate financial power play, the team was on the verge of profitability before it filed for bankruptcy. An offering memorandum by owner Rod Bryden to try to attract new partners suggested the team would be able to break even during this year’s regular season on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis. And since the Senators are expected to make the playoffs this year, that would have meant positive EBITDA for the full year.
But that plan required new investors to join in, and when a deal to bring in such new backers collapsed two weeks ago, it led to a missed payroll payment, followed by Thursday’s bankruptcy filing.
The league’s collective bargaining agreement has a grace period between a missed payroll and when the players would be declared free agents. With Thursday’s bankruptcy filing, the players are likely to be brought current in pay without anyone becoming a free agent.
Similarly the Sabres play in one of the smallest U.S. markets in any league, one that is barely larger than Ottawa, and with one of the most successful and popular Canadian franchises close by in Toronto. But the league has reached an agreement to sell to a local ownership group, and if the team can use the bankruptcy court to shed some of the money it owes to Adelphia, it should be a viable franchise once again.