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Are the Rangers going to stiff Alex Rodriguez?

May 24, 2010, 2:36 PM EDT

UPDATE: OK, some more research leads me to believe that the answer in the headline is “no” A-Rod is not going to get stiffed. At least probably not.

It’s possible and, in “prepacked” bankruptcies like this one, common, for the debtor (i.e. the Rangers) to  file for bankruptcy when it has the assets
to cover the liabilities but can’t pay the liabilities exactly as they come due
. This sort of Chapter 11 may allow the debtor to hold a sale — say, to someone like Chuck Greenberg! — to get fresh
cash and to restructure the timing of payments.

Upshot: A-Rod and all of the other creditors (which includes Mickey Tettleton of all people) are still quite likely to get their money, even if there is some sort of delay or disruption.

I think we all learned something today kids: bankruptcy is difficult to understand. And kind of boring, frankly. So unless a ballplayer shoots someone this afternoon, it’s going to be actual baseball content for the rest of the day.

2:09: I am obviously not a bankruptcy expert, but thankfully some of you are, and you have informed me that I got some stuff wrong below. Let me, to the best of my ability, fix it.

The notion that unsecureds don’t get paid is not accurate. They do get paid, and often, but it’s usually pennies on the dollar. Moreover, they are paid at the same rate, so if Alex Rodriguez gets, say, 50 cents on the dollar, all the unsecured creditors get 50 cents on the dollar.  It would not be kosher, then for A-Rod to get his $24.9 million and the others to get stiffed.

The practical implication of this is that yes, A-Rod is likely to get at least partially stiffed. Because if he gets all of his $24.9 million, all the creditors get all of their money and then, by definition, there is no point of a bankruptcy (i.e. a bankruptcy is defined by owing more money than you have). Since the Rangers filed for bankruptcy it means they don’t have enough money to pay all of their unsecureds at a 100% rate. That means that A-Rod should not get all the money he thought he’d get and all of the ugly union/team dynamics set forth below come into play.

Another point of clarification: there can’t be a “side deal” between the Rangers and A-Rod, because that would violate bankruptcy laws which prohibit a debtor agreeing to make preferential payments to certain creditors before the filing. I didn’t intend that meaning when I said “side deal” — I really meant that there was some understanding on A-Rod’s part that he would be taken care of in the normal bankruptcy process — but that seems far less likely given the pro-rata thing outlined above, even if it were proper for the Rangers to make such an assurance, which I’m not sure is the case.

I’d ask that the bankruptcy experts among you continue to help me out with this stuff, but for now anyway, it seems like, yeah, A-Rod is gonna walk away with less money than he bargained for.  I can’t help but think that this will become something of a problem for baseball going forward.

1:15 P.M.: Pfun Pfact from the Rangers bankruptcy filing: the largest unsecured creditor is Alex Rodriguez, who is still owed
$24.9 million in deferred compensation from his big $250 million deal.

“Unsecured” means that Mr. Rodriguez does not have any collateral for the amount of money he is owed.  Unsecured creditors rarely if ever get any of the money they’re owed when the debtor goes into bankruptcy. Your mortgage company is secured (i.e. it has a lien on your house) which means that if you stiff them, they can take the house back to satisfy what you owe them.  Your credit card company, in contrast, is an unsecured creditor. If you stiff them they can try to collect from you and can ruin your credit rating, but they can’t take your stuff and, for the most part, once you file bankruptcy, its game over for them. Which is the biggest reason why credit card companies donate a lot of money to Congressmen in order to get them to make it harder for you and I to file bankruptcy.

But that’s a subject for another blog. Let’s you and I stick to Alex Rodriguez. Is A-Rod SOL?  Are the Rangers going to really just walk away from the money they owe him? The short answer: I don’t know.

The longer answer: man, I can’t see them just doing that. Lots of teams owe deferred compensation to players. Indeed, I think the Diamondbacks spent more time in the last decade working on deferred comp deals than they did playing baseball games.  If a team were to suddenly renege on a major deferred compensation deal you’d have to think that the union would scream and the other teams — who might like to convince some of their own high-priced players to take deferred compensation — would scream even louder.  If there’s a chance they’re going to get burnt, why would any player take such a deal again?

As is the case with the Tom Hicks creditors, I can’t help but think that there is a side deal to pay Mr. Rodriguez what he is owed, be it from the Rangers or some other source.* Otherwise, the team and the league will have just created a big labor headache that no one needs.

*How that is specifically being done — if indeed it is being done — is a pretty interesting question, because I think it’s unprecedented in baseball history.  The most recent parallel I can think of is Mario Lemieux, who was owed so much in deferred compensation that he just up and converted all that debt into an equity stake with the Penguins and now owns the team.  That can’t happen with A-Rod because baseball prohibits players from doing such a thing.  Seems like it would have to be a cash thing.

  1. Moses Green - May 24, 2010 at 3:28 PM

    grass ain’t greener – wine ain’t sweeter – either side of the hill
    captcha knows where I’ve been: “mellows disclose”

  2. Brian V - May 24, 2010 at 3:34 PM

    how is mickey tettleton still owed?

  3. Tom Shumaker - May 24, 2010 at 3:49 PM

    How about taking this post down. It’s all bull-crap anyway!

  4. Tax Spoils - May 24, 2010 at 3:52 PM

    This appears to be academic because A-Rod is going to get paid anyways, but wouldn’t guaranteeing A-Rod’s deferred compensation against the Rangers’ creditors potentially destroy the tax benefits of the deferred comp in the first instance?
    This strikes me as potentially the most expensive problem for all involved — A-Rod, Rangers, MLB and the players union. In the worst case scenerio, the IRS takes argues that all MLB deferred comp no longer qualifies because it is not subject to the employer’s creditors. This could mean very large back tax bills for the players and ugly lawsuits against the teams, MLB and even the players union.

  5. Skids - May 24, 2010 at 3:53 PM

    Hey, let’s start a fund raiser for ARod. I would hate for him to have to give up his life style, it’s just not fair.

  6. Tyler K - May 24, 2010 at 4:07 PM

    If you go to the last page of the Bankruptcy filing, there is a letter signed by Bud Selig approving of the bankruptcy and sale of the Texas Rangers to Rangers Baseball Express. There is also an “Asset and Liability Purchase Agreement” which states that RBE agrees to acquire both. All of the players will still get their deferred money, including A-Rod.

  7. Joey B - May 24, 2010 at 4:07 PM

    If there is anything more fun than hearing journalism majors opine on baseball trades, it’s hearing lawyers opine on financial matters. Nothing personal, but some of this stuff is complicated even for those trained for it. For example (as others mentioned), many bankruptcies are prepackaged and a mere formality. In real bankruptcies, lenders will lend with the ultimate intent of owning (loan to own), not all creditors are treated equally. The courts will favor employees and the local deli over the more sophisticated banks and other lenders. Sometimes the bankruptcy will simply be a way for an otherwise solvent business to get out from under an onerous lawsuit and a particularly bad contract or lease. Occasionally, businesses are provided with a letter of support from investors or otherwise interested parties so that their auditors don’t provide a qualified opinion for a going concern. And of course, ARod is represented by a union that might insist on all its players getting paid.
    The absolutely worst-case scenario would be for ARod to receive an equity stake in the Rangers in return for the IOU. I would doubt that MLB’s internal rules would hold sway at a bankruptcy hearing.

  8. jwb - May 24, 2010 at 5:34 PM

    “it’s going to be actual baseball content for the rest of the day.”
    Well, there’s the American Needle thingee. . .

  9. El Hefe - May 24, 2010 at 5:51 PM

    Hey, it couldn’t happen to a nicer recipient, well maybe it could but he is no longer playing…… Like the current trend comment, baseball is business, well………BK is the current trend in business!!!! Welcome to the business world, he he he!!!

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