Welfare for Billionaire Team Owners? Paul Allen, the Portland Trail Blazers, and Chapter 11 Bankruptcy

Helen Jung of the Portland Oregonian has an excellent article on Portland Trail Blazers' owner Paul Allen and what he plans to do with his franchise (Will He Hold the Ball, Dish, or Drive?, Aug. 5, 2006). Until last week, Allen, who co-founded Microsoft with Bill Gates and who Forbes Magazine ranks as the world's 6th wealthiest person with a net worth of $22 billion, had planned to sell the team, in part because of frustrations over the revenue he obtains from his deal with the Portland Arena Management group, which hosts the Trail Blazers' home games in the Rose Garden, and in part because of poor management decisions concerning player talent and player contracts (e.g., Zach Randolph's $86 million deal). In fact, the Blazers, which had the NBA's worst record last season, are expected to lose over $100 million in the next few years. But Allen could not find a buyer that met his price, even though the Arena Management group claims that he turned down several lucrative offers.

Blazers' fans are now wondering what Allen--who, if the Seattle Supersonics relocate to Oklahoma City, may seek to relocate the Blazers to Seattle, where he already owns the Seahawks and lives nearby--will do.

As Jung details, one option would be to do nothing. When you are worth $22 billion and you get to own an NBA team, what's a $100 million in losses, really? And actually, because of federal income tax write-offs, he might be able to write-off the losses, thus taking some of the sting out of them.

A second option would be to buy back the Rose Garden, which he owned from 1995 to 2004. That is said to be Commissioner David Stern's preferred option, although bad blood between Allen and the Arena Management group apparently makes that unlikely.

A third and perhaps more controversial option would be to try to put the Blazers into Chapter 11 bankruptcy protection, which would enable the Blazers to stay in business while a bankruptcy court managed its reorganization and franchise-related decisions. Part of the reorganization could entail the Blazers being relieved of the obligation to pay some or all of the player contracts. However, those contracts are guaranteed by the NBA, meaning the NBA would likely pick up the tab for Paul Allen, at least until the reorganization was complete. So that means the other 29 NBA ownership groups would be paying off the contracts of Allen, the NBA's wealthiest owner.

Jung interviews me for the story on this point:

Another significant obstacle would be getting the NBA and other team owners to go along with a bankruptcy-filing-and-relocation attempt, said Michael McCann, a law professor at the Mississippi College School of Law and sports-law expert.

The league -- and other team owners -- might have to take on the responsibility of paying player contracts in a bankruptcy situation, McCann said. Plus, there's the league's image.

"There comes a point where fans say enough is enough," he said.

So how realistic would Chapter 11 be for Allen? I don't think it's very realistic. Depending upon how a court grants relief (and if it grants relief), using Chapter 11 protection to "protect" the Blazers could potentially set-off a disastrous precedent for the NBA and pro sports leagues in general: if teams can get out of bad player contracts by simply declaring bankruptcy, other franchises would seemingly be penalized, since they would be paying off the contracts of the bankrupted franchise (sort of like an unintended form of revenue-sharing). Granted, other NBA owners could agree to not use that mechanism in the future, and could try to condition future purchases of NBA franchises upon the waiving of the right to declare bankruptcy, and thus make this a one-time problem--a Coase Theorem style solution, if you will.

But even as a one-time event, an NBA franchise going into bankruptcy would seem very embarrassing for the NBA--especially considering Allen's profound personal wealth--and possibly damage the league's reputation and hurt the value of other NBA franchises. It would also call into question whom exactly bankruptcy law is supposed to protect; I don't think billionaires like Paul Allen are the intended beneficiaries.

For much more on this story, be sure to check out Henry Abbott's excellent post on True Hoop and Dwight Jaynes' excellent on-line column. There's some other great stuff on Helen Jung's blog, Playbooks and Profits.

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