The sports world is buzzing about Shohei Ohtani’s record-setting $700 million dollar contract with the Los Angeles Dodgers. As bankruptcy lawyers, we are abuzz thinking about the bankruptcy implications of Ohtani’s contract. Today’s blog post will discuss what type of claim Ohtani might have if the Dodgers file for bankruptcy (again). In the near future, another blog will discuss how contracts like Ohtani’s are treated by the Bankruptcy Code.
In case you haven’t seen the specifics of Ohtani’s contract with the Dodgers, it obligates Ohtani to play baseball for the Dodgers for the next 10 years (2024-2033). Over the 10 years Ohtani plays for the Dodgers, the Dodgers will pay Ohtani $2 million per year. The Dodgers are then supposed to pay Ohtani $68 million per year for the 10 years after he’s turned 40 and has no further obligation to show up and play for the Dodgers (2034-2043).
We say he is supposed to continue receiving $68 million per year through his 40’s because things to do not always work out as planned. Serious Dodger fans and sports-business nerds will remember that the Los Angeles Dodgers filed a chapter 11 bankruptcy petition in June 2011. The Dodgers filed because they were on the verge of running out of cash to pay salaries. According to court filings, the three biggest drivers to the Dodgers’ 2011 bankruptcy were: (1) a decline in attendance, (2) Major League Baseball rejecting a proposed media deal with Fox Sports, and (3) a mere $20 million in deferred compensation owed to players. In 2034, the Dodgers will owe $832 million in deferred compensation (more than 40 times the number they owed when they filed in 2011): $680 million just to Ohtani and another $152 million to other players. That deferred compensation number is expected to increase as the Dodgers try to attract more high-quality players with deferred-compensation-heavy contracts to help them win now and pay later.
So, what happens if the Dodgers organization finds itself in a cash crunch again in a few years and has to file bankruptcy in 2034? Do they have to keep paying $68 million per year to a 40-year old, presumably retired Ohtani?
Not necessarily. If the Dodgers file bankruptcy in 2034 (or later years), Ohtani will have the right to file a claim in the bankruptcy case for the amount that he is due, just like all other creditors. In most bankruptcy cases, secured claims (i.e., claims backed by collateral) get paid in full, and unsecured claims (i.e., claims by creditors who do not have collateral) get whatever is left over. Sometimes unsecured claims are paid in full, but more often they are paid pennies on the dollar of what the creditor is owed.
Thus, from the bankruptcy lawyer’s perspective, we are particularly interested in what collateral, if any, Ohani received to secure his deferred compensation. Ohtani and the Dodgers have been quiet about the details of the contract other than the headline dollar amounts, leaving us to wonder whether Ohtani got a mortgage on Dodger Stadium (or some other real estate) to secure his $700 million dollar contract? And if he did get a mortgage, did the current mortgage holders agree to subordinate to Ohtani? Unlikely! Did Ohtani get personal guarantees from each member of the Dodgers’ owner, Guggenheim Baseball Partners, for his pro-rata share of the $680 million to be paid to Ohtani during his 40s? Again, unlikely! Did he get any collateral, or is he at risk of having an unsecured claim for $680 million dollars after spending ten years as the anchor of the Dodgers’ line up (and maybe rotation)? And if he didn’t get collateral, did he get a very clear memo from his agent/legal team explaining the payment risk that he accepted in his contract? (Their malpractice carriers certainly hope so!)
Ohtani could also reduce payment risk by means other than getting a security interest in the Dodgers’ property. For example, according to Forbes, the Dodgers are required to fund the “present value” of their deferred compensation obligations to Ohtani by July 1, 2026. Forbes estimates that would require the Dodgers to fork over $297 million today. If the Dodgers were to put that $297 million into an annuity to be paid directly to Ohtani, the annuity would likely belong to Ohtani – no matter whether the Dodgers filed bankruptcy and even though the Dodgers funded the annuity. On the other hand, if the Dodgers simply bought treasury bonds or an annuity for themselves, Ohtani would be like every other unsecured creditor with payment risk – potentially left holding an empty bag in the event of a bankruptcy.
 The Dodgers owe two of their other superstars –Mookie Betts and Freddie Freeman –significant deferred compensation. The Dodgers owe Betts $120 million in deferred compensation starting in 2034 (the same year as Ohtani) and owe Freeman $57 million in deferred compensation starting in 2028.
 The Dodgers’ owner – Guggenheim Baseball Management LLC – owns hundreds of acres of prime Los Angeles real estate surrounding Dodger Stadium.