The Sterling family trust hearing resumed this week before Los Angeles County Superior Court Judge Michael Levanas and several key legal developments have occurred over the last 48 hours.
Donald Sterling files a new lawsuit
Since TMZ.com published his recorded comments to V. Stiviano on April 25, Donald Sterling has done nothing to undermine his reputation as the league’s most litigious owner. In May, he sued the NBA on antitrust and privacy grounds. In June, he challenged his wife, Shelly Sterling in probate court over whether he was lawfully removed as a trustee. Late this afternoon, Sterling filed a new lawsuit. This one contends the NBA, league commissioner Adam Silver and Shelly Sterling unlawfully conspired to sell the Clippers without his consent. Sterling argues he revoked the Sterling trust on June 9, and thereby reverted ownership in the Clippers back to him and Shelly Sterling.
Expect the NBA and Shelly Sterling to argue the latest lawsuit is frivolous. First, Shelly Sterling reached an agreement with Steve Ballmer 10 days before Donald Sterling tried to revoke the trust. Second, even if Sterling’s revocation severed the contractual relationship between Shelly Sterling and Ballmer, trusts are not instantly revoked. There is a “winding down” period where assets are transferred and obligations are paid. Shelly Sterling will surely argue that she obtained control of the Clippers during this period, and thus lawfully reached an agreement with Ballmer.
Crucially, Sterling’s new lawsuit should not interfere with the probate hearing, as it seeks money damages, rather than equitable relief. It is also the type of lawsuit that, if it is not swiftly dismissed, could last years, long after Ballmer or someone else becomes the new Clippers owner. Also recall that in late May, Shelly Sterling, acting on behalf of herself and the Sterling trust, indemnified the NBA from legal expenses the league incurs because of her husband. Moreover, under California’s community property law, Shelly and Donald Sterling have co-ownership over their wealth, so any payments by Shelly Sterling to her husband are akin to him paying himself.
Glimmer of hope for a settlement
The week began on a more optimistic note. On Monday, Donald Sterling met with Ballmer at the Sterlings’ Beverly Hills home. They were joined by attorneys for Shelly Sterling. The group reportedly discussed the possibility of a settlement that would allow Ballmer to purchase the Clippers with the blessing of both Sterlings. The NBA would be thrilled by such an agreement. The league would like to stabilize the franchise’s ownership before the start of the 2014-15 season. A Clippers’ ownership without Donald Sterling would purportedly strengthen the team’s negotiation position with sponsors and improve its relations with players and fans. While Sterling and Ballmer failed to reach an agreement on Monday, one might later be reached.
From a litigation standpoint, it is telling that Donald Sterling is negotiating. His willingness to do so could suggest he’s worried that Levanas will hold for Shelly Sterling and approve the Ballmer purchase. Obviously, Donald Sterling would be one step closer to losing the Clippers if he loses the hearing. Less obviously, Levanas ruling that Shelly Sterling lawfully managed the trust could provide her with a stronger legal argument that she properly indemnified the NBA. While the lawfulness of her indemnity is a distinct matter from whether Donald Sterling was lawfully removed as a trustee, her attorneys and the NBA would undoubtedly feel emboldened by Levanas deeming her a capable trustee. Donald Sterling thus has an incentive to reach a confidential, out-of-court settlement before Levanas issues a ruling.
Donald Sterling’s settlement talks also signal that his determination to hold onto the Clippers is negotiable rather than absolute. While Sterling has repeatedly asserted that he will use every legal means to keep the Clippers, perhaps he’s realized that a legal fight would only delay the inevitable: his control and ownership of the Clippers will eventually transfer to someone else. Furthermore, Sterling could agree to sell the Clippers but maintain his lawsuits against his foremost enemy, the NBA and its officials, whom he has described as “despicable monsters.” Sterling’s lawsuits are not only about ownership of the Clippers, as he is also suing over his lifetime ban and $2.5 million fine.
To be sure, any settlement with Donald Sterling would clearly require the ink to dry before the parties involved feel certain that the deal is done. Sterling has already changed his mind once on a settlement in connection to the sale of the Clippers and persons familiar with the NBA’s legal strategy regard him as erratic and unpredictable.
Dick Parsons details how Donald Sterling financially damages the Clippers
Former Time Warner chairman Dick Parsons has run the Clippers at the behest of the NBA since Donald Sterling was banned. Parsons testified today and his remarks portrayed Sterling’s continued affiliation with the team as financially ruinous. This is an important legal point. Harm to the franchise is harm to the owner of the franchise. The owner of the franchise is the Sterling trust, which is at the center of the hearing.
Parsons asserted that the Clippers would lose substantial revenue in sponsorships and other business deals if Sterling remained as owner. Companies, according to Parsons, would be less interested in entering into contracts with a Sterling-owned business. Parsons also claimed that Clippers players could boycott games if Sterling remains and that Doc Rivers has voiced a desire to quit unless Sterling is ousted (in fairness to Sterling, Rivers signed on as coach and forced the Clippers to compensate the Celtics with a 2015 first-round pick while Sterling was the owner). Parsons acknowledged, however, that season ticket sales have remained steady during the Sterling controversy. This acknowledgment suggests that season ticket buyers either believe Sterling will eventually be ousted and do not want to give up their seats, or that the Sterling controversy is less of a priority to them than watching Clippers basketball.
Rough start for Donald Sterling expert Dean Bonham
Donald Sterling has retained sports business consultant Dean Bonham to advocate that Ballmer’s $2 billion offer for the Clippers is below market value. Bonham testified today that Shelly Sterling’s quick sale of the team was highly unusual in the world of professional sports. He also portrayed the Clippers as a “trophy” team in that they play in the second largest television market and can thus demand a premium price. Bonham’s testimony is crucial for Donald Sterling to frame Ballmer’s bid as unexceptional and replaceable.
Pierce O’Donnell, an attorney for Shelly Sterling, aggressively tried to undermine Bonham’s expertise. He noted that Bonham did not graduate from high school or college. While business savvy can obviously develop in the absence of schooling, most contemporary sports business experts have earned college degrees. O’Donnell also forced Bonham to acknowledge that he was not, as he previously claimed, president of the Denver Nuggets, but rather president of marketing and sales. Bonham also admitted that he had been let go by a group bidding for the Los Angeles Dodgers (in fairness to Bonham, other sports business experts have been replaced by bidders of teams).
Bonham is a familiar figure to one of Sterling’s attorneys, Bobby Samini, who represented Bonham in a very odd case from 2012. At the time, Bonham was taken into custody by the Los Angeles Police Department for defrauding an innkeeper. Bonham had allegedly refused to pay the JW Marriott Los Angeles Hotel a disputed $20,000 hotel tab, which stemmed from his consulting on the Dodgers bid. Bonham later sued the JW Marriott over the alleged harassment he received while in jail. He claimed he was harassed for being “well dressed” and not “tough looking.”
The timetable of an appeal and why it is so important
If Levanas rules that Shelly Sterling acted in accordance with the trust by selling the team to Ballmer, Donald Sterling will almost certainly appeal. In an appeal, he would need to identify an alleged error by Levanas in carrying out his duties as a judge. One of Levanas’s decisions to admit or exclude evidence or witness testimony could be portrayed as an error. Disagreeing with his decision, in contrast, would not be valid grounds for an appeal.
Levanas has made a number of decisions that Donald Sterling could frame as errors. For instance, Levanas declined to exclude from the record the testimonies of neurologist Meril Platzer and psychiatrist James Edward Spar, despite arguments that their testimonies violated medical privacy laws. Sterling could contend that Levanas decision was in error and significantly harmed his legal arguments.
The prospect of an appeal is extremely important not only because Levanas could be reversed but because appeals take time and might prevent Shelly Sterling and Ballmer from finalizing their agreement by August 15, the date their term sheet is set to expire and by the NBA’s deadline of September 15. The default effect of an appeal would be to prevent the sale from being finalizing until after an appeal is heard. An appeal would likely not be heard for several weeks or months. In order to oust the Sterlings, the NBA would then be forced to either terminate the franchise or wait out an appeal. The league is confident that at least 22 of the 29 other owners would support franchise termination and the auctioning of the team. But franchise termination would be a process that lasts several weeks and could lead to the Sterlings preserving ownership of the team for several months. Silver, it should be noted, recently acknowledged there is a possibility of a suspended Sterling remaining an owner at the start of the 2014-15 season.
Shelly Sterling’s attorneys are aware of the default effect of an appeal and have petitioned Levanas to exercise his authority under Section 1310(b) of the California Probate Code. Under this provision, Levanas could order the sale be completed irrespective of whether Donald Sterling appeals. The NBA would then approve the sale to Ballmer, who would become the team’s owner. Donald Sterling’s appeal would then only provide him with the possibility of money damages — but not the blockage of the sale.
Would Levanas exercise 1310(b)? California law makes clear he can only do so if he believes extraordinary circumstances warrant its intervention. Shelly Sterling contends such circumstances are present.
She argues the trust would suffer substantial harm if the sale to Ballmer is not finalized by September 15, 2014. She notes that the league would begin termination proceedings against the franchise and a subsequent auction would “potentially garner a price lower than $2 billion.”
On Monday, Darren Schield, the chief financial officer of the company that manages the trust’s properties, warned that the trust owes banks about $480 million. The implication was clear: the trust has bills to pay and the team needs to be sold to pay them off. Today, Parsons testified that the $2 billion amount “is a knockout price” and expressed doubt that the Clippers would attract such a high price if Ballmer was not a bidder.
Another witness in today’s hearing, Bank of America’s Anwar Zakkour, testified that the $2 billion price was extraordinary and considerably higher than the bank’s franchise valuation of $1.3 billion. Zakkour was intricately involved in Shelly Sterling and Ballmer’s negotiations.
The NBA has provided supporting declarations on behalf of Shelly Sterling. In them, NBA executive vice president and general counsel Rick Buchanan stresses that Donald Sterling’s continued ownership of the team damages the Clippers relationships with fans, business partners, sponsors and players. He also charges Sterling’s continued ownership would lead to low morale of Clippers employees.
Daniel Wallach, an appellate attorney with Becker & Poliakoff, P.A., has closely studied 1310(b) and its usage by courts. Wallach contends Shelly Sterling would face an uphill battle to prove extraordinary circumstances are present.
“The California Supreme Court has made it clear that 1310(b) should only apply in rare cases,” Wallace tells SI.com. He adds that the Sterling matter is quite different from other cases where 1310(b) was authorized by a judge.
“If you look at other reported cases where California courts have granted a 1310(b) exception, the vast majority involved assets intended for a beneficiary, like someone who needed medical care, that were being squandered by fiduciaries in some pretty extreme situations. In each of these cases, the goal of the 1310(b) exception was to prevent a further dissipation of assets. Here, by contrast, there is no beneficiary whose medical needs are being jeopardized by Donald Sterling’s continued ownership of the Clippers.”
Wallach also disagrees with Shelly Sterling’s contention that an NBA auction of the team would garner a price lower than $2 billion.
“It’s rank speculation by Mrs. Sterling,” Wallace assesses. “Think about it. If the NBA sold the Clippers at a public auction, buyers would be attracted to purchasing a team directly from the NBA, without having to be joined at the hip to Shelly Sterling. The team would probably command a higher price than $2 billion.
“I have a hard time believing that Steve Ballmer would not be willing to pay at least the same amount two months from now. In fact, the team may be worth more to him at that point, since if he buys the Clippers directly from the NBA, he would not have make Shelly Sterling ‘Owner Emeritus’ and ‘Clippers’ Number 1 Fan,’ and give her free seats and other forms of continued influence over his team, as he’s obligated to under his current deal.”
Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. He is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.