NBA's checklist before approving sale of Clippers
One month after NBA commissioner Adam Silver issued a historic lifetime ban of Los Angeles Clippers owner Donald Sterling, the league is on the verge of ending its clash with the notoriously litigious Sterling without a fight. It is a stunning turn of events, and perhaps reminiscent of T.S. Elliot's famous stanza from The Hollow Men:
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This is the way the world ends.
This is the way the world ends.
This is the way the world ends.
Not with a bang but a whimper.
If Sterling is leaving the NBA on a whimper, he'll take comfort in knowing he'll be well compensated. According to ESPN.com and the Los Angeles Times, Sterling's wife and co-owner, Shelly Sterling, has reached an agreement with former Microsoft CEO Steve Ballmer to sell the team for $2 billion. It would be a record sale for an NBA team, eclipsing the previous high ($550 million for the Bucks last month) by almost four times.
The steep purchase price likely reflects the scarcity of NBA teams, the willingness of multiple groups to bid for an NBA team in the nation's second-largest media market, and the short window the Sterling family allowed for bids. According to Robert Raiola, senior manager in the Sports & Entertainment Group of the Accounting Firm O'Connor Davies, LLP, Sterling projects to net about $1.34 billion from the deal, with approximately $662 million paid to the I.R.S. and California Franchise Tax Board in capital gain taxes. These numbers are based on the deal being worth $2 billion and do not take into consideration how money may be divided by members of the trust.
The NBA still must receive the offer and give it final approval, which will likely take weeks. As reported by SI.com on Thursday, the NBA is willing to postpone next Tuesday's hearing to oust Donald Sterling if it has a favorable reaction to a proposed deal. The postponement would last until the NBA can approve or reject the proposed agreement. It is widely expected that the league would approve a bid by Ballmer, who is reportedly worth in the ballpark of $20 billion and friendly with a number of NBA owners and league officials. It therefore is likely that the NBA will postpone Sterling's June 3 hearing.
So what's left to be done before the Clippers are officially Ballmer's and no longer the Sterling's? The NBA will demand certainty on the following issues:
1. Certainty that Donald Sterling is truly leaving the NBA
The NBA will want absolute assurance that Ballmer's agreement to buy the Clippers is final and binding. Keep in mind, Donald Sterling does not technically own the Clippers. The Sterling's family trust owns the team. The details of the trust have not been made public, although it has been widely assumed that Donald Sterling has primary control over the trust. Donald Sterling is also the controlling owner of the Clippers, meaning the NBA views him as the official voice of the franchise. Even if others, such as his wife, have the legal capacity to sign on behalf of the family trust, the NBA will want confirmation that the controlling owner of the team -- Donald Sterling -- is in fact in agreement with the decision to sell the team. The NBA will surely not approve a transaction unless it has absolute certainty Donald Sterling agrees to sever all ties to the Clippers and not challenge the ruling in court.
2. Certainty that Sterling's mental state does not pose legal problems
According to ESPN.com's Ramona Shelburne, Donald Sterling has been declared by medical experts as "mentally incapacitated" and Shelly Sterling has obtained sole power over the trust. It is unclear if there has been a competency hearing before a California judge, although normally a declaration requires consent by a probate court.
The development is significant on a number of levels. Earlier this month, Shelly Sterling told Barbara Walters that she wondered if her husband may have early signs of dementia. Some believed the comments were designed to mollify public animosity for her husband, but apparently she was serious.
The NBA will want assurance that neither Donald Sterling nor his attorney will challenge the declaration of incapacity in court. Sterling, whose responses to CNN's Anderson Cooper invited questions about his competency, has not made any statements indicating that he doubts his competency. If Sterling contests to the declaration, he could invite legal questions about whether Shelly Sterling has the legal authority to represent the family trust. Keep in mind, Shelly Sterling has not been approved by the NBA as a controlling owner and without league consent, she lacks the authority to sell the team. The NBA may be inclined to suspend normal rules of control in order to facilitate the team's sale, although not at the risk that Donald Sterling will later sue the NBA over an unauthorized sale of the team.
If Sterling is mentally incapacitated, some may question whether the NBA should have punished him in the first place. After all, if he lacks the capacity to make sound decisions in his conduct and speech, then his controversial remarks to V. Stiviano and Cooper seem less blameworthy. One might even surmise that NBA owners would be less willing to toss a fellow owner suffering from mental incapacity. Keep in mind two points. First, it is unclear whether Sterling's type of mental incapacity had anything to do with those controversial remarks. Sterling's 32-page answer to the NBA charge notably did not raise mental incapacity as a defense to those remarks. Sterling has also been accused of racism long before any recent cognitive changes, including in a housing lawsuit brought by the Department of Justice and in a wrongful termination lawsuit brought by former Clippers general manager Elgin Baylor. Second, as a legal matter, the NBA is seeking to oust Sterling on several grounds, one of which is Article 13(d) of the league Constitution. This article does not require a specific mental state, such as "intentional," only that the owner failed to meet contractual obligations. For Sterling, those obligations reflect covenants to avoid unethical behavior and advocating positions adverse to the NBA. His mental state in breaching those covenants is not at issue, only whether he breached those covenants.
3. Certainty that Shelly Sterling is truly leaving the NBA
There have been uncorroborated reports that Shelly Sterling may want to maintain an ownership stake in the Clippers. The NBA is poised to reject any arrangement where she preserves an equity relationship with the team. While the NBA's disciplinary action isn't against Shelly Sterling, the league has signaled a desire to turn a new page with Clippers ownership.
4. Certainty in mutual release
The NBA is poised to demand a mutual release from both Sterlings. A mutual release is a contractual covenant whereby the Sterlings and the league agree to relinquish any possible legal claims they might have against the other. This includes past, present and future claims, such as those involving California constitutional law or federal antitrust law. If either side later sues, a judge would likely dismiss the lawsuit on grounds the claim has been waived away by contract. Given that Sterling has been described as the most litigious NBA owner, given that he has been involved in various litigations and threats to litigate over the years, and given that he has not always honored his word (fans of the San Diego Clippers can attest to that) the NBA will probably demand that Sterling relinquish the chance to later sue the league.
One problem for the NBA will be establishing confidence that if in fact Donald Sterling is incompetent, another person -- whether it be Shelly Sterling or Donald Sterling's attorney -- can sign on his behalf.
5. Certainty in continuation of lifetime ban and payment of $2.5 million fine
Sources tell SI.com that Donald Sterling's lifetime ban and fine will remain in effect even if the NBA approves the sale of the team. For the remainder of his natural life, Sterling will be barred from any involvement with the NBA or its teams. This means that he can never again own any part of an NBA team. Whether Sterling could buy a ticket as a fan and attend an NBA game is unclear, although it is worth noting that John Green -- the fan who threw a beer on Ron Artest and set off the 2004 melee between the Detroit Pistons and Indiana Pacers -- is barred for life from attending any Pistons home games. Tickets to NBA games are licenses that can be revoked.
As to the $2.5 million fine, the NBA may be reluctant to approve the sale until he pays. This is especially the case if both sides seek to use a mutual release (as described above). Common sense would suggest that Sterling -- already a billionaire before a deal in which he projects to net $1.34 billion -- would be willing to pay a $2.5 million fine rather than hold up the deal.
6. Certainty that Steve Ballmer understands he cannot move the team to Seattle
Ballmer clearly wanted to bring the Sacramento Kings to Seattle last year, but Seattle fans should not expect the Clippers to come to Seattle. For one, Los Angeles is a much larger and more lucrative market, and it is unlikely Ballmer would want to relocate the team. Even if he did, Ballmer would have to obtain approval from the NBA Board of Governors. As stipulated in Article 7 of the NBA Constitution, an owner who wishes to relocate a team first must present to the league's relocation committee and then receive a majority vote from other NBA owners. By virtue of becoming an NBA owner, Ballmer would contractually agree to follow Article 7 and other NBA provisions.
Still, Seattle fans should be relieved in knowing that a leading advocate for their city obtaining an NBA franchise could soon become the controlling owner of an NBA team. This development could prove crucial should the NBA consider expansion from 30 teams to 32 teams, as Seattle would be an early favorite.
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.
