Friday, April 27, 2007

Ins and Outs of Bankruptcy

Several news sources report 2006 Tour De France Champion Floyd Landis is facing bankruptcy as part of the fallout from his alleged PED use. Bicycling Magazine recently reported that ASO, the TdF owners, have frozen the payment of the prize winnings from the 2006 race. I've wondered about how they handled that, and while it isn't exactly clear what the status of the money *exactly* is (did they pay out the money for the other "jerseys"?) it is worth noting this could get complicated.

The winner of the GC (General Classification, or overall race winner) is awarded the champion's share of the prize money. This is the largest sum awarded. What many casual observers likely don't know is that bike racing is a team sport. In recognition of this, historically and traditionally, the GC winners have given large percentages, and in many cases all, of their prize money to the team owners for distribution to the team.

I don't know if this is required by a rider's contract with a pro team. I would *very much* like to see one of those contracts!

Now watch how complicated this can get. If Landis is forced into bankruptcy, his winners share almost for sure will be considered an asset of his estate in bankruptcy, and belong not to him, but to his creditors. If the contract with Phonak (his old pro team) specifies distribution of his assets in the traditional way, Phonak has the status of creditor, but will get to "stand in line" as the court distributes the assets.

The Phonak Cycling Team of course doesn't exist anymore. (And it is certainly worth noting that "Phonak Hearing Systems" was merely the title sponsor of the separate entity that ran the Pro Cycling Team (I forget the exact name of that entity.) Phonak Hearing Systems is still in business, but the Pro Cycling Team is not.) The Pro Cycling team also had contracts with all their riders, and many of those riders from the 2006 TdF have found jobs with other teams, and are back in the pro peloton. Presumably, they have not been personally paid for their work in winning the 2006 TdF for Floyd, but the terms of their contract may or may not specify how that was to be done. Remember, the entity that was the Pro Cycling Team doesn't exist anymore! I'm not 100% sure, but I think that the Phonak riders unlikely to get paid, regardless of the outcome of Landis' appeals.

Now it gets really weird: imagine Landis files bankruptcy, but then prevails in his USADA case. If ASO ultimately pays out the prize money, it would go to *Landis*. Normally, the rider would have either a traditional obligation or a contractual one to turn the prize money over to the team. If bankrupt though, this money is part of Landis' estate, and it goes to the trustee for distribution to the other creditors. While the other 2006 TdF Phonak riders may claim to be creditors, exactly how a court would deal with that is a little unclear, particularly if there are no contract provisions covering it. Assuming those riders get nothing, the end result could be that the 2006 TdF winners purse would be paid out to Landis' creditors, and presumably, many if not most or all of those are for the expenses involved in his defense against the PED allegations. If this is how things play out, then ASO winds up paying for deficiencies in the way we accuse cyclists of doping. And of course, the team cyclists pay as well, and there are more than a few that think this is as it should be.

Another thing worth noting: the prize money to Landis, even though earned in a foreign country, would likely be "ordinary income" to him in the eyes of the IRS. He gets to pay tax on it, and generally, taxes owed are not dischargeable in bankruptcy. Uh oh...

Bankruptcies are technical things. IIRC, Floyd had a yellow BMC bike made up when he first won the yellow jersey. I wonder where that bike is now? If it is considered a "tool of trade" he might get to keep it as exempt property. Otherwise, you guessed it, it is part of the estate to be used to pay creditors. How bad would that suck? Make a pro cyclist sell his bike to defend a doping charge. Yeesh.

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