What’s Driving LIV Golf’s Chapter 11?

LIV Golf made headlines when it was announced that the group had filed for Chapter 11 bankruptcy. But a bankruptcy filing doesn’t necessarily mean the end of LIV Golf. Most debtors that file Chapter 11 are seeking to reorganize or reduce their debts to become a sustainable business. This appears to be the case for LIV Golf.

LIV Golf launched with enormous financial backing and spent billions attracting players, building tournaments, and establishing itself as an alternative to the PGA Tour, with financial backing from Saudi Arabia’s Public Investment Fund. But when that backing was pulled, LIV Golf’s business model became unsustainable. It was burdened with expensive contracts necessary to operate the sports league, including hefty player contracts and prize purses. Player contracts included big names such as Bryson DeChambeau and Jon Rahm.

The Chapter 11 filing gives LIV Golf an opportunity to restructure some of those expenses. For instance, the golf league has filed a motion to reject numerous contracts and leases in the bankruptcy court. If granted, LIV Golf could “get out of” certain player contracts, vendor contracts, and leases.

Getting out of these contracts does not undo them. Instead, rejection generally operates as a breach of the contract, and the counterparty is entitled to a claim for damages resulting from that breach. The benefit to LIV Golf is that those damages are generally treated as unsecured claims and addressed through the bankruptcy process. In other words, LIV Golf would likely not have to pay those damages in full.

LIV Golf is also seeking to use Section 363 of the Bankruptcy Code, which provides a mechanism for a debtor to sell or otherwise dispose of assets outside the ordinary course of business, subject to court approval. Section 363 can be an important tool in a Chapter 11 case because it allows a debtor to monetize assets or restructure its operations while the bankruptcy case is pending.

Without these expenses, and potentially through the use of Section 363, LIV Golf can propose to carry on at a much smaller scale without expensive obligations weighing it down.

This highlights the true purpose of a Chapter 11 case: to restructure debt and other obligations and give a financially distressed business an opportunity to operate under a more sustainable business model.

Whether that model will include some of professional golf’s biggest names is something worth watching.