KSL Creditors Committee: The Fish Stinks From The Head Down
When it filed its petition for bankruptcy on September 11, KSL Media alleged that a former controller, Geoffrey Charness, bilked the company out of millions in a fraudulent scheme that was a major contributor to the company’s financial collapse.
But now, after conducting its own investigation, the Official Committee of Unsecured Creditors of the defunct media agency has made its own allegations. Earlier this week the committee told the California branch of the U.S. Bankruptcy Court hearing the case that it believes that company founder and sole board member Kal Liebowitz likely bilked the company as well.
The committee alleged that Liebowitz constructed “fraudulent conveyances arising from excessive compensation, apparently unpaid loans owed to [the estates of the bankrupt KSL] totaling at least $2.82 million and unexplained ‘reimbursements’ for legal expenses totaling at least $425,000 within three months preceding,” the filing of the bankruptcy petition.
The committee also told the Bankruptcy Court that it was investigating former KSL CEO Harold “Hank” Cohen and his activities at the company. It said in its filing that “the committee’s investigation regarding Mr. Cohen is still ongoing, but at this point, the Committee believes that the estates also have substantial claims and actions against Mr. Cohen.”
The committee also raised questions concerning KSL’s failure to take “remedial measures,” after it discovered Charness’ alleged fraud. Charness left the company in 2010, yet it wasn’t until the summer of this year that the company sued the former controller for his alleged wrongdoings. Liebowitz, the committee said, at the very least breached his fiduciary duty as head of the company by failing to take effective action earlier. The committee also characterized as “nonsensical” KSL’s agreement to a stay of the suit against Charness pending some action in the Chapter 11 proceeding.
The creditors committee was formed in October by the U.S. Trustee overseeing the case and is comprised of Fox Cable Network Services, MacDonald Media, NBC Universal, Telebrands Corp., TV Guide Networks, Valassis and Viacom Media Networks. Collectively those companies are owed millions by debtor KSL Media and two affiliated companies. In its bankruptcy court papers KSL reported total debts of nearly $100 million.
The Creditors Committee asked the court to order both Liebowitz and Janet Miller-Allen, the current controller of the agency, who has been designated to oversee the wind-down process of KSL, to produce certain documents and submit to “oral examination” in January by the committee’s Los Angeles-based law firm, Pachulski Stang Ziehl & Jones. The Committee's request was granted in its entirety on Dec. 26.
The committee said it tried without success to get Liebowitz to voluntarily submit to questioning. And it alleged that since the bankruptcy filing, KSL has “demonstrated egregious bad faith and mismanagement in these Chapter 11 cases. The debtors have engaged in stonewalling tactics (including in respect to discussion with the committee on an acceptable liquidating plan); and have been consistently non-responsive to the committee and its advisors regarding documents, information and other important case matters.”
The committee also asserted that Miller-Allen, who was promoted to controller of KSL shortly before the filing its bankruptcy petition, is unqualified to oversee the company’s wind-down process. She has “no executive, management, liquidation, or bankruptcy related experience,” it said. It noted that Miller-Allen, who served as finance manager prior to being named controller, reported to Charness, who KSL paints as a main villain in the company’s demise. That said, the committee noted, at this point it has “no indication that the controller herself is tainted by the fraud, malfeasance and other improper acts committed prepetition by the Debtors’ officers and other executives.”
The committee argued in its court filing that Liebowitz earlier agreed to forgo any role in the company’s bankruptcy wind-down process but appears to have such a role which amounts to a blatant conflict of interest because, “absent any consensual resolution, he will be sued by the estates for, among things, malfeasance, preferences, fraudulent transfers, and/or other claims.”
The committee also referenced a $7 million settlement that KSL made with a former client in 2012 that Liebowitz “was a party to and the apparent beneficiary of.” Cohen may have also benefitted and the deal is under investigation, the committee said, asserting that $2.2 million in payments “may be directly avoidable and recoverable from the recipients thereof, but also might be recoverable from Liebowitz, Cohen and potentially others.”
“The ability of the Debtors to manage their affairs and fulfill their responsibilities as debtors and debtors-in-possession is in grave doubt,” the committee concluded. It is seeking to have Miller-Allen replaced as overseer of the bankrupt agency’s wind down process.
The company shut its doors the same day it filed its bankruptcy petition in September, laying off all but a couple dozen staffers to help with
the wind down.