• by Steve McClellan  @mp_mcclellan, January 23, 2014

The U.S. Bankruptcy Court Judge hearing the KSL Media case has granted the new company Trustee overseeing the wind-down process, David Gottlieb, subpoena power to force Kal Liebowitz, the founder and former chairman of the defunct media shop, to submit to questioning under oath.

The examination is part of an investigation that Gottlieb, who was appointed Trustee at the end of December, has launched on behalf of the KSL Media estate. It addresses numerous unanswered questions about how the defunct media agency’s financial health deteriorated so badly that it was forced into bankruptcy.

Gottlieb was harshly critical of Liebowitz for his stewardship of the agency (or lack of it), which was founded more than 30 years ago. He said it was likely that the agency estate would sue Liebowitz for defrauding the firm.

Gottlieb said there is also some indication that Liebowitz may have been trying “to pull the strings behind the scenes” after KSL filed for bankruptcy in September of last year. If so, Gottlieb contended, “a fraud was perpetrated upon this Court, the estates and creditors.”

Gottlieb replaced Janet Miller-Allen, a KSL veteran who Liebowitz designated as Trustee of the debtor company when it filed for Chapter 11 bankruptcy protection last fall. The unsecured creditors committee, which launched its own investigation shortly after the filing, urged that Miller-Allen be dismissed after it concluded that she was unqualified to serve in the Trustee role. Before she could be ousted, Miller-Allen resigned at the end of 2013.

The creditors committee investigated the activities of Liebowitz and other officers of the company. It did not complete its investigation, which stopped at the end of the year, when KSL opted to shift from a Chapter 11 reorganization process to Chapter 7 liquidation. But the committee said there was evidence that Liebowitz “borrowed” at least $2.8 million from the company and apparently had not paid any of it back.

There is also a paper trail leading to “unexplained reimbursements” for legal expenses, totaling some $450,000, including payments to an attorney handling Liebowitz’s divorce. Liebowitz could be on the hook for all that money -- which, if it can get it back, the estate in turn would pay out to creditors.

Gottlieb noted that KSL had claimed that a former controller, Geoffrey Charness, had stolen millions from the agency from 2006 until he was fired in 2010. KSL cited Charness’ actions as a key reason for the firm’s financial decline and subsequent bankruptcy. One of the key unanswered questions looming over the entire affair, Gottlieb told the court, was why it took the agency three years to pursue any legal action against Charness. That action came in the form of a civil lawsuit filed in the summer of 2013.

But when KSL filed for Chapter 11 protection, it agreed to a stay of the civil suit against Charness, pending the outcome of the bankruptcy proceeding. That decision, said Gottlieb, was “nonsensical.”

Gottlieb said that Liebowitz breached his fiduciary duty at various times, including his failure to act in a timely and effective manner once Charness’ misdeeds were uncovered, and for appointing the unqualified Miller-Allen to the Trustee role. And if he did that in an attempt to have some sway over KSL Media’s post-petition affairs, “he had serious conflicts of interest by reason of his various prior failings and other improper actions.”

The Bankruptcy Court Judge, Alan M. Ahart also gave Gottlieb subpoena power to compel both Miller-Allen and former KSL CEO Hank Cohen to testify under oath about their involvement in the firm’s affairs.

Gottlieb also noted in his filing that Cohen may owe the estate money, as well. He told the court that both Liebowitz and Cohen were the “apparent beneficiaries” of a settlement agreement between KSL and a former undisclosed client which resulted in the transfer of $7 million in company funds “to or for the benefit” of that client. More than $2 million in payments were made within 90 days of KSL’s bankruptcy filing and is therefore recoverable by the estate, Gottlieb said, as are payments received by Liebowitz and Cohen stemming from that deal.

While Miller-Allen was Trustee, no attempt by the KSL estate was made to recover that money, Gottlieb told the court. “Prompt examinations into these and other matters are more than warranted,” he said.