• by Steve McClellan  @mp_mcclellan, July 14, 2014

Bankrupt media planning and buying shop KSL Media, now in Chapter 7 proceedings, may have total debt of close to $200 million, about double what the firm initially acknowledged.

Cumberland Packing Corp. has filed papers with the U.S. Bankruptcy Court hearing the case asserting that if the Court voids a confidential settlement agreement it signed with KSL in 2012, it would be entitled to file an unsecured claim against the company of $96 million. That figure includes what  Cumberland termed “treble damages,”  although the company does not specify the legal grounds upon which that damages claim is based.

The court papers indicate that under the settlement agreement KSL agreed to pay Cumberland about $7 million. It’s not precisely spelled out in the filing although sources familiar with the situation said that the companies struck the agreement after KSL had failed to place some $32 million in media buys that Cumberland had pre-paid KSL to make on its behalf.

Sources said KSL used the $32 million for its own operating expenses instead of using it to buy Cumberland’s media. The treble damages claim would imply Cumberland believes the use of its money in that way was intentional and illegal. Sources have indicated that  KSL used other clients’ money as operating capital as well and would pay media bills after they were reconciled months later using other funds.

KSL Trustee David Gottlieb, who has been investigating the agency’s practices for months told the court earlier this year that “My investigation to date indicates that the Debtor KSL appears to have been operating on a cash negative basis from at least 2002 and continued to operate on a cash negative basis consistently through” Sept. 11, 2013 when the company filed for bankruptcy."

Gottlieb has asked Judge Alan M. Ahart to void the settlement agreement and force Cumberland to return the money to the KSL estate so that it could it help the insolvent firm pay off some of its debt.

Gottlieb has argued that the settlement agreement constituted a “fraudulent transfer” that should not have occurred and that is legally voidable because KSL was insolvent at the time (although the company didn’t file for bankruptcy for another year) and that the agency didn’t receive “equivalent value.”

Gottlieb argued that KSL founder Kal Liebowitz and former CEO Hank Cohen were apparent “beneficiaries” of the settlement agreement with Cumberland, suggesting they received payments while KSL itself didn’t even receive a release from “the purported resolution of Cumberland’s claims.”  

And in court papers filed earlier this month Gottlieb argued that Cumberland didn’t provide “any facts in support” of its unsecured claim for $96 million. Thus, he told the court, those claims “should be disallowed in their entireties.”

Ahart has yet to rule on the validity of the Cumberland settlement agreement.