• by Steve McClellan  @mp_mcclellan, February 17, 2015

A little more than a year before KSL Media filed for bankruptcy in September of 2013, the now defunct media agency struck a settlement agreement with former client Cumberland Packing Corp., makers of Sweet’N Low. Under the terms of the deal KSL paid Cumberland $7 million.

Now the marketer has struck a new deal with the trustee of the KSL Estate under which it will return $1.75 million of those proceeds to the estate for potential disbursement to creditors.

The new agreement, which was approved by U.S. Bankruptcy Court Judge Alan Ahart late last month, is just the latest bizarre twist in the bankruptcy proceeding that began in September 2013 when KSL went belly up.

Cumberland’s agreement to return the money is somewhat ironic given that its initial settlement with KSL was recompense for an estimated $32 million in advertising funds prepaid to KSL — funds that the agency allegedly used for other purposes than to buy ads for the client.

Last March David Gottlieb — the KSL Estate’s Bankruptcy Trustee — asked the court to void the settlement, calling it a “fraudulent transfer,” and one that the court could void because payments under the deal were made within 100 days of KSL’s bankruptcy filing. Gottlieb also asserted that KSL Founder Kal Liebowitz and former KSL CEO Hank Cohen received payments in exchange for entering into the settlement deal with Cumberland.

In response to Gottlieb’s request to void the settlement agreement, Cumberland responded last summer that if the deal were voided, it would be entitled to file claims totaling $267 million against the KSL Estate and the estates of two KSL sibling firms, TV 10s and Fulcrum 5, that are all tied to same bankruptcy proceeding.That figure represents treble damages against each of the Estate entities. Cumberland never spelled out specifically in court papers why it believed it might be entitled to treble damages, but the implication was that KSL had intentionally defrauded it of its pre-paid advertising dollars.

The agreement between Gottlieb and Cumberland came after months of discovery proceedings and several rounds of negotiations, parts of which were mediated by a retired U.S. Bankruptcy judge.

Under the terms of the claw-back settlement Cumberland agreed to waive its right to any further claims against the KSL Estates. But it’s possible that the company could seek repayment of the $1.75 million from Liebowitz and Cohen. According to court papers both former KSL executives signed “negative covenants” assuming responsibility for the $7 million in the initial pre-Bankruptcy settlement agreement if those payments weren’t completed.