Banks declare SF Weekly and parent company in loan default

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VVM boss Mike Lacey is trying to duck paying us

The Bay Guardian’s lawsuit against SF Weekly and its parent company took a dramatic turn this week when a banking syndicate announced that Village Voice Media has defaulted on its $77 million loan.

San Francisco Superior Court Commissioner Everett A. Hewlett, Jr. also ordered that all of the Weekly’s advertising income be sequestered in an account designated by the Guardian and held there until April 5, when the Guardian will ask the court to appoint a receiver to take control of the Weekly’s assets.

The Weekly and its parent owe the Guardian more than $21 million as the result of a 2008 lawsuit verdict. A San Francisco jury found that the Weekly had sold ads below cost in an effort to damage the Guardian.

The case is on appeal, but the Weekly and Village Voice Media haven’t posted an appeal bond -- essentially an insurance policy that would guarantee payment of the judgment. So the Guardian has the legal right to collect the money.
VVM has been hiding its money behind a complex corporate structure,
but in recent weeks the Guardian has won a series of court decisions that have allowed us to seize two Weekly vehicles, all of the income that the newspaper’s subtenants pay for leasing office space, and 50 percent of the Weekly’s ad revenue (and 100 percent of the revenue from credit card payments).

In an effort to block us from collecting that revenue, the Weekly filed a motion March 16 seeking a restraining order that would have stopped the Guardian from contacting Weekly advertisers. The court refused to issue the order – but as part of its application, VVM disclosed some rather dramatic facts.

Among the exhibits filed in court: A March 12 letter from the Bank of Montreal, which leads a banking syndicate that has helped VVM expand and advance its alternative newspaper empire. The letter, signed by Managing Director Thomas McGraw, states that because of the “recent economic downturn and the resulting financial difficulties,” VVM had been “unable to meet its amortization payments” and had been forced to renegotiate the loan in June, 2009. That new agreement had required that VVM send all of its profits -- that is, “all revenue above its costs, plus a minimal operating cushion” -- directly to the bank.

And now that the Guardian has been awarded a lien on all of the Village Voice papers and the right to half the Weekly’s income, the bank had declared VVM in default on the entire loan, which now stands at $77 million.

The default allows the bank to claim that it has the first right to any Weekly ad revenue, and VVM lawyer Randall Farrimond tried to make that argument to Commissioner Hewlett. But Hewlett was skeptical: “The Court never determined that the Bank of Montreal had any rights that had been adjudicated yet,” Hewlett said at a March 16 hearing. In fact, after hearing that the bank had sent its own letters to Weekly advertisers ordering them to send payments directly to the bank, Hewlett noted:

“Now, I’m not terribly sympathetic with Bank of Montreal doing what they did. “I mean it is possible that, absent some adjudication of their interests, that they are in contempt of court by interfering with the Court’s order.”

Hewlett said he had no intention of granting the restraining order or changing the essence of his earlier ruling -- that the Guardian had the right to half SF Weekly’s income stream. But to save the advertisers from confusion over who to pay, he ordered that all money collected from advertisers be placed in a bank account chosen by the Guardian, in a bank that was not part of Bank of Montreal’s syndicate.

The Guardian will be back in court April 5 to ask for the appointment of a receiver, who would take control of the Weekly’s business operations and, under court guidance, divide any revenue between the Guardian and any other creditors.
In the meantime, VVM and the Bank of Montreal have asked a judge in Delaware – where SF Weekly is formally incorporated – to block collection efforts in California.

At a surprise hearing where the Guardian's lawyers were given only five minutes warning and had no opportunity to present any evidence, the Delaware Chancery Court was nonetheless very skeptical of Bank of Montreal's claims, and essentially ruled only to maintain the status quo until the Court could make a more informed decision.

The case continues to draw extensive news media interest; the Stranger, a Seattle alternative paper, ran a lengthy, detailed story on the case March 17.

You can read the key documents (including a declaration from Weekly publisher Josh Fromson and the bank letters) in the recent filing here. (PDF)

Comments

I hear you're good for it.

Honestly, this was never about journalism: it's a pissing contest between Bruce and Lacey, who have much more in common than either of them will likely ever admit. The Stranger piece is a must-read. This is a tragic personality clash that has only one result: the death of one or the other of San Francisco's altweeklies. Is that a good thing?

Posted by The SF Weekly's Big Pile of Money on Mar. 18, 2010 @ 1:33 pm

It's fairly common for a Bank to hold a first lien against a corporation in this way, and that would most definitely have precedence over any court judgments.

The analogy is if you sue a private individual who doesn't pay the judgment and you place a lien on his house. Which is fine except if his mortgage exceeds the value of the property, then you have a lien against negative equity.

And of course any bankruptcy will typically discharge court judgments that are not hypothecated.

If the loan pre-existed the filing of your suit, and if the loan clearly indicates it is a first charge against the assets, then the Bank will always get paid before any other creditors.

In a sense, you've been too successful here. If you'd been awarded a more manageable amount, they might have settled on paying you some fraction of the award. As it is, those two delivery trucks might be all you get.

Then again, maybe you're happy just putting them out of business. Ironic since that's what you claimed they were trying to do to you.

As I always tell my clients, let's see if we can collect before we allow our anger throw good money after bad.

Posted by Tom Foolery on Mar. 18, 2010 @ 2:14 pm

"Then again, maybe you're happy just putting them out of business. Ironic since that's what you claimed they were trying to do to you."

That's capitalism.

Posted by Alan Collins on Mar. 18, 2010 @ 2:40 pm

As I mentioned before, I don't get why SFBG and SF Weekly devote so much ink to their own lawsuit (particularly issues involving collection efforts). It seems strange to essentially generate your own news and then report on it. Did the Delaware Chancery Court issue an injunction? "Status quo" sounds like injunction. Perhaps that will stop the need to report on this litigation.

Posted by Patrick on Mar. 19, 2010 @ 3:41 pm

Why is it that people who want to avoid the real issues always claim personality conflicts? Bruce Brugmann never had a problem with the Weekly until it was bought by Lacey, who's not only an absolute jerk (judging by the way he treated his new employees as soon as he bought the paper) but whose libertarian politics are antithetical to San Francisco values. It's the politics of Lacey and the Weekly that the Guardian has been complaining about, not Lacey's personality, though there's plenty to complain about there, too.

Posted by Jeff Hoffman on Mar. 19, 2010 @ 9:42 pm

Libertarian values are from contrary to so-called "San Francisco values (whatever they are"

Ron Paul has a lot of support judging by the number of bumper stickers and window posters I still see in my neighborhood 2 years after he withdrew from the 2008 presidential race.

Posted by Tom Foolery on Mar. 20, 2010 @ 7:54 am

Jeff Hoffman's post is a non sequitur. He claims people miss the real issues by claiming personality conflicts. They he claims this Lacey person is an "absolute jerk." Then he says that the SFBG is complaining about the politics of the Weekly and Lacey. Then he says there is a lot not to like with Lacey's personality.

I kind of doubt that the SFBG filed a lawsuit because it didn't like the SF Weekly's politics.

I also kind of doubt that Jeff knows or has ever met this Lacey guy, which calls into question how he has any basis for his post.

Posted by Guest on Mar. 20, 2010 @ 3:03 pm