The Work

April 21, 2009 6:47 PM

The Bankruptcy Files: Midway Games, My Rich Uncle

Posted by Brian Baxter

The bankruptcies of Midway Games and My Rich Uncle have many lawyers working overtime.

The controversial sale of a controlling stake in Midway Games is involving several firms, while a novel auction rate securities suit has been filed against several directors and officers of liquidating student lender My Rich Uncle.

Midway Games

When Midway Games filed for bankruptcy in February, much of the talk centered around the Chicago-based company's mind-melting video game franchise, anchored by that trailblazer of gratuitous violence, Mortal Kombat.

Besides Mortal Kombat's amazing soundtrack, back then we also noted that Massachusetts businessman Mark Thomas stood to profit big time from the paltry $100,000 investment he made last November to acquire an 87 percent stake in Midway Games from debt-saddled media mogul Sumner Redstone. (In his deal with Redstone, Thomas also picked up $70 million in Midway debt--with $30 million of that total being the company's lone secured claim.)

Now three firms--Shearman & Sterling, Milbank, Tweed, Hadley & McCloy, and Kramer Levin Naftalis & Frankel--are preparing for Mortal Kombat in the bankruptcy court as that transaction takes center stage.

The Daily Deal reports that Redstone's privately owned media and entertainment company--Dedham, Mass.-based National Amusements Inc. (NAI)--manages the mogul's stakes in CBS, Viacom, and Midway. But by sacrificing Redstone's controlling stake in Midway to Thomas for pittance, lawyers for Redstone sought to apply the ensuing loss on the sale to taxes, thus allowing NAI to raise cash to address shortfalls on its balance sheet stemming from steep declines in the stock prices of CBS and Viacom.

While the sale may have helped Redstone and NAI, unsecured creditors for Midway Games are claiming that Redstone and NAI effectively sacrificed the video game company to salvage NAI's stakes in CBS and Viacom.

With Midway running dangerously low on cash, The Deal reports that a central issue in bankruptcy proceedings is whether or not the company can draw down on cash that Thomas now claims as collateral.

Milbank's Linda Dakin-Grimm and other lawyers from the firm are advising Midway's unsecured creditors committee, which has been taking Thomas, Redstone, and NAI to task over the deal.

Thomas, represented by Kramer Levin, has testified that he first heard about the Midway sale in mid-November when he received a call from Shearman M&A partners Creighton Condon and Peter Lyons, who were advising Redstone and NAI on the sale and whom Thomas knew from a prior business relationship.

But The Deal reports that U.S. bankruptcy judge Kevin Gross in Delaware appears to harbor suspicions about the low sale price for Midway last fall.

"This is a game company, but that did not give [NAI] the right to treat a public company as if it were a toy," a transcript shows the judge saying in an April hearing. "The fact . . . that acquisition holdings for an investment of $100,000 stands before creditors who invested millions of dollars in Midway is something that the court can't ignore."

Bankruptcy records show that Midway's Chapter 11 counsel at Blank Rome have so far billed the company for nearly $165,000 in fees and expenses. Dewey & LeBoeuf, which is serving as counsel to Midway's board of directors, has submitted bills for roughly $51,000. And Milbank has so far billed the creditors committee for $105,000 in fees and expenses.

My Rich Uncle

In February we reported that the Chapter 7 filing by New York-based MRU Holdings, the student lender that popularized the brand My Rich Uncle, had left 18 firms awaiting nearly $2 million in back billables.

My Rich Uncle has been beset by several embarrassing legal problems in recent years, such as a former employee being charged with embezzling $2.3 million from MRU accounts in December. But according to Kevin LaCroix's excellent D&O Diary, My Rich Uncle now finds itself embroiled in another legal thicket: auction rate securities (ARS) litigation.

LaCroix reports that four MRU directors and officers--CEO Edward McGuinn, Jr., CFO Vishal Garg, vice president and general counsel Yariv Katz, and president Raza Khan--have been sued by plaintiffs who purchased MRU shares between July 9, 2007 and September 19, 2008. (MRU, which is in Chapter 7 liquidation, was not named as a defendant.)

According to the 45-page class action complaint filed in U.S. district court in Manhattan on April 15, plaintiffs claim that MRU failed to disclose that the ARS market had become illiquid and that the student lender's ability to rely upon securitizations to sell loans and free up capital could be compromised by reduced stability in that market.

Unlike other ARS-related class actions, LaCroix writes that the MRU suit differs in that the plaintiffs are not investors suing broker-dealers who allegedly sold them ARS, nor are they shareholders of a company that invested in ARS. Instead LaCroix writes that "the plaintiffs in the MRU case are shareholders of a company that put loans into pools out of which the securities were issued." (Brian Murray and Randall Steinmeyer from New York's Murray, Frank & Sailer are serving as counsel to the shareholder group.)

For LaCroix, this fundamental difference is proof that the collapse of the ARS market beginning in February 2008 will become "an absolute litigation generating machine" and that "further [ARS] lawsuit variants seem likely as the wave continues to progress."

Baker & McKenzie financial restructuring and insolvency partner Ira Reid, who is representing MRU in the bankruptcy court, says that to his knowledge the MRU directors and officers that have been sued have not yet retained counsel.

Bankruptcy records show that Reid's firm was paid $834,464.98 in discounted fees and expenses for a broad range of corporate, M&A, and restructuring work done for MRU in the period between November 2008 and the company's bankruptcy filing in early February.

Those same records show that Baker waived "payment of substantial fees incurred" by MRU totaling approximately $498,453.04 for "unpaid services rendered prior to October 2008."

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