FORT WORTH (CN) – RadioShack’s former officers, directors and biggest shareholder schemed to sell the bankrupt company on the cheap to hedge fund Standard General, unsecured creditors claim in court.
The Official Committee of Unsecured Creditors of RadioShack Corp. sued the hedge fund, its principal investment officer Soohyung Kim, former RadioShack CEO Joe Magnacca, Wells Fargo Bank and several of RadioShack’s former directors on Monday in Federal Court.
The creditors claim the defendants delayed actions that would have preserved value, to force through refinancing of $585 million in debt in October 2014 that handed control to Standard General.
RadioShack filed for Chapter 11 bankruptcy protection in February this year, announcing it would sell up to 2,400 of its 4,000 stores and close the rest .
The hedge fund then purchased about 1,700 stores and the rights to the RadioShack name.
Calling the bankruptcy a “crash-landing,” the plaintiffs claim Kim and Standard General cherry-picked the best RadioShack stores and assets and left creditors holding a bag with $500 million in unpaid debt.
The creditors blame the board of directors for an “ill-advised” turnaround attempt in 2013, borrowing $835 million and loading the company “crushing debt” that was overseen by Magnacca, who failed to provide the “operational flexibility” needed for a turnaround.
“In early 2014, within only a few months of the borrowing, RadioShack’s crisis managers and restructuring professionals advised the directors that RadioShack needed to consider selling itself or massively deleveraging through an in-court restructuring,” the 81-page complaint states. “At that point, the directors had only one task at hand: maximize the immediate value of RadioShack, which could be accomplished by aggressively auctioning the company to the highest and best bidder. If the directors had followed this mandatory course, losses would have been stemmed, the corporate enterprise would have benefited, and unsecured creditors would have had a recovery. Instead of taking this advice from its financial advisors, the board initially did nothing for several months as RadioShack’s condition continued to deteriorate. No competitive bidding process was held, and no potential buyers were affirmatively pursued.”
Only last summer did the company talk to Kim and Standard General, its largest stockholder, about a change of control, the plaintiffs say.
“Standard General and Magnacca went to great lengths to undermine RadioShack’s restructuring advisors and any other party suggesting the possibility of a RadioShack bankruptcy,” the complaint states. “Influenced by Standard General and the now conflicted Magnacca, the board focused exclusively on the Standard General-led change of control transaction.”
The board of directors knew the hedge fund’s recapitalization plan “was doomed to fail from the start” and would only delay bankruptcy, the plaintiffs claim.
Standard General did not respond to a request for comment Tuesday.
The creditors seek damages for breach of fiduciary duty, aiding and abetting, unjust enrichment and fraudulent transfer. They are represented by Karl Stern with Quinn Emanuel in Houston.
Sprint has announced it will create a “store within a store” in up to 1,750 surviving RadioShack outlets. RadioShack items are sold alongside Sprint cellular phones and wireless services. Some RadioShack stores have been sold to smaller companies.
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