(CN) - The founder and directors of Liberman Broadcasting, a Spanish-language broadcaster based in Burbank, drained $6.2 million from the company as it slipped into insolvency, a shareholder claims in a derivative lawsuit.
Armory Credit Opportunity Fund claims Lenard Liberman and his associates wasted company assets and made "substantial improper distributions to [LBI] Holdings' controlling shareholders and insiders ... at a time when Holdings was insolvent and unable to satisfy its legitimate obligations to its creditors, including Armory."
Armory sued LBI Media Holdings, Lenard and Jose Liberman and two other directors, Terence O'Toole and Winter Horton, in Los Angeles Superior Court.
LBI Media Holdings was founded by Lenard Liberman and his father, Jose, in 1987, and began to make a series of loans to the Libermans and other corporate officers in December 2001, according to the lawsuit.
"The aggregate outstanding balances of the insider loans, including interest, totaling approximately $3.6 million, was classified as stockholders deficiency as of December 31, 2011 and were forgiven in 2012," Armory claims.
In the meantime, the Libermans issued notes that netted the company an immediate $38.8 million, but left it with a debt that would balloon to $68.4 million when the notes reached maturity, according to the lawsuit.
"Under the terms of the Senior Notes Indenture, cash interest did not accrue and was not payable on the notes prior to October 15, 2008, but the value of the Old Discount Notes increased each period until it equaled $68.4 million in October 15, 2008, which accretion was recorded in Holdings' public statements as additional interest expense," Armory says.
"After October 15, 2008, cash interest began to accrue at a rate of 11 percent per year, payable semiannually on each April 15 and October 15," according to the complaint.
After issuance of the notes, the company's financial position tanked, as "increased programming and other costs substantially reduced Holdings' gross profits and earnings before interest, taxes, depreciation and amortization," Armory claims.
Directors tried to salvage the company by incurring even more debt, exacerbating the situation.
"Throughout 2012, Holdings reported liabilities far in excess of its assets and substantial shareholders' deficits in its financial statements," Armory says in the complaint.
"Holdings also admitted in writing that it would be unable to repay its debt holders, including holders of the Old Discount Notes and the New Discount notes, on maturity.
"Holdings has failed generally to pay its obligations as they become due, including failing to timely pat a semiannual interest payment on the Old Discount Notes of $3.8 million, which was due on October 15, 2012.
"Further, during all times relevant to this complaint, Holdings has lacked sufficient capital in light of its contemplated business activities."
Armory claims that in October 2012, LBI Media Holdings offered shareholders an exchange of old shares for new securities in its affiliate companies, an Armory rejected.
At the same time, Armory claims, LBI's founders and directors forgave the outstanding insider loans and transferred million of dollars to themselves. They did so by paying "bonuses" totaling more than $2.4 million to Jose and Lenard Liberman, despite never having paid such bonuses before, according to the complaint.
"The bonus payments and the forgiveness of the insider loans (which together comprise the unlawful distributions) aggregated to more than $6.2 million," the complaint states. "Thus, as a result of the unlawful distributions, Holdings or its subsidiaries distributed over $6.2 million to insider-equity holders at a time when Holdings was insolvent, not able to pay its debts as those debts became due, and had unreasonably small capital for its ongoing businesses."
To address its continued liquidity problems, LBI again offered shareholders an exchange of old shares for new, but only if they executed a release consenting to the unlawful transactions of 2012, Armory claims. Again, it says, it refused.
In June 2013, Armory sent LBI's board of directors a letter outlining its concerns and asking it to "take action to protect and preserve its assets for the benefit of all of its constituents."
"By letter dated June 24, 2013, Holdings responded and refused to take any action in response to the claims discuss herein," the complaint states. "In light of the continuing risk that further dissipation of the assets of Holdings could occur, and the irreparable harm that could be caused to Holdings from further mismanagement, Armory brings this action in Armory's name and this derivative action to protect the rights of Holdings and its creditors, including Armory."
Armory demands at least $2.2 million and recovery of other unlawful distributions as found, and damages for breach of fiduciary duties, and reckless failure to monitor or oversee the operations of the company.
Armory is represented by Samuel Newman with Gibson, Dunn & Crutcher.
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