Ron Burkle’s Yucaipa Companies, Fortress Credit Lending and Drawbridge Special Opportunities Fund (which is also a Fortress fund) filed with the US Bankruptcy Court for the Southern District of New York (Manhattan) to force Inner City Media Corporation (ICMC), ICBC Broadcast Holdings and the related Inner City Broadcasting units into Chapter 11 bankruptcy. The debtholders claim a pre-packaged voluntary Chapter 11 filing was all ready to go earlier this month, but ICMC Chairman Pierre “Pepe” Sutton nixed the deal.
The filing seeking to put ICMC into an involuntary Chapter 11 bankruptcy proceeding says the creditors haven’t received payments on their loans in over two years and that the original loan value of $197 million has grown to about a quarter billion in principal, plus unpaid interest and fees. The lenders claim the current value of the assets are less than what is owed, but they were nonetheless willing to reach a consensual deal providing some value to ICMC’s shareholders and unsecured creditors in order to get a prepackaged Chapter 11 filing that would move quickly through reorganization.
According to the creditors’ filing with the bankruptcy court, ICMC’s equityholders repeatedly pressed for better recoveries. The terms eventually agreed to would have given the equityholders $1.2 million in cash, 2% ownership of the reorganized Inner City, five-year warrants to purchase 6% of the common stock, and a new management incentive plan under which Inner City managers would be eligible for stock options up to an additional 6%. Sutton himself was to receive a five-year employment contract under which he would receive base pay of $600K per year, 2% of the company stock under the management incentive plan and the title of Chairman Emeritus.
The lenders say the ICMC board of directors had voted to approve the terms for a voluntary Chapter 11 filing on August 13th. Then it gets interesting.
“Upon information and belief, shortly after the ICMC board meeting on August 13, 2011 – and entirely unbeknownst to the Senior Lenders – Mr. Sutton commandeered the ICBC board of directors in order to in order to block any further progress toward a restructuring agreement. While the precise details of all that occurred in the 48 hours after ICMC’s board meeting on August 13, 2011 are unclear, given the lack of communications from the Alleged Debtors, on information and belief, Mr. Sutton, as a member of the board of directors of ICBC, terminated the ICBC directorships of Charles M. Warfield (ICMC President and Chief Operations Officer), Lois Wright (ICMC Executive Vice President and General Counsel), and Edwin Shirley (a long-standing director of ICBC and ICMC), each of whom supported and voted in favor of the Restructuring Proposal in his or her capacity as director of ICMC, and installed new ‘professional’ directors in their place. With Messrs. Warfield and Shirley and Ms. Wright removed from the ICBC (and possibly the ICMC) boards of directors, Mr. Sutton apparently proceeded to disavow the Restructuring Proposal, engage new restructuring counsel, Akin Gump Strauss Hauer & Field LLP (‘Akin’), and an investment bank, Rothschild, Inc., after having received counsel from Skadden and financial advisory services from Alvarez & Marsal for over three months,” the lenders said in their court filing.
The legal filing also claims that ICMC/ICBC threatened to file for Chapter 7 liquidation bankruptcy and seek a declaratory ruling by the FCC that the action by the senior lenders to sweep $10 million from an Inner City account at JP Morgan amounted to a de facto change of control, thus threatening the radio station licenses. The lenders refused to return the cash, and in fact swept an additional $4.5 million from the JP Morgan account and $400K from a Citibank account just before filing the involuntary petition to put the company in Chapter 11.
“In light of all that has transpired over the past few months – and, in particular over just the last few days (including the Alleged Debtors’ threats to shut their business and file chapter 7 cases) – the Senior Lenders arrived at the rational conclusion that involuntary chapter 11 cases were the only way to avoid the costly, value-destructive chapter 7 cases threatened by the Alleged Debtors, and the only means to break the apparent impasse caused by entrenched equityholders who have disregarded their fiduciary duties as directors and officers of the Alleged Debtors,” said the filing made on Friday, August 19.
Inner City owns 17 radio stations, of which WLIB-AM & WBLS-FM New York are the largest and best known. It also has clusters of stations in San Francisco, Columbia, SC and Jackson, MS.
According to the most recent FCC ownership filing, Pepe Sutton holds 49.4% of the voting power at Inner City, Renee H. Sutton holds 10.4%, Percy E. Sutton 5.3%, Hal Jackson Productions 4.1%, Leatrice Sutton 2.2%, Cheryl L. Sutton 1.8%, Harold B. Jackson 1.8%, Oliver C. Sutton II 1.4%, Charles C. Andrews Jr. 0.9%, Lois Wright 0.1%, Roscoe C. Brown 0.1%, Carlos Russell 0.1%, Dr. Barbara Justice 0.1% and Henrietta Lyle 0.1%.
Inner City did not respond to a request form RBR-TVBR for comment. The company has not filed a response with the federal bankruptcy court.