Air America and Matters Legal (2)

A regular Macho Nachos reader recently responded to my latest installment on the Air America case thusly:

The management of the old company (whether a board of directors, managers or managing equity owners) has a fiduciary duty to act for the benefit of the creditors of the old company assuming it was insolvent at the time of the asset sale to Piquant, LLC.

In non-lawyer terms, the old management was required to act in the best interests of the creditors of the old company.  If the old management did not act in the best interest of the creditors, then the old management is liable to the creditors for breach of the duty of loyalty and duty of care.

So far, so good.

If the old management consists of the same persons as the management of the new company, Piquant LLC, then those same persons have a conflict of interest and perhaps a disqualifying financial interest.  Decisions by interested managers are highly suspect.  Unless it is proven by management that the decision was fair to the creditors, then the interested management and the new company are exposed to liability.

It so happens that I got a call from a DC lawyer buddy of mine yesterday, and happened to chat with her about this very case. Given the brief outline of the facts of the case that I gave her, it was her considered opinion that if Piquant LLC's description of the transfer of Air America was accurate, it will be very difficult for a prosecutor to come after the folks at Piquant LLC, provided that the lawyer for the folks at Piquant was not wholly incompetent.

Because Piquant LLC did not purchase the company Progress Media, but rather purchased the assets that kept Air America running, then it is incumbent upon the folks at Progress Media to use the proceeds from the sale of assets to satisfy the creditors. If we accept Professor Bainbridge's account of Progress Media's financial situation as accurate - namely, that they were in hock for millions of dollars to various creditors, it is entirely possible that the sale of the Air America assets were insufficient to even come close to digging them out of debt, even if we assume a good-faith effort on the part of Cohen and the rest of the Progress Media gang.

The lawyer I spoke with said that this sort of thing happens on a shockingly frequent basis, and it would take a very low-talent lawyer indeed to butcher the transaction in such a manner as to leave the new investors of Piquant LLC open to liability, again provided that a good-faith effort was made on their part (while simultaneously acting as Progress Media) to repay the creditors. When companies have net worths of less than zero, these things happen. The lawyer I spoke with speculated that the only reason that we're hearing about this case is because one of the creditors defrauded in this case was a favorite liberal charity, and the company leaving them on the short end of the stick operated a liberal talk radio network. That, and the fact that the creditor in this case probably had no legal justification for making this loan in the first place.

What makes this case potentially different is the involvement of public funds that never should have been in the coffeurs of Progress Media in the first place. At this point, the lawyer I spoke to refused to offer further comment on the basis of having no experience dealing with the criminal side of these transactions. In other words, if we accept the notion that Cohen (and Rosen) and only those two individuals had any knowledge of the Gloria Wise loan in the first place, it is possible (and indeed probable) that the folks from Piquant LLC walk scot-free. If, however, it can be proven that they knew of the loan beforehand, and if the law was broken in the extending of the loan with the knowledge of those other than Cohen and Rosen, then of course the fact that they changed companies will not shelter them, legally speaking.

It seems to me, in summary, that the questions that we have remaining (from a legal standpoint), as it pertains to the current operators of Piquant LLC are these:

1. Did the Dobneys, et al know of the loan at the time it occurred, or before they purchased Air America's assets from Progress Media?
2. To what extent did Progress Media make a good-faith effort to repay creditors from the proceeds of the sale of Air America's assets?
3. Did Progress Media receive a "fair market price" for Air America's assets, or was the transaction a deliberate attempt to defraud creditors?

Bottom line is that there are very large legal loopholes for people (with talented lawyers) to jump through to avoid corporate debt, whereas the loopholes are smaller when it comes to knowingly bilking the government of money. My feeling, as I have followed this story, is that the folks from Piquant will probably walk free, legally speaking.

That, of course, doesn't make what they did any less sleazy. According to their own admission, they knew of this fraudulent loan over a year ago, given to a company that they were intricately involved with, and have still yet to pay back a dime. We expect this kind of behavior from evil corporate tycoons like Andy Fastow. We ought to expect better from the folks who are "looking out for the little guys."

UPDATE (08-03-05 15:31:00 CDT): Brian Maloney outlines the incredible deceptiveness of Air America during this whole scandal, including conflicting company statements, outright lies, and flat contradictions of the DOI statement. As always, worth a read.

UPDATE (08-03-05 15:38:00 CDT): Michelle Malkin exposes the Air America backers for the fraudulent race-baiting huslters that they are. Did we mention that these people are sleazy?

UPDATE (08-03-05 16:13:00 CDT): Breaker, whom I quoted at the beginning of this post, responds:

As the author of the quoted paragraphs that you start with in this post, I wish to clarify something that your DC friend may not fully appreciate.

Assuming the persons authorizing the sale for old Air America (Progressive Media) are the same as the persons managing new Air America (Piquant, LLC), then those persons have a hopeless conflict of interest.  This  makes a legal attack on them quite formidable.

As management of the old insolvent company, their fiduciary duty is owed to the creditors of the old Air America.  Normally, the duty is discharged by obtaining the relevant facts and making a business judgment.  Courts normally defer to the business judgment of management.

But in this case, assuming the new management consists of essentially the same persons as old management, the old management has a disqualifying financial interest.  In that case, the old management would have the burden of proving that the sale transaction was objectively fair to the old company and the creditors.  That burden is not a slam dunk to meet. 

Unless the old management obtained unimpeachable, independent appraisals of value, then a legal attack by creditors would be a serious risk to the new company and its management.  Another appraiser may be found who may give an opinion of a higher value.  Then Air America would be in the soup.  That's is why most of these kinds of transactions are cleansed with a trip through Bankruptcy court.

Finally, I understand that new Air America has committed to pay off Gloria  Wise.  That brings into question whether the payoff belongs to the other creditors who have been shafted by Air America.  If I were representing a shafted creditor, I would bring an action against Piquant, LLC and Gloria Wise.

I think, in some respects, that we are talking past each other here. I agree that the owners of Progress Media (many of them the same folks at Piquant) had an obligation to satisfy the debts of their creditors with the proceeds from the sale of the Air America assets. My speculation (based on Professor Bainbridge's article) was that their debt was so great that the entire net worth of their assets would not begin to cover the debt that they had accrued.

So, in the process of honestly discharging the obligation to their creditors (which, of course, is something that the Dobneys and the rest of the gang must prove that they did), that the debt to Gloria Wise (which I think is up to $900,000 at latest count) may have gotten lost in the repayment shuffle - especially if some of the other creditors had more securities against their loan agreements, etc (that last sentence was entirely my own speculation and may be completely bunk). Given that nobody can seem to produce so much as a loan agreement on paper between Gloria Wise and Progress Media, I could certainly see a situation in which other creditors had their debt discharged first and Gloria Wise got left in the lurch.

Of course, it's also possible that Cohen ran off with all the money and used it for his cancer treatments. At this point, we don't know. It's also possible that the Drobneys, et al did not faithfully discharge their responsibilites to the creditors of Progress Media, in which case, it is correct in that they are legally going to be in some hot water (I don't recall saying otherwise in my original post).

As to the presence of a conflict of interest, I can certainly see where that arises, as well. But I was assured by the lawyer I spoke with that this kind of transaction, wherein investors in a company buy out the assets of that company and form a new one, is a transaction that does happen with some regularity, and is further a legal transaction. I would assume that if the Drobneys, et al can establish that they faithfully discharged their responsibilites to the creditors of Progress Media to the best of their ability, then they are off the hook. If not, then they are still on it (hence question 2).

UPDATE (08-04-05 18:56:00 CDT): Welcome, readers of Hugh Hewitt and Michelle Malkin! I have received several comments both attached to this post and via email that lead me to believe that many people are not understanding the fact that Piquant LLC did not purchase Progress Media. The purchased the assets of Air America from Progress Media. This means, so far as I can tell, that the responsibility of Piquant LLC members is absolutely zilcho for the debt of Progress Media.

However, insofar as at least some of the owners of Piquant are also the owners of Progress Media, they are (personally) responsible for discharging their responsibility to the creditors of Progress Media.

Another issue that has been raised, which I addressed in the email (by frankly admitting that the lawyer I spoke with declined to comment on the basis of insufficient knowledge) was the difference that is raised in this particular case, in that one of the creditors of Progress Media was a charity that primarily operated on public funds. No one that I have spoken to yet has a solid answer to that question, but I would love to hear one from an expert in that area.

Comments

[Breaker]

As the author of the quoted paragraphs that you start with in this post, I wish to clarify something that your DC friend may not fully appreciate.

Assuming the persons authorizing the sale for old Air America (Progressive Media) are the same as the persons managing new Air America (Piquant, LLC), then those persons have a hopeless conflict of interest. This makes a legal attack on them quite formidable.

As management of the old insolvent company, their fiduciary duty is owed to the creditors of the old Air America. Normally, the duty is discharged by obtaining the relevant facts and making a business judgment. Courts normally defer to the business judgment of management.

But in this case, assuming the new management consists of essentially the same persons as old management, the old management has a disqualifying financial interest. In that case, the old management would have the burden of proving that the sale transaction was objectively fair to the old company and the creditors. That burden is not a slam dunk to meet.

Unless the old management obtained unimpeachable, independent appraisals of value, then a legal attack by creditors would be a serious risk to the new company and its management. Another appraiser may be found who may give an opinion of a higher value. Then Air America would be in the soup. That's is why most of these kinds of transactions are cleansed with a trip through Bankruptcy court.

Finally, I understand that new Air America has committed to pay off Gloria Wise. That brings into question whether the payoff belongs to the other creditors who have been shafted by Air America. If I were representing a shafted creditor, I would bring an action against Piquant, LLC and Gloria Wise.

[TC@LeatherPenguin]

When everything is said and done, the question I had back in June of '04, when this change of Air Idiot's management occurred, still stands unanswered and probably is at the heart of what looks like a massive fraud case in the making: what assets changed hands?What did Drobny, et. al. sell, as "Progressive," to themselves under a new name, "Piquant," and who decided the valuation of these alleged assets?

[MachoNachos]

TC,

What assets changed hands? According to the Piquant LLC statement, Air America itself was the asset that Progress Media sold to Piquant LLC.

Who decided the valuation of these alleged assets? Now that IS very much central to this case. In a normal transaction, in which nobody involved is being investigated by the DOI, I would assume nobody even checks on such a thing. However, now that this fraudulent loan has come into question, every lawyer I have spoken with emphasizes the point that in order for this sale of assets to be a legitimate legal cover for Piquant LLC, it must be determined that the assets were sold at a legitimate price, rather than just as a dummy transfer from one entity to another.

Companies have ways of valuing assets which are frankly beyond my powers of understanding, but if this WAS a dummy transfer, smarter folks than I am will surely figure it out.

[Breaker]

Of course here is a very piquant development in the Air America stink.

http://breakers.typepad.com/leftbeach/2005/08/dan_rather_hire.html

[TC@LeatherPenguin]

"According to the Piquant LLC statement, Air America itself was the asset that Progress Media sold to Piquant LLC."

And therein lies my problem: at the time, Air America was an untested concept is possession of nothing but angry, unpaid creditors, quickly amassing even more debt (including salary owed their employees, for Pete's sake!). What did Piquant get at the time of the purchase other than possession of those bills? Air Idiot looked like a corpse, business-wise. No sane person familiar with the radio business gave them much of a chance of succeeding when all the free publicity they had received previous to their launch suddenly blew up and they were tossed off the air in Chicago and LA. A station owner in Chicago who they were in talks with to get back on the air there said he was willing to cut a deal as long as they paid upfront; no one trusted them to last long enough to extend any faith or credit in the very concept of Air America. They were untested, damaged goods.

The fraud started the day they swapped the "owners" names; it's just amazing they've lasted this long before it finally caught up to them.

[Howard Veit]

How about the failure of the buyer to do any due dilligence? This seems very strange, almost as if this was a sham transaction. I've been involved in the purchase of several privately held companies and I had a due dilligence firm ransack the places. And trust me, the sellers had to sign plenty to assure that all debt was accounted for. Doesn't this lack mean more than all the legal goblygook of your lady friend in D.C.?

[johnt]

I'm not a lawyer but I'm not so sure Piquant is off the hook. If I understand this corectly they purchased the assets but not the liabilities. Ok, so that means the have a direct,tangible benefit in the funding provided by the quesionable investments. They are carrying these funds either in their current accts or capital accts. Interested gov't lawyers as part of a recovery process,may well be able to bring legal action against the new owners,which may be the reason said owners are considering a payback. You benefit from a misuse of gov't grants,you return the money,you might say it's a variation on the unwitting use of stolen goods except in this case the owners knew about it.

[Breaker]

I will offer a response your pregnant question as to the responsibility of Piquant, LLC and its management for the debts of Gloria Wise, or lack thereof, due the nature of the funds loaned being traced to charitable or public funds.

The facts, of course, are murky so take this a speculation.

Assuming that no one in management of Piquant knew of the nature of the funds, the fact that the source funds to Gloria Wise are donations or received from Govenment sources should not matter - unless there is some New York statute that provides otherwise.

The management of Gloria Wise is exposed to liability for misuse of government funds, however.

The more interesting question - and probably the reason that Piquant is saying that it will restore the funds - is that at least some of the funds may have been stolen by the actions of Evan Cohen using a rubber stamp to forge checks conveying funds from Gloria Wise to Progressive Media.

Anyone receiving stolen property is required to return the property to its rightful owner whether or not the person receiving stolen property pays fair value for the stolen property. Someone advising Piquant may have concluded that the assets purchased from Progressive Media carried the taint of stolen property.