A court-sanctioned committee of unsecured creditors of Freedom Communications Inc.—the former owner of the Orange County Register—have filed a lawsuit against former Freedom executives Aaron Kushner and Eric Spitz in the Santa Ana division of the U.S. Bankruptcy Court.
The plaintiff’s committee includes a number of unpaid vendors and the Pension Benefit Guaranty Corp., a federal safety net for retirement savings.
The lawsuit alleges that Kushner and Spitz, as trustees of the company’s retirement plan, “wasted millions of dollars of Freedom’s pension plan assets on two unsuccessful life insurance investments: a direct life insurance program and a life insurance settlement.”
The suit is a follow-up to a filing last September by the Los Angeles office of Pachulski Stang Ziehl & Jones LLP—which was the lead negotiator for creditors during the bankruptcy hearings, and represents the plaintiffs in the current lawsuit—to inform the court that it would investigate possible legal claims against former Freedom insiders.
Freedom declared bankruptcy in November 2015 and was acquired last year by Denver-based Digital First Media, which paid $49.8 million in cash. During the bankruptcy negotiations, one of the secured creditors, Greenwich, Conn.-based Silver Point Finance LLC contributed $1.5 million to serve as a financial reservoir for the unsecured creditors to pursue legal cases Spitz said.
The unsecured creditors’ committee was appointed by the office of the U.S. Trustee Program, standard operating procedure in a bankruptcy case. The members of the committee are representatives of a number of unpaid vendors and the Pension Benefit Guaranty.
The sale of Freedom covered several secured creditors, including: $20 million to Silver Point Finance; $3.5 million divided between Freedom’s former chief executive, Mitchell Stern, and Mark McEachen, a former chief financial officer; and $16.2 million to the pension corporation for missed payments.
The pension plan in December had about 5,300 participants and $287.3 million in assets, according to the U.S. Department of Labor.
The recently filed lawsuit is against Kushner, Spitz and other individuals and entities associated with the pension plan’s investments.
The pension plan was already underfunded by more than $100 million when Kushner and Spitz closed the deal that financed the purchase of Freedom Communications in 2012, according to the lawsuit.
They invested tens of millions of dollars of the pension plan’s assets in a direct life insurance program and a life insurance settlement program, according to the lawsuit, which goes on to say that life insurance was not authorized under the pension plan’s investment policy statement.
One apparent investment in life insurance made under Kushner and Spitz was the subject of a 2014 Los Angeles Times article, which said that the Register was trying to get consent from its employees that would allow Freedom to take out million-dollar-plus life insurance policies on them and name the company’s pension plan the beneficiary.
The lawsuit alleges that Kushner and Spitz’ life insurance investments cost the pension plan millions of dollars and “increased [Freedom’s] obligations to the pension plan” and its “liability to the Pension Benefit Guaranty Corp. and other creditors, with in excess of $190 million claims” filed by the federal agency in the bankruptcy case.
Another claim of the lawsuit is based on Kushner’s exit from Freedom Communications in March 2015, eight months before the company declared bankruptcy. The suit alleges that Kushner fraudulently received “substantial amounts” of “post-resignation compensation” despite the company being headed toward bankruptcy. It also claims that Kushner should not have been released from claims that had already been made related to the pension plan’s “failed investments.” The lawsuit seeks to set aside his release and asks for the return of his compensation.
Kushner could not be reached.
Spitz said the bankruptcy settlement didn’t include any money to pay the unsecured creditors. He called the lawsuit “frivolous” and accused Robert Feinstein, the lead attorney for the Pachulski Stang Ziehl & Jones office in New York, for simply capitalizing on the $1.5 million regardless, referring to the money that was set aside to pay for litigation as a “war chest.”
The bankruptcy process came down to three contenders—an investment group led by one-time former Freedom Chief Executive Richard Mirman; Chicago-based Tribune Publishing Co.; and Digital First.
Spitz said that Feinstein, in his role as negotiator for the creditors, wanted the Freedom team to put up $10 million on top of their bid for indemnification against additional claims.
“We literally walked out,” Spitz said. “And instead of having three bidders bidding up the price, there were two.”
Spitz defended Kushner’s exit, saying it was a “typical exit package that a senior executive gets, based on an employment contract.” And he said the pension fund “was in much better shape after we took it over than when we got it. It’s unequivocal. The numbers prove it.”
Spitz declined, however, to provide any numbers to support his claim, saying “there are so many ways to value a pension fund.”
Feinstein said his firm does not comment publicly on pending litigation.
