In re Maxwell Newspapers, Inc.
| Decision Date | 23 February 1993 |
| Docket Number | Bankruptcy No. 91 B 15531. |
| Citation | 151 BR 63 |
| Parties | In re MAXWELL NEWSPAPERS, INC., d/b/a Daily News, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Jones, Day, Reavis & Pogue by Marc S. Kirschner and Fredrick E. Sherman, New York City, for Maxwell Newspapers, Inc. d/b/a Daily News.
Winston & Strawn by Howard Seife, New York City, for the Official Committee of Unsecured Creditors.
Stroock & Stroock & Lavan by Brian M. Cogan and Mark S. Cheffo, New York City, for Mirror Group Newspapers, PLC, MGN Ltd. and RTI Holdings, Inc.
DECISION ON DEBTOR'S MOTION FOR SUMMARY JUDGMENT EXPUNGING CLAIMS OF MIRROR GROUP NEWSPAPERS, PLC, MGN LIMITED AND RTI HOLDINGS, INC.
At a time when the Daily News' extinction was but days away, in early 1991, there appeared Robert Maxwell, the seeming savior who was paid over $60,000,000 to take the newspaper off the hands of its former owner. It was through this debtor, Maxwell Newspapers, Inc. (which did business as and, for ease of reference, will be called in this opinion the "Daily News"), that Maxwell acquired the Daily News. From the facts brought out in the Daily News' summary judgment motion, a good many of which are uncontested, the late Mr. Maxwell appears to have moved countless millions of dollars among his various enterprises without regard to the propriety of his actions and the consequences which he was causing, thereby exposing this relatively small business to potential claims of affiliated entities in the hundreds of millions of dollars. This decision deals with the claims of Mirror Group Newspapers, plc ("Mirror") and of its two subsidiaries, MGN Limited and RTI Holdings, Inc. (collectively the three will be called "MGN"), which aggregate some $110,000,000.
Maxwell's empire comprised two components, the "private side" companies owned by the Maxwell family and believed to be headed by Headington Investments, Ltd., ("Headington") and the "public side" companies headed by Maxwell Communication Corporation plc ("MCC"), which is owned publicly and in minority part by Headington. See In re Brierley, 145 B.R. 151, 154 (Bankr.S.D.N.Y.1992). The Daily News is private side, being indirectly owned by Headington. Mirror is a publicly traded company, a substantial number of whose shares are owned by Headington.
Through the newspaper which it owned until very recently, this debtor had strong local ties. Yet its chapter 11 case is but a small part of a large transnational bankruptcy, implicating three chapter 11 cases in this court and scores of administrations and windings-up in London. As this decision illustrates, many of the Maxwell-related entities have claims one against the other which need be sorted out through, one hopes, negotiation or, failing that, extensive litigation.
It was on March 14, 1991 that Robert Maxwell acquired ultimate ownership and control of the tabloid from the Tribune Company. Virtually immediately, he installed himself as chairman of its board of directors. From that time until a month or so after his death in November 1991, Maxwell and members of his immediate family dominated the Daily News' board of directors and, according to the debtor, exercised complete control over it.
Once ensconced, Maxwell instructed the Daily News' comptroller, Marshall Genger, to set up several bank accounts for its operational use. With the help of Kathleen Guinessey, treasurer of Macmillan, Inc. (the well-known publishing company which is a subsidiary of MCC), Genger set up accounts at Chase Manhattan Bank, N.A. ("Chase") as well as at Nebanco, Continental and Mellon Banks. At Chase, Genger set up operating, payroll and disbursement accounts. Guinessey also opened an account in the Daily News' name at National Westminster Bank ("NatWest"). The Daily News claims that none of its employees, save Robert Maxwell and his son Kevin, as well as people with a prior affiliation to the Maxwell companies, even knew of the NatWest account until late May or early June 1991.
On the heels of these activities, Maxwell, who at all times had authority to transfer funds into or out of any of the Daily News' accounts, began using the bank accounts for the numerous transfers that, over the next eight or nine months, would make up what the Daily News itself now describes as the "fraudulent scheme" through which Robert and Kevin misappropriated funds of various Maxwell-controlled entities. See Debtor's Local Rule 13(h) Statement at ¶¶ 16-18. Between March and November 1991, some $238 million was transferred into the Daily News' accounts and most was promptly transferred out. Cogan Aff., Exh. D. The Daily News does not dispute that it was cash-starved and looked to Maxwell for money. Sherman Decl., Ex. F at 60. Nor does the Daily News dispute that, as a result of the Maxwells' fraudulent scheme, the Daily News retained a benefit in the form of a net balance of nearly $7,000,000. Cogan Aff., Exh. D. What the Daily News does say is that this apparent benefit is irrelevant to MGN's claims because if one looks to the four-day period during which funds of MGN, rather than funds of other Maxwell-related entities, were received and disbursed by the Daily News, the Daily News was left short by some $377,000, a factual point which MGN does not dispute. Thus, the Daily News says, it too sustained a loss from Maxwell's actions and ought not be held accountable to MGN for the $110,000,000 siphoned from it; the Daily News and MGN are either both victims of Maxwell, or, if they cannot divorce themselves from him, equally culpable for his actions and, therefore, not chargeable with intercompany claims of one another.
The four days on which the Daily News focuses begin on October 21, 1991 and end on October 24. But the prelude to what happened during those days was on October 18. On that date, Larry Bloom, the senior vice president of the Daily News, was attending a conference in Washington when he received a telephone call from Maxwell. Maxwell informed Bloom that Maxwell would soon be transferring approximately $86 million into the Daily News' accounts, and that although the majority of that money would be promptly transferred out, some money would remain for the Daily News' operating needs. Cogan Aff., Exh. A at 111. Maxwell indicated that the monies deposited were funds derived from the sale of shares of Scitex Corporation, a company in which Bloom understood Maxwell to be a shareholder. Id. at 110. Bloom assured Maxwell that Genger was capable of carrying out those transactions in Bloom's absence. Following this conversation, Bloom alerted Genger to the impending transfers.
Three days later, on October 21, Genger received a telephone call from Kevin Maxwell. Consistent with the conversation between Bloom and Robert Maxwell, Kevin told Genger that the Scitex funds were to be transferred into and right out of the Daily News' operating accounts, but that some funds would remain in the Daily News' accounts for its operating use. Genger believed that the Daily News would be left with some $9 or $10 million from the transactions, an amount which he later characterized as "barely adequate" to pay past due Daily News obligations. Cogan Aff., Exh. B at 60. Over the next three days, following orders given by Robert and Kevin, Genger transferred the following amounts into and out of the Daily News' accounts:
Transfers In
Date Amount
10/21 $ 86,105,000.00
10/22 $ 22,000,000.00
10/23 $ 2,200,000.00
10/23 $ 1,700,000.00
10/24 $ 1,000,000.00
_______________
Total Amount $113,005,000.00
Transfers Out
10/21 $ 55,786,352.25
10/21 $ 8,818,673.21
10/22 $ 6,246.56
10/22 $ 21,000,000.00
10/22 $ 17,770,560.00
10/23 $ 9,000,000.00
10/24 $ 1,000,000.00
_______________
Total Amount $113,381,832.02
Bloom and Genger both believed that the $86,105,000 transferred into the Daily News' accounts on October 21 represented the proceeds of the Scitex sale, but the funds were actually the proceeds of a loan made by Bankers Trust to MGN Limited at the behest of Robert and Kevin Maxwell and Mirror director Michael Stoney. Shortly after Genger transferred the loan proceeds into the Daily News' accounts, Kevin directed him to transfer them out to Bankers Trust (to repay an earlier loan Bankers Trust had made to Mirror Group, PLC (now Robert Maxwell Group, PLC)).
MGN attributes its losses to collusion among a group of individuals but has publicly acknowledged weaknesses which may have played a part in the diversion of MGN's funds. They include: internal controls and operating procedures which failed to identify related party transactions and bring them to the attention of the independent directors for their approval; funds transfers permitted on the authority of Robert Maxwell alone or of other directors who were also directors of other Maxwell-controlled companies without the Audit Committee (consisting of non-executive directors) having been convened; inadequate authority of the finance department to verify and record the activities carried out by the treasury department; and the resultant lack of proper documentation relating to these activities which would have enabled the keeping of proper books of account. Sherman Decl., Exh. H at 10.
With Robert Maxwell's death and the collapse of his finances, the Daily News filed for relief under chapter 11 of the Bankruptcy Code. MGN filed proofs of claim totaling $110,000,000 based on, among other grounds, Maxwell's fraudulent...
To continue reading
Request your trial