In re Mid America Broadcasting of Topeka, Inc.
| Decision Date | 19 November 1984 |
| Docket Number | Bankruptcy No. 83-40985. |
| Citation | 45 BR 507 |
| Court | U.S. Bankruptcy Court — District of Kansas |
| Parties | In re MID AMERICA BROADCASTING OF TOPEKA, INC., Debtor. |
Charles R. Hay, Goodell, Stratton, Edmonds, Palmer & Wright, Topeka, Kan., for Mid America Broadcasting of Topeka, Inc.
David M. Segal, Trustee.
Mendal Small, Spencer, Fane, Britt & Browne, Kansas City, Mo., for trustee.
James P. Rankin, Eidson, Lewis, Porter & Haynes, Topeka, Kan., for Coe and Thompson.
Michael W. Thompson, Mitchell, Kristl & Lieber, Kansas City, Mo., for Cale W. Hudson.
David A. Lander, Husch, Eppenberger, Donohue Elson & Cornfeld, St. Louis, Mo., Joe B. Whisler, Chanute, Kan., for Larry D. Hudson.
Jeffrey L. Willis, Minter & Willis, Wichita, Kan., for Southwest Nat. Bank.
Carol A. Park, Asst. U.S. Trustee, Wichita, Kan.
This proceeding is before the Court on the trustee's application to sell all of the assets of the debtor. An objection to the sale was made by certain equity security holders of the debtor corporation. The same equity security holders seek alternative relief, should the sale be approved, of allowance as an administrative expense sums they invested in stock of the debtor post-petition.
The appearances by the parties are as follows: Charles R. Hay, Goodell, Stratton, Edmonds, Palmer & Wright, Topeka, Kansas, attorney for Mid America Broadcasting of Topeka, Inc.; David M. Segal, Denver, Colorado, Trustee; Mendel Small, Spencer, Fane, Britt & Browne, Kansas City, Missouri, attorney for the trustee; Carol A. Park, Assistant U.S. Trustee, Wichita, Kansas; James P. Rankin, Eidson, Lewis, Porter & Haynes, Topeka, Kansas, attorney for stockholders Dean M. Coe and Larry P. Thompson; Michael W. Thompson, Mitchell, Kristl & Lieber, Kansas City, Missouri, attorney for Cale W. Hudson; David A. Lander, Husch, Eppenberger, Donohue, Elson & Cornfeld, St. Louis, Missouri, and Joe B. Whisler, Chanute, Kansas, attorneys for Larry D. Hudson; Jeffrey L. Willis, Minter & Willis, Wichita, Kansas, attorney for Southwest National Bank.
At the conclusion of the hearing held on October 17, 1984 the parties were asked to address the following issues:
1. Is the stockholder derivative action now pending an assignable asset of the debtor?
2. Are punitive damages recoverable in suits at equity in Kansas?
3. Is it appropriate to treat capital contributions made during the chapter 11 proceeding as loans for which administrative expense priority may be granted?
Memoranda have been submitted and the matter is ready for decision.
Before the issues of this case are discussed some background information gleaned from this and other hearings would be helpful in understanding the present situation.
The debtor's primary business is operation of KLDH TV, Channel 49, in Topeka, Kansas. KLDH TV went on the air in mid-1983 in an undercapitalized condition but with a line of credit in the approximate amount of $750,000. Shortly thereafter, disputes arose among the equity security holders. These disputes ultimately resulted in the filing of several state court actions. In those actions Larry D. Hudson is the primary party on one side while Cale Hudson, Larry's brother, and Larry P. Thompson, Dean M. Coe, Robert J. Earley and Terri Tharp are generally aligned on the other side.
After a lengthy hearing in October, 1983 the Neosho County District Court entered preliminary rulings adverse to the interest of Larry D. Hudson in the state court action which contains counts constituting a stockholder derivative suit. Soon thereafter, on November 18, 1983, the corporate debtor filed a proceeding in chapter 11 in this Court.
During the early course of this proceeding it became apparent that the debtor had insufficient operating capital and was suffering a shortfall of income to meet expenses in excess of $100,000 per month. During a conference called by the Court in December the problem was discussed. It was determined that the parties could find no outside lending source willing to fund operation of the television station on an unsecured basis. The station had no collateral which could be offered to a lender to reasonably secure such funding. The parties were unwilling or unable to make personal loans to the corporation under § 364. The Court suggested that administrative insolvency would result in probable conversion of this case to a chapter 7 proceeding unless a loan was forthcoming or stock was issued to the present shareholders. All parties agreed to a stock offering which would allow the present shareholders to retain their percentage ownership and also would allow them to pledge the newly issued shares. The stock offer was of 1,111 shares at $388.20 per share with the first round of bidding to be completed by December 28, 1983. The date was extended at the request of all parties to permit the securing of a $200,000 loan and possible settlement of the litigation which had damaged the station's ability to obtain working capital. Neither the loan nor the settlement materialized and the stock offering was made. The issue was fully subscribed and proceeds from the sale totalling some $431,290.20 became available to the corporation to cover approximately three months of operating losses.
In early February, 1984 the Court remanded the stockholder derivative action to state court for a trial scheduled in April, 1984.
Shortly thereafter, the debtor again needed money to meet its monthly losses and the parties again agreed to seek loans and, should that quest fail, to issue stock under the same conditions as had been authorized in December.
During a severe ice storm on March 18, 1984 the debtor's 1,439 foot broadcast tower collapsed. When the station came back on the air some days later, the temporary tower which was erected permitted only greatly reduced coverage. The tower was insured and is now in the final stages of replacement; however, the debtor had no business interruption insurance and thus its already precarious financial position was dealt a severe blow. The second stock offering, to be held in late March, suffered from a lack of willing offerors, and no stock was sold. At a hearing before the Court in early April, the parties ultimately agreed to a "control block" stock issue. At a hearing in early May, the "control block" auction Order was rescinded by this Court for reasons stated of record and a trustee was ordered appointed. On May 9, 1984 David Segal accepted the position of trustee.
Since appointment of a trustee, Larry D. Hudson has extended loans to the debtor to enable it to operate. The trustee was unable to obtain loans from any other source. The loans constitute administrative expenses pursuant to § 364 of title 11. Shortly after his appointment, the trustee announced his intention to seek buyers for the assets of the debtor. Though a number of brokers were contacted and the availability of the station was widely known, no legitimate offer for the debtor's assets has been made other than by Larry D. Hudson. All parties admit that a sale seems to be the only way to avoid financial disaster for the debtor and KLDH TV. In fact, it would appear to be the only method of keeping the TV station on the air and continuing the employment of its 30 or so employees.
The debtor has obligations totalling some $6,885,490 and assets of approximately $4,764,224 of which $350,000 is the capitalized amortized cost of acquiring the FCC license and Industrial Revenue Bonds.
The debtor's monthly losses since April have averaged $130,000; however, the August and September average is $98,500.
The only bid to purchase the assets of the debtor has been made by Larry D. Hudson. The bid is for all of the assets and encompasses payment or assumption of all pre-filing debt and leaseholds and all post-filing administrative expenses. All lessors and secured creditors have either affirmatively agreed to the bid or have not objected to it.
The stockholders' derivative action was not valued by the corporation or the trustee in arriving at corporate asset value. The derivative action seeks recovery of certain payments to Larry D. Hudson or corporations or other business entities under his ownership and/or control which are alleged to have been improperly paid. The improper payments are alleged to have been in the amount of $421,000 to Midwest Telco and unknown amounts improperly paid to Larry D. Hudson for management services. By no party's estimate would these payments, even if recoverable in whole, exceed one million dollars. The payments more than likely would not exceed $600,000. Other personal actions by various stockholders are joined in the lawsuit; these do not constitute a corporate asset and thus would remain to be litigated even if the derivative action is included in the corporate assets sold to Larry D. Hudson. The action also seeks punitive damages.
Even before the passage of the Bankruptcy Reform Act of 1978 which included a broadened concept of property of the estate, stockholder derivative actions were considered property of the estate. Meyer v. Fleming, 327 U.S. 161, 66 S.Ct. 382, 90 L.Ed. 595 (1946). This concept is continued in § 541 of title 11. See the legislative history of § 541, House Report No. 95-595, 95th Cong. 1st Sess. 367 (1977), Senate Report No. 95-989, 95th Cong., 2nd Sess. 82, (1978), U.S.Code Cong. & Admin.News 1978, p. 5787; 4 Collier on Bankruptcy, § 541.10 pg. 541-67 (15th Ed.1983).
It appears that a substantial argument can be made that federal law would allow the assignment of the cause of action even in the face of contrary state law. The supremacy clause of the constitution provides that where state law conflicts with federal law, the former must yield. U.S. Const. art. 6, cl. 2. The power to enact bankruptcy legislation belongs to Congress. U.S. Const. art. 1, § 8, cl. 4. The trustee has the...
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