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Friday, March 19, 2010

Delaware Judge Blocks Guardian Cash Grab

Posted By on Fri, Mar 19, 2010 at 12:45 PM


A Delaware judge has put the brakes on the Bay Guardian's efforts to take half of the SF Weekly's advertising revenues.

After ruling that the Guardian's collection efforts pose the threat of irreparable harm to the Weekly and its lender, Bank of Montreal, the Hon. Donald F. Parsons, Jr., Vice Chancellor of the Delaware Chancery Court on Wednesday issued a temporary restraining order barring the Guardian from contacting Weekly advertisers, or from requesting or demanding that they make payments directly to the Guardian.

Attorneys for the Weekly's lenders had sought the ruling earlier this week after the Guardian began sending the Weekly's customers letters threatening them with sanctions or contempt of court if they didn't immediately start sending half of their payments to the Guardian's Newport Beach attorney.

The Delaware order temporarily prohibits the Guardian from any further such activity. The judge noted that his ruling was prompted by his belief that the Guardian's attempt to intercept the Weekly's revenues clearly would jeopardize the financial interests that the Bank of Montreal holds as a result of its senior lien on Weekly assets.

The Guardian's latest assault on the Weekly is part of its aggressive campaign to grab cash from its rival before the California Court of Appeal has ruled on the underlying merits of a below-cost pricing suit the Guardian filed against the Weekly in 2004. The judgment in that case has ballooned to more than $21 million after a judge trebled the damages and then tacked on 10 percent interest, which has caused the debt to grow at a rate of more than $5,000 per day.

The Delaware judge said his ruling was necessary in part because, should it ultimately be proven that the Guardian is liable for damages as a result of its behavior -- which it undertook despite repeated warnings from the bank -- "there is some reason to doubt the ability of Bay Guardian, due to its own financial situation, in terms of the extent of leverage and so on, to actually pay any damages award that might be given in favor of Bank of Montreal."

The next step in the Delaware court process will come when the judge schedules arguments on whether he should issue a preliminary injunction against the Guardian until the entirety of the bank's case against the Guardian can be heard. In the meantime, the temporary restraining order will remain in place until the court takes further action.

During the telephone hearing in Delaware on Wednesday, Guardian attorney Jay D. Adkisson said the Guardian would abide by the Delaware court's ruling.

On Monday, in response to concerns raised by SF Weekly in front of San Francisco Superior Court Commissioner Everett A. Hewlett that his order allowed the Guardian to leapfrog the bank's position and that the conflicting instructions from Bank of Montreal and the Guardian were confusing SF Weekly's advertisers, Hewlett ruled that any monies collected by the Guardian be deposited in a neutral trust account, where they will remain inaccessible to either party until his court issues further instructions. However, Bank of Montreal is not a party to any of the California proceedings, and the Delaware Court has restrained the Guardian from taking any further action to collect SF Weekly's revenues and communicating further with SF Weekly's advertisers.

Meanwhile, in a blog post about the case yesterday, Guardian editor Tim Redmond made several factual errors, and made at least one claim bordering on the inscrutable: His assertion that the Delaware judge was "very skeptical of BMO's claims.

In fact, a transcript of the hearing shows that the judge said it seemed obvious to him that BMO had "a colorable claim," and that "It does appear that they [Bank of Montreal] are a secured creditor in a first position, and no argument has been presented as to why they wouldn't be in that first position as to most, anyway, of the amounts that are in dispute here" and that Bank of Montreal "...has superior rights that are being interfered with by the defendant, Bay Guardian, through the actions that it has taken." The Delaware Court also found that the Weekly faced the threat of immediate and irreparable harm if the Guardian were allowed to proceed with its collection efforts under Hewlett's order. Those were precisely the rulings that BMO asked the judge to make.

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Andy Van De Voorde


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