Granite Broadcasting examiner uncovers potential for breach claims against Cornwell, some directors

By Caroline Salls

Pittsburgh, April 3 - Granite Broadcasting Corp.'s examiner reported that the company has potential claims for breach of fiduciary duty against controlling shareholder and officer W. Don Cornwell and against the company's board of directors, excluding Eugene David and Kirk Aubry, according to a Monday filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the examiner's report, the potential claims arise from Cornwell and the board's role in the company's entry into a term loan facility and restructuring agreement with Silver Point Finance LLC.

Examiner Andrew C. Hruska said the most significant event leading up to Granite's bankruptcy filing was an interest payment due on its senior secured notes and, to make this payment, the company entered into the Silver Point term loan, which allowed the company to make the interest payment and to acquire a television station.

However, Hruska said at the time the board voted to accept the Silver Point term loan, there was a competing proposal from a group of preferred equity holders, which included terms that were arguably more favorable to the company than Silver Point's proposal.

But, absent a bankruptcy filing, the preferred equity holders' proposal required Cornwell's approval, which was never given.

As a result, the board agreed to the Silver Point loan, which obligated Granite to negotiate a proposed restructuring that was acceptable to the lender.

This restructuring proposal is now the basis of Granite's plan of reorganization.

In his report, Hruska said it can be inferred from his findings that Cornwell "felt greater personal comfort in his potential future with restructured Granite under the control of Silver Point versus [preferred equity holder] Harbinger."

In addition, Hruska said the preferred equity holders' proposal could have been implemented outside of Chapter 11 bankruptcy, but both Harbinger's restructuring and liquidity proposals would have required Cornwell's consent as the sole holder of the company's class A common stock.

The examiner's report said that, although it stressed avoiding bankruptcy, Harbinger's proposal called for a change of governance, including Cornwell's eventual removal.

Hruska said Cornwell had little incentive to seek the highest possible price for his shares in a restructuring agreement, because no one expected there would be enough enterprise value to pay the holders of the preferred shares and, in turn, to leave residual value for the common stockholders.

"This situation created incentives for Cornwell to use his control as CEO and chairman to maximize benefits that would accrue to him personally, rather than the best deal for the company," Hruska said in his report.

The report said the directors are liable for potential breach claims because they allowed Cornwell to direct the process of seeking financial alternatives without properly overseeing, supervising and controlling his actions.

Aubry and Davis were appointed to the company's board of directors by its preferred equity holders. The other board members were appointed by Cornwell.

Granite, a New York-based owner and operator of network-affiliated television stations, made a pre-packaged Chapter 11 filing on Dec. 11. Its Chapter 11 case number is 06-12984.

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