Metromedia Steakhouses creditors committee files lawsuit to recharacterize $224.94 million of claims

By Caroline Salls

Pittsburgh, Feb. 4 - Metromedia Steakhouses Co., LP's official committee of unsecured creditors filed a lawsuit Tuesday in an attempt to recharacterize or subordinate $224.94 million of claims arising from transactions completed under the control of company insider John W. Kluge, according to a filing with the U.S. Bankruptcy Court for the District of Delaware.

According to the committee's complaint, Kluge and his affiliates have "exerted dominating control" over Metromedia for more than 20 years through their direct ownership of Metromedia Co. and their indirect ownership of Metromedia Steakhouses' general partner, Metpon Acquisition, Inc.

By installing himself as president and chairman of Metromedia Corp. and business associate and fellow trustee Stuart Subotnick as president of Metpon, the committee said Kluge ensured his ability to control both sides of transactions with Metromedia Steakhouses.

As a result, the committee is looking to recharacterize or subordinate the transactions in question, including an alleged credit agreement and $165.3 million promissory note, an alleged $400,000 revolving promissory note and an alleged $6 million revolving promissory note.

While the company's financial records characterize these Kluge investments as loans, the committee said "the overwhelming number of facts and circumstances demonstrate that the Kluge investment is a loan in name only and equity in reality."

"Not only did the Kluge note have little, if any, resemblance to a debt security, it seemed to lack the most fundamental aspect of a debt security - the obligation to repay," the committee said in its complaint.

Specifically, the committee said Metromedia Steakhouses has not paid interest on the Kluge note for seven years, resulting in $51.75 million of accrued interest and an event of default.

However, the committee said it has not received any evidence that Kluge has ever enforced the default.

"Unsecured creditors of the debtors' estates should not be made to further bear the burden of Kluge's deceptions and control," the committee said in the complaint.

Committee targets Metromedia, Metpon

In addition, the committee filed a separate lawsuit against Metromedia Co. and Metpon in an attempt to keep Metromedia Co. from recovering against fictitious claims and invalid security interests and "seeking to siphon at least $40 million of quantifiable value from the debtors' estates."

The committee said it will accomplish this by:

• "Piercing the corporate veil of Metromedia Co. and its so-called direct subsidiary Metpon" given the alleged lack of any evidence suggesting that Metpon is or was adequately capitalized, the overlap of directors and officers, an absence of communications between Metpon and Metromedia Steakhouses and the absence of evidence suggesting Metpon kept proper corporate minutes;

• Avoiding the liens of Metromedia Co. allegedly securing $4.6 million of debt outstanding under Metromedia Steakhouses' pre-bankruptcy term loan that were never validly perfected;

• Avoiding the liens of Metromedia Co. allegedly securing the purported $4.2 million pre-bankruptcy revolving credit facility that were perfected 32 days after the effective date of the alleged loan;

• Recharacterizing or subordinating the purported $4.2 million pre-bankruptcy revolving credit facility;

• Avoiding as a fraudulent conveyance or recharacterizing roughly $29 million of illegal dividends that accrued for several years under various management services agreements; and

• Recharacterizing or subordinating Metromedia Co.'s $1.9 million claim arising under purported unsecured promissory notes issued between June 2008 and July 2008 "that are bare of customary lending provisions, issued at a time when the debtors were grossly undercapitalized, had been operating at a loss for over 20 years and could not realistically be expected to repay such indebtedness."

Metromedia is a steakhouse company based in Plano, Texas, that operates restaurants under the names Ponderosa Steakhouse and Bonanza Steakhouse. The company filed for bankruptcy on Oct. 22. Its Chapter 11 case number is 08-12490.

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