Midway Games' creditors committee sues shareholders, directors for 'disastrous' transactions

By Caroline Salls

Pittsburgh, May 12 - Midway Games Inc.'s official committee of unsecured creditors filed a lawsuit Monday in the U.S. Bankruptcy Court for the District of Delaware in connection with what it claimed were a "series of disastrous and ill-advised financial transactions."

The complaint names the company's former and current controlling shareholders and members of Midway's board of directors as defendants.

According to the lawsuit, the board members breached their fiduciary duties by putting the interests of the former shareholders above the interests of the company and instructed the apparently insolvent Midway to enter into a transaction "that piled $70 million in additional debt on the struggling Midway."

The committee said the former shareholders transferred their 87% stake in the company and their interest in $70 million of the debt they had arranged to the new shareholders for just $100,000 "in a last ditch bid to escape their own financial woes."

As a result, the committee said the company was turned over to Mark E. Thomas, who was "completely unsuited to be the 87% owner of a publicly traded company.

In addition, the committee said the transaction generated more than $700 million in tax losses for the former shareholders, which enabled them to receive a massive tax refund. Meanwhile, the committee said Midway lost millions in tax attributes.

The creditors committee is asking the court to subordinate the Thomas parties' interests and reclassify them as equity rather than debt.

The committee is also seeking damages for fraudulent transfer, unlawful conversion, corporate waste, breach of fiduciary duty, aiding and abetting the breach and unjust enrichment.

Midway Games, based in Chicago, is a developer and publisher of interactive entertainment software for videogame systems and personal computers. The company filed for bankruptcy on Feb. 12, and its Chapter 11 case number is 09-10465.

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