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Tuesday, March 16, 2010

Bay Guardian Sued by Weekly's Banks

Posted By on Tue, Mar 16, 2010 at 11:45 AM

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The Bay Guardian's total disregard of SF Weekly's lenders' senior lien rights have led those banks to ask a Delaware court to issue a temporary restraining order and injunction that would end Bruce Brugmann's increasingly frantic efforts to bleed money from the Weekly.

The lawsuit filed against the Guardian by the Bank of Montreal on behalf of a group of institutional lenders also asks a judge to force the newspaper to return any cash it may have already received as part of its attempts to collect on a $21 million below-cost pricing judgment now before the California Court of Appeal.

The Weekly has asked the appeals court to throw out the judgment, and the case is awaiting oral arguments. But rather than wait for a ruling, the Guardian has delayed the appeal as long as possible while at the same time plowing ahead with its collection efforts.

For months now, the Guardian has openly dared BMO to declare a default on its lending arrangement with the Weekly and step into the legal arena if it wishes to protect its interests.

What it got in return late last night is a lawsuit designed to prevent the Guardian from taking so much as a penny from the Weekly before the bank's interests have been satisfied.

The suit, which actually names both the Guardian and the Weekly as defendants, was filed in the chancery court in Delaware, where the Weekly is chartered, and where the Guardian chose to register its judgment back in November. (As the borrower and legal owner of the advertising accounts, the Weekly technically had to be named.)

In the filing, BMO accuses the Guardian of knowingly interfering with its contractual relationship with the Weekly, which includes its "first security interest" on any Weekly assets.

In addition to seeking the restraining order and injunction, the bank asks the court to make the Guardian pay actual damages, pre- and post-judgment interest and attorneys' costs, along with punitive damages to reflect its reckless conduct in the case.

"Bay Guardian knows that it is not entitled to be paid from the Receivables ahead of BMO," says the bank's complaint. "However, as a competitor of SF Weekly, Bay Guardian has an ulterior motive: it hopes that, by improperly restricting SF Weekly's cash flow, it can eliminate SF Weekly as a competitor, or make it a less effective competitor."

In essence, the bank's complaint echoes what the Weekly has repeatedly argued to local judges and court commissioners: that any lien the Guardian received as a result of its judgment is secondary to BMO's interests, and that the Guardian's increasingly aggressive collection efforts represent an improper attempt to cut in line.

BMO has asked the Delaware court to expedite its request, noting that a March 9 "assignment order" issued by San Francisco Superior Court Commissioner Everett A. Hewlett Jr. established a ticking clock for the Weekly.

The Guardian contends that Hewlett's order granted it permission to begin taking 50 percent of the Weekly's advertising revenues and 100 percent of any American Express credit-card transactions. Based on that interpretation, the Guardian began making efforts to intercept the revenues in which BMO has a senior interest.

Hewlett's March 9 order made no mention of BMO's interests. And in its Delaware filing, BMO noted that it believes that ruling and other orders that have come out of the commissioner's court appear to exceed that court's jurisdiction, in part because BMO has never appeared in the California court. By contrast, BMO's complaint notes, Delaware has both jurisdiction over the bank and the authority to determine the primacy of its interest in the Weekly's assets.

Last week's ruling from Commissioner Hewlett gave the Weekly five days to hand over to the Guardian a list of its advertisers and any amounts that are due and payable -- meaning that tomorrow, March 17, would be the deadline. But BMO's suit asks the Delaware court to prohibit the Weekly from complying with that order.

"Should Bay Guardian be permitted to notify SF Weekly's advertisers and request payment, BMO will suffer irreparable harm in the confusion caused to the some 800 advertisers of SF Weekly," says the complaint.

In light of Commissioner Hewlett's ruling, BMO last Friday sent notice to all of the Weekly's advertisers that any monies due to the Weekly should be paid directly to BMO in recognition of its senior interest.

In a related development, Weekly attorneys will go before Commissioner Hewlett this morning to ask him to issue his own temporary restraining order against the Guardian. That move is in part an effort to sort out the awkward dynamic created by the Guardian's interpretation of Commissioner Hewlett's previous ruling: a situation where some advertisers are receiving letters from the Guardian threatening them with contempt of court if they don't immediately start sending checks to Brugmann's attorney in Newport Beach, while also receiving notices from BMO instructing them to pay the bank instead.

In an affidavit filed in Delaware, BMO vice president Thomas E. McGraw makes it clear that the bank's intention is to keep the Weekly healthy -- and to keep doing business with its longtime client, despite the formal declaration of a default made necessary by the Guardian's actions.

"BMO reserves its rights to make certain funds available to SF Weekly to pay business expenses in order to allow it to sustain operations and generate further and greater revenues to assist in paying down the debt to the lenders," the affidavit says.

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Andy Van De Voorde

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