The Bay Guardian’s lawsuit against SF Weekly  and its parent company took a dramatic turn this week when a banking syndicate announced that Village Voice Media has defaulted on its $77 million loan.
San Francisco Superior Court Commissioner Everett A. Hewlett, Jr. also ordered that all of the Weekly’s advertising income be sequestered in an account designated by the Guardian and held there until April 5, when the Guardian will ask the court to appoint a receiver to take control of the Weekly’s assets.
The Weekly and its parent owe the Guardian more than $21 million as the result of a 2008 lawsuit verdict. A San Francisco jury found that the Weekly had sold ads below cost in an effort to damage the Guardian.
The case is on appeal, but the Weekly and Village Voice Media haven’t posted an appeal bond -- essentially an insurance policy that would guarantee payment of the judgment. So the Guardian has the legal right to collect the money.
VVM has been hiding its money behind a complex corporate structure , but in recent weeks the Guardian has won a series of court decisions that have allowed us to seize two Weekly vehicles, all of the income that the newspaper’s subtenants pay for leasing office space, and 50 percent of the Weekly’s ad revenue (and 100 percent of the revenue from credit card payments).
In an effort to block us from collecting that revenue, the Weekly filed a motion March 16 seeking a restraining order that would have stopped the Guardian from contacting Weekly advertisers. The court refused to issue the order – but as part of its application, VVM disclosed some rather dramatic facts.
Among the exhibits filed in court: A March 12 letter from the Bank of Montreal, which leads a banking syndicate that has helped VVM expand and advance its alternative newspaper empire. The letter, signed by Managing Director Thomas McGraw, states that because of the “recent economic downturn and the resulting financial difficulties,” VVM had been “unable to meet its amortization payments” and had been forced to renegotiate the loan in June, 2009. That new agreement had required that VVM send all of its profits -- that is, “all revenue above its costs, plus a minimal operating cushion” -- directly to the bank.
And now that the Guardian has been awarded a lien on all of the Village Voice papers and the right to half the Weekly’s income, the bank had declared VVM in default on the entire loan, which now stands at $77 million.
The default allows the bank to claim that it has the first right to any Weekly ad revenue, and VVM lawyer Randall Farrimond tried to make that argument to Commissioner Hewlett. But Hewlett was skeptical: “The Court never determined that the Bank of Montreal had any rights that had been adjudicated yet,” Hewlett said at a March 16 hearing. In fact, after hearing that the bank had sent its own letters to Weekly advertisers ordering them to send payments directly to the bank, Hewlett noted:
“Now, I’m not terribly sympathetic with Bank of Montreal doing what they did. “I mean it is possible that, absent some adjudication of their interests, that they are in contempt of court by interfering with the Court’s order.”
Hewlett said he had no intention of granting the restraining order or changing the essence of his earlier ruling -- that the Guardian had the right to half SF Weekly’s income stream. But to save the advertisers from confusion over who to pay, he ordered that all money collected from advertisers be placed in a bank account chosen by the Guardian, in a bank that was not part of Bank of Montreal’s syndicate.
The Guardian will be back in court April 5 to ask for the appointment of a receiver, who would take control of the Weekly’s business operations and, under court guidance, divide any revenue between the Guardian and any other creditors.
In the meantime, VVM and the Bank of Montreal have asked a judge in Delaware – where SF Weekly is formally incorporated – to block collection efforts in California.
At a surprise hearing where the Guardian's lawyers were given only five minutes warning and had no opportunity to present any evidence, the Delaware Chancery Court was nonetheless very skeptical of Bank of Montreal's claims, and essentially ruled only to maintain the status quo until the Court could make a more informed decision.
The case continues to draw extensive news media interest; the Stranger, a Seattle alternative paper, ran a lengthy, detailed story on the case March 17 .
You can read the key documents (including a declaration from Weekly publisher Josh Fromson and the bank letters) in the recent filing here.  (PDF)