When Aaron Kushner acquired the O.C. Register last year Kushner claims that the Register’s former owners, Angelo Gordon, withheld the true value of the company. Now, the former owners are suing Kushner for $17.45 million.
The lawsuit began when Kushner’s holding company, 2100 Trust accused the previous owners of the O.C. Register of intentionally misinforming Kushner’s company by failing to give a complete assessment of pension obligations, credit card debt, overhead, and several other indicators of financial stability. As a result, 2100 Trust said that the remaining funds from the deal would not be released from escrow because the price of the register was grossly overinflated and will lead to liabilities of $62.3 million for Freedom Communications.
Angelo Gordon balked at the allegations of misrepresentation by filing a lawsuit earlier this month demanding full payment of the remainder of the escrow funds that Kushner ordered back. The lawsuit was filed in Delaware, where both companies are based.
This lawsuit is just one in a series of misfortunes that have befallen Kushner’s media conglomerate. Some industry experts believe that this is a sign that the paper is in financial distress because of similar signs of financial instability, including the fact that the O.C. Register stopped contributing to employee‘s 401ks and subscriptions have waned since last year despite receiving investments of $15 million from Kushner.
Kushner is also facing pending litigation from an outside adviser who claims that Kushner owes him $14 million and from former executives of the O.C. Register, who claim that they were not provided with severance pay.
Freedom Communications has recently taken steps to rectify some of its financial problems. Earlier this week it released word that it had completed acquisition of the Riverside based paper, the Press-Enterprise after Freedom Communications missed its deadline to finalize the deal earlier this month.
Defenses to Mergers and Acquisitions Breach
Intentional misrepresentation, or fraud, is often a defense to breach of contract and it is also a relatively common worry in merger agreements. Usually a merger agreement will allow a party to withhold funds from an escrow in the event of fraud. However, intentional misrepresentation can also provide a basis for a lawsuit by the victim to reclaim damages caused by the misrepresentation.
In some cases the wrongdoer does not necessarily need to know that the misrepresentation was false. If the wrongdoer acts with reckless indifference to the accuracy of the misrepresented fact, that will be enough to establish the required intent for fraud. This means that the wrongdoer knew the representation was likely untrue but consciously disregarded the risk and made the representation anyway. In the context of enforcing a merger agreement, the party seeking to avoid a contractual obligation does not need to show that they actually sustained a loss due to the misrepresentation; they only need to show a loss if they are seeking damages for the fraud.
Damages for an intentional misrepresentation includes the difference in value between the actual and paid value of the object of a transaction. Additionally, the victim of fraud may be entitled to punitive damages.
Have Questions or Concerns About a Possibly Fraudulent Transaction?
If you are facing a dispute based on alleged misrepresentations in business dealings contact the Law Offices of Tony T. Liu at (714) 415-2007.