RadioShack was driven into bankruptcy because of a takeover scheme by the New York hedge fund Standard General, according to a lawsuit by a committee for creditors who say they are owed more than $500 million.
By delaying actions that might have preserved some of the chain’s value, Standard General allegedly sought to take over RadioShack at the lowest price possible. The lawsuit, filed in federal court in Fort Worth, says turmoil at the company led to RadioShack’s February bankruptcy filing, including an October transaction that paved the way for the hedge fund to win control.
“A mere four months after the October 2014 transaction, RadioShack met its inevitable fate of Chapter 11 in the Delaware bankruptcy court,” low-ranking creditors said the complaint, filed Monday. “The company’s crash-landing into bankruptcy involved immediate closure of half of RadioShack’s operations and handed over the company’s most valuable assets to Standard General less than 60 days later.”
The lawsuit targets Standard General, its principal investment officer, company lender Wells Fargo Bank and RadioShack’s former CEO Joseph Magnacca.
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Creditors accuse Magnacca of helping Standard General take over RadioShack at a reduced price in return for getting a position on the board of directors at another troubled retailer controlled by the hedge fund, the T-shirt maker American Apparel.
After filing for bankruptcy, the company closed about half its 4,000-plus stores and in March sold more than 1,700 stores to Standard General, which had been the company’s biggest shareholder, for about $145.5 million.
Richard Hahn, a bankruptcy lawyer for Standard General, did not immediately reply to an e-mail requesting comment on the lawsuit.
The creditors may find it difficult to win their case, said Erik Gordon, a law professor at University of Michigan’s business school.
“Managers have wide leeway to exercise their business judgment regarding what is good for a company,” Gordon said. “An after-the-fact claim that if they had acted differently the result might have been different is a weak claim.”
The lawsuit claims that Standard General conspired with Magnacca beginning in early 2014, after the company had suffered years of shrinking sales and losses.
Magnacca and Standard General successfully fought to undermine RadioShack’s restructuring advisers, who had recommended that the company either sell itself or prepare for an organized bankruptcy, according to the complaint.
Instead, the company delayed any action that could have preserved enough value to pay unsecured creditors. Standard General bought the company’s senior debt in October in a transaction that ensured the company would gain control, according to the complaint.
Magnacca wrongly favored Standard General in those negotiations in the months before the February bankruptcy filing, according to the complaint.
“While asking Standard General about other retail opportunities, Magnacca pledged to be ‘anyplace' at ‘anytime' for the hedge fund,” according to the lawsuit. The company put Magnacca on the board of American Apparel in July 2014 while Magnacca was negotiating details of the October loan transaction, according to the lawsuit.