Judge reverses decision on Midway suit

 
Updated 3/30/2010 7:35 AM

U.S. Bankruptcy Judge Kevin Gross recognized a mistake of his own before he was reversed on appeal. As a result, Gross corrected an opinion he issued in late January dismissing most of a lawsuit by the official creditors' committee of Midway Games Inc. against former owner Sumner Redstone and companies he controls.

"Judges are not infallible and it is clear that this judge erred," Gross said.

                                                                                                                                                                                                                       
 

In his original opinion on Jan. 29, Gross dismissed most of the suit because he concluded that controlling law in Delaware doesn't recognize a claim for so-called deepening insolvency. Gross allowed claims to survive where the committee is attempting to recharacterize parts of the transaction as secured lending rather than so-called true sales. Likewise, preference claims were to survive until disposition of the recharacterization claims.

In reversing himself, Gross reinstated claims for so-called constructive fraudulent transfer if the committee succeeds in recharacterizing the transaction.

Gross also last week extended Midway's exclusive right to propose a plan until May 14.

Redstone was sued for what the committee called a "disastrous and ill-advised" $90 million transaction in February 2008 that saddled Midway with $70 million in new debt it "had no ability to satisfy." For details on the January opinion, click here to see the Midway item in the Feb. 3 Bloomberg bankruptcy report.

Last week Gross approved the disclosure statement explaining Midway's liquidating Chapter 11 plan. The confirmation hearing for approval of the plan will be held May 21.

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Chicago-based Midway filed under Chapter 11 in February 2009, listing assets of $168 million and debt of $281 million. Including foreign subsidiaries not in bankruptcy, the asset and liability totals were $178 million and $337 million.

Midway sold assets to generate $43 million cash, leaving no substantial secured claims unpaid. Most of the assets were purchased in July by a subsidiary of New York-based Time Warner Inc. for $33 million plus accounts receivable. The non-bankrupt European subsidiaries were sold in August for nominal consideration.

Midway's debt originally included $150 million in convertible notes, $29 million on a secured term loan and revolving credit, $40 million on a secured loan facility and $20 million on a subordinated loan. Unsecured claims by suppliers totaled $96 million, the company said in a court filing at the outset.

The case is In re Midway Games Inc., 09-10465, U.S. Bankruptcy Court, District of Delaware (Wilmington).