UPDATE: Investor Sues Brown Publishing for $9 Million

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By: Mark Fitzgerald

An West Coast investment firm with a minority stake in Brown Publishing Co. alleges in a lawsuit that the family-controlled Ohio chain shifted its newspapers and other assets to shell companies and was preparing a bankruptcy filing — all with the aim of keeping the firm from collecting at least $9 million under a stock warrant agreement.

Acting on a request in the lawsuit by Windjammer Capital Investors of Newport Beach, Calif., a Hamilton County (Ohio) judge issued a temporary restraining order in the case — but later lifted the order while denying Windjammer?s request for a preliminary injunction against Brown Publishing and several executives named as defendants.

Brown Publishing, the lawsuit says, “initiated a scheme of trying to move assets between shell companies in order to avoid contractual and fiduciary duties to Windjammer.”

Windjammer alleges that without its knowledge, Brown Publishing created a new limited liability company called Business Publications, and that on March 20, again without notice to Windjammer, Brown Publishing’s board of directors approved a “sale” of all the company’s assets to Business Publications. Other shareholders were aware of the transfer, and approved a bankruptcy filing.

“The sale would not include any payment to Brown Publishing and would leave it an empty shell with no assets,” the lawsuit says. The suit was first reported by Cincinnati Enquirer reporter Mike Boyer.

Before the original story was posted, neither a lawyer for Windjammer nor Brown Publishing?s general counsel returned voice messages from E&P seeking comment. After its publication, Brown Publishing President and CEO Roy Brown left a voice message saying an earlier version of this story was incomplete, and its original headline inaccurate. He did not return two other calls from E&P.

Friday evening, Brown e-mailed a copy of the judge?s order denying Windjammer?s request for a preliminary restraining order against Brown Publishing and lifting the temporary restraining order. The order has a stamp indicating it was entered April 24.

Judge Steven E. Martin also instructed Brown Publishing to provide Windjammer with documents and records relating to the transfer of assets to Business Publications and any sale or proposed sale of assets to Business Publications.

Brown publishes 18 dailies and 27 weeklies in Ohio. The lawsuit names as defendants the company and some subsidiaries plus President and CEO Roy Brown, Clarence Brown and Clancy Brown.

Windjammer says it entered into a stock warrant agreement with Brown Publishing in 2004. On March 5, 2009 — about two weeks before the alleged sale — Windjammer says it converted some of the warrants into 100 shares of the company.

The sale or transfer of assets violates the warrant agreement, Windjammer says in the suit.

“If Brown Publishing is permitted to consummate the asset transfer with its insiders, it will render Brown Publishing insolvent and unable to satisfy its obligation to Windjammer,” the lawsuit says. “Brown Publishing’s shareholders, other than Windjammer, appreciated that fact because they voted to authorize Brown Publishing to file for bankruptcy.”

Learning of the transfer, Windjammer said that on March 27, it exercised a “put” option under which it says it must be paid “the greater of $9 million or the fair market value” of all exercised and unexercised shares under its warrant agreement.

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