By Matt Wirz 

RadioShack's junior creditors are suing hedge fund Standard General LP, the company's largest prebankruptcy shareholder and current owner, in a last-ditch effort to get repaid.

The lawsuit, filed Monday in U.S. District Court in Fort Worth, Texas, by the committee representing RadioShack's unsecured creditors, also names Wells Fargo & Co. and former Chief Executive Officer Joseph Magnacca, alleging they helped Standard General take over the company at creditors' expense.

The suit comes as the electronics retailer moves forward with a number of settlements aimed at speeding its exit from chapter 11 protection. The bankruptcy sale of RadioShack's assets earlier this year raised only enough to cover the company's top-ranking loans, leaving litigation against RadioShack's owner and lender as the unsecured creditors best hope of seeing a recovery.

Standard General, Mr. Magnacca and Wells Fargo couldn't immediately be reached for comment.

RadioShack's unsecured creditors, including AT&T Inc., landlords of RadioShack stores, former employees and holders of $330 million bonds, claim Standard General used Mr. Magnacca to outflank the company's own financial advisers.

RadioShack lender Wells Fargo also helped Standard General by arranging a new loan for RadioShack in October although analysts at the bank knew the company was insolvent, according to the lawsuit.

"Would it be risky for me to buy you a gift card from [RadioShack] now for your Christmas present?" Wells Fargo analyst David Eller joked with other analysts in an electronic message sent Oct. 2, according to the suit. "I think you are good but you will definitely need to use it before [March 15]," replied Grant Jordan, a managing director in the bank's research department.

According to the suit, Standard General and Mr. Magnacca maneuvered last year to block recommendations by RadioShack's financial advisers to sell the company, possibly in bankruptcy court. Liquidating the company in 2014, could have raised cash to pay out unsecured creditors around 21 cents on the dollar, but left shareholders like Standard General with nothing, the suit alleges. The firm's bonds now trade for less than one cent on the dollar, according to MarketAxess.

Standard General bought RadioShack's brand and leases for about 1,700 stores in May after a heated bankruptcy court battle. The deal marked the culmination of a yearlong campaign by the hedge fund to salvage its purchase of 9.8% of RadioShack's stock in early 2014.

In July of 2014, Standard General gave Mr. Magnacca a position on the board of directors of another company it owned the largest stake in, American Apparel Inc. The hedge fund's founder, Soohyung Kim, counseled Mr. Magnacca that "frankly given what is happening at [RadioShack] having something else going on might be healthy," according to the creditor suit.

American Apparel warned in public statements this month that it may file for bankruptcy court protection.

At the same time, Mr. Kim was pressuring Mr. Magnacca to fire AlixPartners LLP, one of RadioShack's financial advisers. In early August Mr. Kim wrote to Mr. Magnacca that "Holly [Etlin of AlixPartners] is a snake, you told me that you recognized that early and we already know her...She should already be gone," according to the suit. Ms. Etlin declined to comment

Mr. Kim encouraged RadioShack's directors to work around the same advisers the board had selected in 2013 to help the company navigate a prolonged decline in sales. Mr. Magnacca wrote senior managers instructing them concerning the advisers "not to share information that they can use against us and our goals," according to the suit.

Standard General wanted to bypass the advisers to enact a plan that would ensure its continued control of the company after it went bankrupt, according to the suit. The strategy hinged on Standard General becoming a secured lender to RadioShack because loan holders stand at the front of the line in corporate bankruptcies, while shareholders come last, a person familiar with the company said.

The creditors' suit, which also names Mr. Kim and RadioShack's directors for breaches of their fiduciary duty, seeks to claw back tens of millions in fees paid to Standard General and Wells Fargo as so-called fraudulent transfers if the company was insolvent at the time it took on new liabilities. Such lawsuits--seeking to retrieve transfers a troubled company makes before collapsing--are often unsecured creditors' best shot at seeing a recovery on their losses.

The defunct retailer, which has officially changed its name, now calls itself RS Legacy Corp. The remains of RadioShack are scheduled to go before the U.S. Bankruptcy Court in Wilmington, Del., Sept. 16 to seek confirmation of the chapter 11 plan that divides the remaining assets, including any proceeds from the lawsuit over the company's failure.

Write to Matt Wirz at matthieu.wirz@wsj.com

 

(END) Dow Jones Newswires

August 31, 2015 17:40 ET (21:40 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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