Midway Games creditors sue board members and Redstone

Creditors of Midway Games Inc. are suing the Chicago company’s board members and former majority owner Sumner Redstone, alleging that his sale of Midway was a “fraudulent transfer” that benefited the media mogul while pushing Midway into bankruptcy.

The suit, filed Monday in federal Bankruptcy Court in Delaware, alleges that Redstone sold his 87% stake to investor Mark E. Thomas for a mere $100,000 so Redstone could register $700 million in tax losses and collect a “massive tax refund.”

The plaintiffs include a group of unsecured creditors for the publisher of the Mortal Kombat video game franchise. The suit also names Redstone’s daughter, Shari Redstone, and his company National Amusements Inc., as well as Thomas and five board members who approved of the sale, alleging that the board made a number of decisions that “put the interest of the Redstone defendants above Midway’s interests.”

The board members named are Robert J. Steele, Joseph A. Califano, Robert N. Waxman, William C. Bartholomay and Peter C. Brown. Shari Redstone resigned as Midway’s chairwoman in November and was replaced by Brown.

“This suit is completely without merit,” a spokeswoman for National Amusements said in an e-mailed statement. “The conduct of Mr. Redstone and NAI was entirely proper, and we strongly disagree with any suggestion that Mr. Redstone or NAI breached any fiduciary duties.”

Thomas’ lawyer declined to comment.

Redstone, who owns the National Amusements chain of movie theaters as well as controlling shares of Viacom Inc. and CBS Corp., began in 2003 to aggressively expand his minority stake in Midway. But under the strain of enormous debt, he shed his shares in November by selling them to Thomas and got a big tax write-off in the process.

The suit alleges that Thomas “was completely unsuited to be the 87% owner of a publicly traded company” because “he had no background in the video game industry. He had no assets to invest in Midway.”

Since the sale, Thomas has refused to grant interviews or issue statements through his attorney, which has prompted speculation about his motives.

Apparently his reticence extended to creditors as well. “Upon acquiring his controlling interest, he refused to speak with any officer or director of the company and even refused to disclose his middle initial so that an investigation could be made into his background,” according to the lawsuit.

As holder of $70 million in Midway bonds, Thomas is among the first in line to collect from a sale of the company. Creditors, including those represented by the plaintiffs, would be paid after Thomas and other debt holders.

Warner Bros., which has been quietly bulking up its games business, is rumored to be among those interested in buying Midway. But the creditors’ lawsuit indicates that any deal would be delayed until Midway’s creditors and owners, including Thomas, agree on how to distribute the proceeds of a sale.

--

alex.pham@latimes.com