Kings’ Ransom: Fans Help Pay Tab : Hockey: New court documents show team used advance playoff ticket money to meet payroll.

On June 1, 1993, the Kings wrote a new chapter in franchise history, skating triumphantly for the first time into Game 1 of the Stanley Cup finals to face the Montreal Canadiens.

Not known then was how precarious the team’s financial shape was off the ice. Only one day earlier, then-owner Bruce McNall’s main company had defaulted on an interest payment due to Bank of America. Five weeks earlier, an emergency $2.8-million loan--approved personally by one of Bank of America’s top executives--was needed to meet the team’s payroll and to pay suppliers.

New court documents filed in McNall’s personal bankruptcy case and obtained this week by The Times show that, while the Kings were becoming the toast of Los Angeles in 1993, the team also was struggling to meet its most basic financial needs. Later in the year, the threat of bankruptcy court loomed so seriously for the team that a contingency plan was drawn up to put the club there. Only patience by some of McNall’s bankers--along with emergency funds made available at critical points--avoided that.

The documents stand in stark contrast to the public position taken by King officials--seeking to ease concerns of fans and the team’s high-paid players such as Wayne Gretzky--that the business of hockey went on as usual despite McNall’s deteriorating financial condition.

Instead, the documents portray the Kings as a high-wire act from early 1993 until this past May, when McNall sold 72% of the team to Jeffrey Sudikoff and Joseph Cohen. One bank lawyer says in the documents that the club faced a “nuclear meltdown” had McNall failed to complete that sale.

In addition, the documents contain embarrassing information likely to irk some fans.

This past spring, the team, strapped for cash and performing nowhere near its Stanley Cup final level of the previous year, met its $1.5-million, bimonthly payroll partly by tapping into some of the millions of dollars from fans’ advance playoff ticket money. Fans had to meet a February deadline to pay for playoff tickets, even though it wasn’t a certain thing the Kings would, indeed, make the playoffs.

Eventually, the Kings failed to make the playoffs, and fans who had purchased the nonexistent playoff tickets ended up effectively loaning the Kings their payroll money interest free. Refunds to those fans were not received until six weeks after the team’s final game. The decision to use the money to cover payroll came despite strong objections from a Bank of America lawyer. One of the bank lawyers said the lender was “very, very concerned” about using the money for that purpose.

The information on the playoff money is contained in sworn testimony from Robert Morrison, a lawyer with Pillsbury, Madison & Sutro, who represented Bank of America in dealing with McNall. The bank had extended some $125 million in business and personal loans to McNall before he sold a majority stake in the team in May.

Cohen, now chairman of the Kings, confirmed in an interview that fans’ playoff ticket money was used to fund the payroll, but defended its use as “a cash-flow issue.”

There have been no allegations that using the playoff ticket money for payroll was illegal. And discussions about using the money occurred while the team was still in contention in March, although by that time the team’s chances of making the playoffs were minimal.

But Morrison said in his statement that the bank conveyed to Sudikoff and Cohen “the fact that the bank did not consent to that use and that it was an improper use of those funds. . . . “ At the time, Sudikoff and Cohen were working to close the purchase of a majority stake from McNall. Morrison says in his statement that “the bank became very, very concerned that Sudikoff and Cohen, who were essentially running the Kings, were going to use the playoff money to fund the payroll.”

He also said that he found out--not from Cohen and Sudikoff directly but from two bankruptcy attorneys, Kenneth Klee and Michael Tuchin, that the playoff funds were used for payroll. Klee and Tuchin had been retained to work with McNall and the Kings. A separate bank memo on file in court says that the bank had been assured that the funds were to be kept at a separate account at City National Bank and “will not be used without the banks’ consent.”

The lengthy delay in postseason refunds for playoff tickets was a major sore spot this year for King fans, some of whom deposited thousands of dollars to reserve tickets before the playoff hopes evaporated. Some were especially irked because they had been asked to pay a 75% down payment in a letter from the Kings in January, before the February payment deadline.

Cohen defended the use of the funds, adding that he and Sudikoff always intended to provide money for refunds.

“The fans are the lifeblood of our business and the money belongs to the fans,” Cohen said. “We know that and it was our intention to refund the money to the fans.”

Cohen said he and Sudikoff had put a lot of money into the team at that point, and that Bank of America never stopped the Kings from using playoff money to cover payroll.

“The practice in sports is to use the funds as they come in and if refunds are necessary, the ownership stands behind the refunds,” Cohen said.

Sudikoff and Cohen were known to have been funding payroll just before they closed the deal to buy a majority stake in the team--up to $4.1 million at one point--but the disclosure that playoff money was used is new, as is the fact Bank of America objected so strongly.

Said Cohen: “Jeffrey and I had put in a lot of cash. We were committed to putting cash in. This is money the team billed. There is a practice of holding the money.

“They told us this was normal procedure. Kings management told us. I think (the decision) was probably made by Kings management and potential new ownership. It was clear the money would be returned and, in fact, it was.”

As previously reported, McNall’s finances currently are being reorganized in bankruptcy court. In addition, sources have said that McNall has agreed to plead guilty to four criminal counts stemming from a federal investigation into his banking practices.

The documents on file also include an examination of James Bailey, a former senior financial executive in McNall’s operation, who claims he raised questions about possible irregularities in McNall’s operation as far back as August, 1992. A bankruptcy trustee’s report released last week also said that Bailey found “various financial improprieties in January, 1994, including a bank account of the Kings that was not kept on its accounting books and into which millions of dollars were transferred during 1993-94.”

In his statement, Bailey claims he expressed concern to McNall then about rumors that the company was being seriously mismanaged and that company assets were being used for personal expenses. According to Bailey’s account of the meeting, McNall told him that some of his executives “had been involved in systematically creating false financial statements.”

Said Bailey in his statement: “ . . . I said to him, ‘These people are grossly incompetent.’ He (McNall) said to me, ‘I need to keep them around. This is what they’ve done for me in the past.’ ”

Bailey declined to comment about his statement. A former McNall general counsel, Mark Eastman, has testified that he recalled Bailey telling McNall some of his executives were incompetent, but did not recall McNall’s response.

McNall lawyer Tom Pollack said that Bailey’s testimony “included numerous inaccurate statements and was contradicted in several instances by the testimony of several other employees.”

Added Richard Wynne, McNall’s bankruptcy lawyer: “Jim Bailey is still trying to figure out ‘Who shot J.F.K.’ and his testimony is based on unsupported guesses and is contradicted by other testimony and other evidence.”

Bailey also testified that he found evidence that “substantial amounts of money had been taken out of the Kings and put into a bank account at First Los Angeles Bank.” Bailey said he suspected that Bank of America was unaware that this money had been taken away from their collateral.

Upon his examination of the Kings’ financial records, he estimated $7.5 million was moved out of the Kings into First Los Angeles between June 1, 1993 and Dec. 31, 1993 and that anywhere from two to three million was taken out of the Kings between March, 1993, and May 31, 1993. Additionally, Bailey said that he was told by Marty Greenspun, former King executive director of finance, that in December, 1993, a $309,000 check intended to go to the Kings was intercepted by a McNall employee and put in First Los Angeles Bank.

Last year, after Christmas, Bailey was asked to serve as executive vice president and controller of the Kings. He said McNall and a lawyer asked him to “go down there and protect the Kings’ financial integrity and give comfort to Bank of America and give comfort to Sudikoff.”