Icahn Seeks Unfair Blockbuster Claim Sanction, Law Firm Says in Court

Billionaire Carl Icahn seeks unfairly to punish the law firm that reviewed information related to a possible insider-trading claim in Blockbuster Inc. (BLOAQ), the McMillan Law Firm APC said in court papers.

Icahn seeks sanctions against the law firm, which represented Blockbuster creditor Lyme Regis Partners LLC in a lawsuit brought as part of the movie-rental chain’s bankruptcy. The suit, which alleged that Icahn had inside information as he invested in Blockbuster, was dismissed in March by U.S. Bankruptcy Judge Burton Lifland in New York.

McMillan Law Firm fulfilled its obligations to review the complaint for a holder of unsecured bonds in Blockbuster and filed it for legitimate reasons, lawyers for the firm wrote in papers filed yesterday.

“Merely by filing motion, defendants have achieved the punitive results they are seeking -- Mr. McMillan’s former malpractice insurance carrier has doubled his rates for renewal,” lawyers for the firm and partner Scott A. McMillan wrote. The La Mesa, California-based firm has three attorneys, according to its Web site.

Lyme Regis’s lawsuit distorted the law and relevant facts, lawyers for Icahn, chairman of New York-based Icahn Enterprises Holdings LP, said in court papers.

Proxy Fight

Icahn led a 2005 proxy fight which put him on Blockbuster’s board as the largest shareholder, when the stock was worth about $10. He resigned five years later and in March 2010 sold most of his stock.

Before Blockbuster’s September 2010 bankruptcy, Icahn bought about a third of the company’s senior bonds. Along with Monarch Alternative Capital LP, Icahn also helped finance operations in bankruptcy, under a “debtor-in-possession” loan that grants lenders more seniority over other creditors.

Blockbuster sold its assets to Dish Network Corp. (DISH) in April for $320 million, leaving nothing for unsecured creditors and shareholders. Senior lenders, who said they had a lien of $630 million on all the company’s property, will get about $178.8 million.

Lyme Regis had claimed that if Icahn hadn’t had inside information, he still would have been an equity holder at the time of the bankruptcy, putting him in line to be repaid after, not before, the unsecured noteholders. Blockbuster’s decision to issue $675 million in senior debt in 2009, while Icahn was on the board, put unsecured bond holders at risk, Lyme said in its lawsuit filed Dec. 23.

‘Distinct Advantage’

“Given his long history with the debtor and entrenched relationships with the debtor’s fiduciaries, including the CEO and two active board members, Mr. Icahn was in a position to influence the corporation and had a distinct advantage over other creditors, including plaintiff,” Lyme Regis said in its initial complaint.

In a motion for sanctions, Icahn’s lawyers said they should be awarded attorneys’ fees and costs in defense of “a string of frivolous and malicious motions.”

The law firm’s claim that “the Icahn Entities intentionally destroyed the value of their equity in Blockbuster by forcing the public issuance of secured debt that the Icahn Entities would later buy back from third parties at a discount is implausible,” lawyers for Icahn wrote in a motion to dismiss the suit.

Even though the judge ruled the suit should be dismissed, McMillan Law firm said its actions don’t merit sanctions. An investigation by McMillan gave him reason to believe that a case might properly be made against the Icahn defendants for “manipulations that gave them an advantage over other creditors in the bankruptcy,” lawyers for the firm wrote.

Lifland said in a March hearing that he denied Lyme Regis’s lawsuit against Icahn because the investment firm, which holds 9 percent senior notes in Blockbuster, had suffered no specific harm. The lawsuit was “porous” and lacked information to back up claims that Icahn engaged in improper conduct, Lifland said.

The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

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