Harbinger Capital Partners Master Fund v. Granite Broadcasting Corp.

Granite Broadcasting Corporation (Granite) (defendant) was a Delaware corporation that owned and operated various television stations. Harbinger Capital Partners Master Fund I, Ltd. (Harbinger) (plaintiff) was the beneficial owner of 38.6 percent of Granite’s 12.75 percent cumulative exchangeable preferred stock. The preferred stock was entitled to coupon payments at a stated rate. The terms of the preferred stock’s certificate of designation provided that Granite was required to redeem, to the extent that funds were legally available, all preferred shares at a fixed price, plus accumulated dividends, on April 1, 2009. If Granite defaulted on its obligations to redeem the shares and pay the accumulated dividend, preferred shareholders had the right to elect certain directors to the board of directors. This voting right was described as the exclusive remedy in the event of default. The terms of the preferred shares also limited the amount of debt that Granite could undertake, imposed restrictions on certain distributions, and restricted certain mergers, consolidations, and asset sales. Granite faced significant financial difficulties beginning in 2005. In an effort to mitigate its financial problems, on May 1, 2006, Granite entered into agreements to sell two television stations to separate buyers for an aggregate consideration of $150 million. Harbinger was concerned with the terms of the transactions, particularly their noncompete agreements that would restrict Granite from reentering either the Detroit or San Francisco markets for the following five years. Harbinger also believed that the terms of the transactions were structured deliberately to avoid Granite’s restrictions under certain senior note indentures, posing harm to creditors, and that the transactions were being improperly coerced by one of Granite’s important sources of financing. In general, Harbinger alleged that the transactions would only delay an inevitable bankruptcy to the detriment of Granite’s creditors. Accordingly, Harbinger filed a lawsuit to enjoin the sales of the television stations. Granite moved to dismiss on the basis that Harbinger, as a preferred shareholder, lacked standing to bring claims in the capacity of a creditor. In response, Harbinger argued that under recent changes to generally accepted accounting principles (GAAP) by the Financial Accounting Standards Board (FASB), mandatorily redeemable preferred shares were treated as long-term debt, thus making Harbinger a creditor.