Penthouse Bankruptcy Case May Focus on Legality of Original Loan

WOODLAND HILLS, Calif.—The bankruptcy of Penthouse Global Media has been contentious from its very beginning on January 11, in part because it grew out of a civil suit filed against the company by one of its stockholders and financial officers—and while the civil case is on hold thanks to the bankruptcy proceedings, the parties to the bankruptcy have been spending several days per week in court, with the most recent hearings focused on whether original lender ExWorks Capital, and Dream Media Corp. (DMC), to whom ExWorks assigned some of that debt, have any right to collect the voluminous interest on the loans in the first place."Debtor Penthouse Global Media, Inc. and its affiliates (collectively, 'Debtor') hereby objects to the claim of Dream Media Corporation ('DMC') asserted to be $10,377,517.49 as of January 4, 2018. DMC is the assignee of the term loan and revolving line of credit (the 'Loans') advanced by ExWorks Capital Fund I, Ltd. ('ExWorks') to Debtor," wrote Penthouse attorney Michael H. Weiss in an "Objection" motion filed on February 26. "The sole basis of the objection is that interest charged on the Loans is usurious and cannot be charged to Debtor under California law. In California, a lender may charge no more than 10% interest per annum on a loan. Absent a qualified exemption, the agreement charging usurious interest is illegal and a lender cannot recover any interest."The motion cites the California Constitution's section on "Usury," which is Article XV, which restricts interest rates on loans to be generally 7 percent, though a 10 percent rate is acceptable if the funds are "used primarily for the purchase, construction or improvement of real property."The amount agreed upon by Penthouse buyer (and current CEO) Kelly Holland in receiving the loan from ExWorks was 23 percent, which is not illegal in Illinois, ExWorks' home turf—but Weiss is arguing that because all of the loan details were worked out in California, that California's usury laws should apply. If his argument is successful, Penthouse's debt to ExWorks and DMC would be reduced to about two-fifths of the currently claimed amount.As the Penthouse motion explains, the loan with ExWorks was solicited to an ExWorks affiliate in Southern California, all meetings concerning the details of the loan were worked out in Southern California, and while there have been several amendments to the loan agreement, those too were signed off on in Southern California."Under California law, a lender may charge no more than 10% interest per annum on a loan," Weiss argues. "An interest rate in excess of 10% is usurious. Absent a qualified exemption, the agreement charging usurious interest is illegal and a lender can recover no interest."However, he notes, "California exempts loans in excess of $300,000 to sophisticated parties engaged in a commercial transaction from the usury laws. That exemption is unavailable if the debt was issued or guaranteed by an individual. Here, the loan is guaranteed by Ms. Holland, an individual." [Citations removed here and below]Much of the motion is taken up with a discussion of why California law should take precedence over Illinois law, because "If the proper law to govern the parties is Illinois law as chosen in the Loan Agreements, the Loans do not appear to be usurious. However, if California law applies, then the Loans are usurious. As discussed below, despite the choice of Illinois law in the Loan Agreement, the Restatement [of Conflicts of Law] indicates that California has a more significant interest in this transaction and its law should apply."After a long discussion of the relative connections of Illinois and California to the loan, Weiss argues that California law should take precedence because the loan has had more "contact" with California than Illinois, and that the factors to be considered should be, under the applicable law, "(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties. These contacts are to be evaluated according to their relative importance with respect to the particular issue." According to Weiss, all of those factors work in California's favor.Whether Weiss' motion will be successful remains to be seen, and attorneys for both ExWorks and DMC have objected to it. It will be up to Bankruptcy Judge Martin R. Barash to decide which state's laws take precedence.In the meantime, all of Penthouse's financial transactions are being scrutinized and approved or denied by the court-appointed trustee David K. Gottlieb, whose trusteeship was approved by the court on March 6. Although the trustee had the power to fire Penthouse CEO Kelly Holland, that has not happened, and according to Gottlieb's Initial Status Report, filed on Monday, and according to Holland, at a hearing held yesterday, the trustee described Holland and her staff as being "extremely cooperative, pleasant and professional to work with," with the judge replying that he "would have been surprised if it were anything less."This fight will not be over soon, and when there are new developments, AVN will report them.