Bankruptcy Law 360

Former Telecom CEO Ordered To Repay $12M Loan
By Ron Zapata, ron.zapata@portfoliomedia.com

Portfolio Media, New York (January 28, 2008)

A former AT&T Corp. president has been ordered to pay more than $12 million as a result of allegedly preferential and fraudulent transfers made to him after he left now-bankrupt telecommunications company Teligent Inc.

Chief U.S. Bankruptcy Judge Stuart M. Bernstein of the Southern District of New York entered his final judgment on Thursday, awarding Teligent’s unsecured claim estate the multimillion-dollar judgment against Alex Mandl, who had served as board chairman and CEO before IDT Corp. took over Teligent.

Attorneys for the estate and Mandl did not immediately return requests for comment on Monday.

Mandl was president and CEO of AT&T before joining Teligent’s predecessor, Associated Communications LLC, as board chairman and CEO in September 1996.

As part of his employment agreement, Teligent’s original shareholders, Microwave Services Inc. and Digital Services Corp., loaned Mandl $15 million. Under the deal, the loan would be automatically forgiven after five years if Teligent terminated Mandl’s employment for reasons “other than for cause” or if Mandl terminated his employment for “good reason.”

The agreement was later amended to accelerate loan forgiveness for $3 million if Mandel was still employed with Teligent after one year. Following his first anniversary, Mandl’s remaining balance was $12 million.

On April 17, 2001, IDT Corp. acquired Microwave Services, which resulted in IDT’s ownership of more than 40% of Teligent’s Class A common stock. Howard Jonas, IDT’s chairman and CEO, was subsequently named chairman of Teligent’s board.

Jonas told Mandl that he wanted to bring his own CEO and management team to Teligent, Mandl said during a bench trial in April 2007. Mandl then packed up and never returned to Teligent, Mandl told the court.

Mandl’s separation agreement, which became effective on April 27, 2001, said that the reason for Mandl’s termination was “other than for cause.”

Mandl’s loan agreement was also restructured, with the remaining $12 million of the loan to be forgiven in 20 annual installments rather than all at once.

However, Mandl said months later in an interview with Washington Business Forward magazine that he had left Teligent after he couldn’t convince the board to adopt a $700 million recapitalization plan.

Mandl said in the interview that he had discussed leaving Teligent at the right time, which came once IDT took over the company.

Teligent filed for bankruptcy in May 2001 and confirmed a plan 16 months later. Savage & Associates PC was appointed as the representative of the unsecured creditors to pursue Chapter 5 causes of action and claim objections.

Savage filed the adversary proceeding against Mandl in April 2003, which was later amended to recover the $12 million loan for alleged constructive fraudulent conveyance.

Savage claimed that Teligent had committed a constructive fraudulent transfer under bankruptcy and Virginia law when it released Mandl from the obligation to repay the $12 million loan.

Judge Bernstein said in his findings that he rejected Mandl’s accounts at trial, noting that Mandl had never testified that his statements in the magazine interview were inaccurate and that his trial comments conflicted with other evidence.

“I find that Mandl gave a more credible account during the interview,” Judge Bernstein said. “It was published no more than three months after the event, when it was fresher in Mandl’s mind. In addition, Mandl gave the interview before this lawsuit, which may have affected his recollection of what occurred. ”

Thus, Judge Bernstein said that under the magazine’s version of events, Mandl had no “good reason,” as defined under his employment contract, to resign and thus owed the $12 million pursuant to his contract.

“Teligent’s decision to terminate Mandl other than for cause, coupled with the release in the separation agreement, discharged a valid, $12 million obligation,” Judge Bernstein said. “In essence, the form of the termination was a $12 million gift.”

Judge Bernstein also awarded Savage $40,000 plus interest for money transferred from Teligent to Mandl for reimbursement of business expenses after his termination.

However, Judge Bernstein did not grant Savage any interest on the $12 million loan, ruling that the firm failed to prove an appropriate interest rate. Savage has asked the court to reconsider its decision regarding interest.

Judge Bernstein also rejected Savage’s intentional fraudulent transfer claims.

“The record does not reflect any other evidence implying that Teligent intended to defraud its creditors,” Judge Bernstein said. “Rather, I infer from the evidence that IDT, which had assumed control of Teligent, made the business judgment that it was worth canceling Mandl’s $12 million debt to get rid of him.”

Michael J. Venditto, a bankruptcy attorney at Anderson Kill & Olick PC, said

“He didn’t think before he talked to the press,” Venditto said. “He went out there trying to sell himself, to show a good positive image and put a spin on the story, which had a counterspin which ultimately did him in.”

He said the verdict “certainly opens the eyes” of attorneys representing executives to watch out for pitfalls relating to compensation in the form of loans.

After leaving Teligent, Mandl became CEO of digital security company Gemplus SA, which has since become Gemalto, where he currently serves as vice chairman of the board.

Teligent, which provides business data, Internet and voice services, has since been acquired by telecommunications company Startec Global Communications Corp.

The unsecured claims estate representative was Savage & Associates PC.

Mandl was represented by Kirkpatrick & Lockhart Preston Gates Ellis LLP.

The adversary proceeding is Savage & Associates PC v. Alex Mandl, case number 03-2523, in the U.S. Bankruptcy Court for the Southern District of New York.
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