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Founder, Creditors Differ as to Loki's Future Course

Aug 17, 2001, 16:06 (31 Talkback[s])
(Other stories by Dennis E. Powell)

By Dennis E. Powell, Special to LinuxToday

The founder of Linux games publisher Loki Software, Inc., says he hopes that his company's filing for Chapter 11 bankruptcy protection will allow it to remain in business.

In an interview, Scott Draeker said that the company had made some financial mistakes and said that the filing, in federal court in California August 2, is to keep a lone creditor from "gut[ting] the company."

Creditors, meanwhile, including former employees who claim that in some cases they're owed more than a year's wages, disagree as to whether they want Loki to be liquidated, with the proceeds distributed among themselves, or kept alive but run by someone other than Draeker. Companies to whom Loki owes money are said to favor the former, while former employees are banding together in hope of bringing about the latter.

The filing came immediately after one creditor, Mark Lance Colvin, won a judgment of $237,000 against Loki in a proceeding before the California Labor Board. Colvin, who was fired by Loki last December, said he had gone largely unpaid for 19 months. In addition, his lawyer says, Colvin loaned Loki nearly $100,000 via credit card, including at least one occasion when he charged all or part of Loki's semi-weekly payroll, which the company has refused to repay.

Rumors of Loki's financial hard times had been circulating within the industry for months, and the Chapter 11 filing -- in which the company seeks protection from creditors while formulating a plan to stay in business -- was not unexpected. The timing, agreed Draeker and David J. Harter, Colvin's lawyer, was due to the judgment awarded Colvin by the California Labor Board following hearings this spring and early summer.

"We made some mistakes," said Draeker. "We ran up some bills that we couldn't pay. The last thing you want is for someone to come in and gut the company and leave the other creditors with nothing." Loki's debt is said to total more than $1.5 million.

"We will be proposing a plan and we intend it to be fair and equitable to the creditors and realistic, so the company can go ahead," Draeker continued.

Colvin, based on a deposition given by Draeker in the matter July 18, was with the company from May 1, 1999, until Draeker fired him Jan. 5, 2001, during which time he acted as an employee, a company officer, an investor, and a lender, apparently enjoying few if any of the protections normally attendant to those respective functions. He was paid few times during that period, but purchased supplies, transportation, and lodging for the company, charging the items to his credit cards. Colvin maintained that he expected to be repaid, but Draeker characterized the charges variously as loans, investments, and contributions to the company. They were not repaid. On at least one occasion, Colvin claims, he passed his credit card through Loki's credit card machine in order to give Loki a cash advance that allowed it to meet its payroll.

During the deposition, Draeker said that he was unaware of salary checks that he, Draeker, had received and endorsed, and said that he did not know if the payments had been entered in his income tax returns. On one occasion, he testified, about $100,000 was transferred to his account from which $88,000 in payroll, rent, and other expenses were paid. And on at least one occasion, the company loaned employees the amount of their net salaries against payment of those salaries instead of paying the salaries themselves, producing what may prove to be a thorny payroll tax issue, depending on whether the "loans" constituted pay or not.

A nonpracticing lawyer, Draeker met Colvin with both were employed by Apple in the early 1990s.

Loki lost the action brought by Colvin, who was awarded $237,000.

"There's a stay on the case, because of the bankruptcy," said Harter in an interview. They will very lileky end up paying only a small portion of their debts, while my guy will be paying off credit card debts incurred in behalf of Loki for the next 20 years."

Harter said that Colvin and other debtors are eager to see the fuller financial disclosure from Loki that will come with the bankruptcy filing. Draeker said that every penny will be accounted for, and denied that there had been any improprieties.

"All our financial transactions, lawsuits against the company and by the company, everything is a matter of public record," said Draeker. "Let the facts be heard. Let's get this stuff heard. Let's get the facts out rather than some story told by a disgruntled employee."

Meanwhile, discussion is underway whereby former employees and perhaps other creditors would ban together as a class in hope of becoming the single largest creditor, thereby gaining additional sway in the disposition of the bankruptcy. While under the law employees are given preferred treatment in bankruptcies, this is only up to about $5,000 per employee. At its height, Loki employed about 20 people; at the time of the July deposition, the number had dwindled to four. The employees have discussed taking over the company in hope of turning it around. The reorganizational plan Draeker's lawyers will file is expected to leave him in control.

"They're looking into putting in an independent party to run the company," said Harter, who says his advice would be different. "I would tell them to form a new company and purchase those products from bankruptcy." In that way, he said, the new company would be free of Loki's existing liabilities.

Draeker said that he expects his plan to prevail and for Loki to remain in business.

"Absolutely," he said. "We want to be here for the long haul."

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