A U.S. bankruptcy judge yesterday barred an overseas company owned by Saudi arms broker Adnan Khashoggi from collecting $31 million in commissions from Northrop Corp., ruling that Khashoggi's unpaid U.S. creditors may have an overriding legal claim to the money.
The preliminary injunction, granted in Salt Lake City by U.S. Judge John Allen, was a severe blow to Khashoggi, who has been engaged in a long-running battle with Northrop over his role in brokering billions of dollars worth of arms sales to the Saudi Arabian government in the early 1970s.
Last April, after nearly eight years of litigation, a federal appeals court upheld an arbiter's ruling that Northrop had failed to compensate Khashoggi for work done on the firm's behalf. The court directed Northrop to put $31 million in unpaid commissions into the Swiss bank account of Khashoggi's Triad International Marketing S.A. by this week.
But yesterday's ruling raises for the first time the prospect that Khashoggi's numerous U.S. creditors may be able to tap into the Northrop commissions as well as the arms dealer's other overseas assets.
Faced with more than $100 million in debts, Khashoggi's U.S. holding company, Triad America Corp. of Salt Lake City, filed for reorganization last January and is now being supervised by a court-appointed trustee.
Allen's ruling came one day after it was disclosed that the Energy Department recently paid $69.9 million to the creditors of an alcohol fuels plant owned by one of Triad's subsidiaries, Agrifuels Refining Co. The company had defaulted on its federally guaranteed loan, triggering the Energy Department's payment to a group of creditors headed by the Bank of New England.
Danny C. Kelly, a lawyer for the Triad trustee who asked for the preliminary injunction, said yesterday that Allen's ruling was a "good start" toward permitting Triad's customers to begin pursuing a vast and secretive international network of Khashoggi companies, many of them based in the Cayman Islands.
Citing a recently issued report by a court-appointed examiner, Kelly said various overseas Khashoggi companies owe at least $139 million to Triad's domestic creditors.
No legal representative of Khashoggi showed up during yesterday's hearing. John R. McDonough, a Los Angeles lawyer who represented Triad International Marketing in the Northrop litigation, said that Allen's ruling "was not a happy development" but that his firm has not been authorized to represent Khashoggi in the matter.
A Northrop spokesman said the ruling would not interfere with the company's plans to appeal the circuit court's opinion to the Supreme Court.
Allen's ruling came in the wake of a recent report by a court-appointed examiner concluding that Triad America's collapse was caused by "gross mismanagement, dishonesty and/or fraud" by Khashoggi and his business partners who operated the company.
Examiner Leonard Gumport noted that Khashoggi transferred $89 million from Triad America to his overseas companies and that a third overseas firm, called Triad International Marketing Co., had failed to provide up to $50 million in capital for Triad America that was required under a 1984 stock subscription agreement.
Allen ruled yesterday that it was "reasonably probable" that creditors would be able to establish that Triad International Marketing Co. and Triad International S.A. were under the "common control and ownership" of Khashoggi and his brother Essam Khashoggi, and that there was a "substantial likelihood" that the creditors would prevail in a trial.
As a result, he gave Triad creditors a lien on any funds Northrop owes to the Liechtenstein-based Triad International Marketing.