KDHX faces crossroads in court—with two more to come this spring

The battle for the future of KDHX has three decision points in the next two months—and one comes this week.

The community radio station’s bankruptcy has been underway in federal court since March. Station leaders say they’re out of money, and they have sought to sell their broadcast license and tower to a Christian radio behemoth to cover the nonprofit’s debts. 

Critics of station leadership are hoping to stop, or at least slow, the sale. They say donations would flow in with new leaders—and that instead of selling its main asset, it should explore new governance. 

But the path ahead is complicated. For one thing, says Tom DeWoskin, the bankruptcy lawyer at Danna McKitrick engaged by the station’s critics, it’s quite rare for a nonprofit to file for bankruptcy. (Various Catholic dioceses that fell into financial crisis after mishandling sex abuse allegations offer some of the only precedents.) 

For another, KDHX’s critics had previously filed a lawsuit challenging the station’s governance in circuit court. They argue that the questions raised by that lawsuit need to be answered before any reorganization.

Questions of governance in state court

At an expedited hearing before Judge Kathy A. Surratt-States today, KDHX will argue that its bankruptcy should proceed without the state court matter being sorted out first. 

Its critics will argue that that’s impossible. Their state court lawsuit, filed in January, argued that the board had improperly fired 100 DJs to keep them from getting to vote on station governance—and potentially block a sale of the broadcast license. Surely, they say, that’s relevant. 

KDHX argues, however, that bankruptcy ought to pause all other legal proceedings. Continuing to pursue the case in state court, they argue in court filings, violates the protections they should enjoy under bankruptcy law.

Judge Surratt-States could rule on that key question as early as today. 

Questions of ongoing funding

The second decision point comes on or after May 13.

When KDHX’s board filed for bankruptcy, it did so with a lender providing funds to keep the station functioning during the bankruptcy. That lender is called a debtor-in-possession. But critics note that the debtor-in-possession here is hardly a neutral party: It’s K-LOVE, the Christian radio station that KDHX wanted to sell its broadcast license to. 

Documents show that K-LOVE’s loan would be interest-free if KDHX sells its major assets to K-LOVE. “But if you don’t sell the station to it, then they’re going to charge 12 percent interest and other expenses,” says DeWoskin. “And 12 percent interest plus expenses on a loan that’s secured by a license worth $5 million is totally unwarranted. It’s a no-risk loan.” 

K-LOVE’s loan is currently limited to $500,000. KDHX will need an extension this month to keep the money coming. DeWoskin aims to instead persuade Judge Surratt-States that KDHX should consider other debtor-in-possession options, with better terms. That could open the door to other parties providing operating loans that aren’t dependent on an asset sale. (Since KDHX filed for bankruptcy, a second Christian radio company, Joy FM, has indicated it wants to buy the station’s broadcast license as well—and, as SLM has reported, a group of community members had also previously sought to swap themselves in as the lender, although negotiations with the board soon broke down.) Those arguments are scheduled for May 13.

The big question: To sell, or not sell, the license

The final—and biggest—decision point comes in June. KDHX wants the judge to approve the sale of its license and broadcast tower. Critics want to slow down the process and get a chance to explore alternatives. They see important questions about whether the sale would actually benefit the community, and live up to the station’s mission. Would a different kind of reorganization allow KDHX to preserve its broadcast capabilities?

As DeWoskin notes, the nonprofit mission of KDHX has long been to operate a community over-the-air broadcast station. He believes the station’s purpose is to allow local artists access to the local airwaves. Selling its broadcast rights and tower to a Christian radio station would contravene that mission.

“There are many, many sources of Christian radio broadcasting in the St. Louis area. I’m not aware of any other media outlets for local talent, though,” he says. “That’s what makes KDHX unique, and why it’s important to preserve the station in its current format.”

He stresses that the goal isn’t to permanently stop a sale. “If it turns out that it’s the only way to go, so be it,” he says. But they believe other alternatives have not been explored, and should.

“If we can get the judge to say, ‘I’m not going to approve a sale, there are too many questions behind why we’re having a sale in the first place, and I want this fleshed out through a plan,’ that would be a victory for us,” DeWoskin says. 

The station has around $2 million in debts. Judging by the offers made by K-LOVE and Joy FM, a sale of its license could bring in about $5 million. 

“What makes a nonprofit bankruptcy so unusual is that there are no shareholders,” DeWoskin notes. “Normally, if you liquidate the company and there’s extra money, it goes to the shareholders.” In a nonprofit liquidation, who gets the extra funds? In KDHX’s case, with the purchase price for a broadcast license likely to far exceed the station’s debts, that question becomes especially acute. 

“There’s not a lot of law on this,” DeWoskin cautions. But if you’re selling a nonprofit’s primary asset—its crown jewel—he believes that the mission of the organization comes into play: “Instead of looking at the interest of shareholders, you need to look at the reason the nonprofit was set up.” 

On St. Louis Public Radio’s monthly Legal Roundtable last week, lawyers questioned why KDHX leadership was intent on pushing the sale through quickly. “Any time someone wants to rush, that’s a red flag for me,” said St. Louis-based attorney Sarah Swatosh.

Attorney Bill Freivogel agreed, saying he was troubled by the clause in K-LOVE’s bid that included a bonus if the sale went through quickly: “I do hope the court is not rushed by that kind of gamesmanship.” 

DeWoskin echoes the calls to slow down, noting that the station has an insurance policy paying for its bankruptcy lawyers. He also believes the two Christian radio companies vying to purchase the station’s assets are unlikely to walk away. 

“If you’re interested enough to offer $5 million for something today, you’ll still offer that 60 or 90 days from now,” he says. “And the fact that there’s a second offer really tells me that these offers will still be here in the reasonable future. That’s enough time for both sides to get a plan of reorganization on file, explain their reasoning, and let interested parties object to the plan which they think is worse.”

At all three decision points, DeWoskin’s case involves asking the judge to slow down, to consider alternatives, to look at the bigger picture. With two key court hearings in the next month, it should become clear whether the judge is at all receptive to those arguments. If not, KDHX could be cleared for its end on the airwaves by June.