PR Guru's Public Spat Over a Debt

Michael Sitrick wages a legal fight to collect on a $7.7-million judgment linked to the dot-com bust, despite an accord that waived the debt.

By Kim Christensen
Times Staff Writer

October 21, 2006

Los Angeles spin-meister Michael S. Sitrick is testing his powers of persuasion in the legal arena, trying to convince the courts that he's entitled to collect on a $7.7-million judgment he previously agreed to forgo.

For nearly four years, the public relations executive made no attempt to recover the money from Ryan Kavanaugh, in whose now-defunct KC Capital investment fund Sitrick lost $6.3 million during the dot-com bust.

But then Kavanaugh, 31, hit it big in Hollywood, making millions by lining up money for movie productions through his company, Relativity Media. Since 2005, he's been credited as a producer on more than a dozen films, including the box-office hit "Talladega Nights: The Ballad of Ricky Bobby."

Now, Sitrick wants his money back. He contends that he's no longer bound by a November 2002 agreement not to collect.

The ensuing dispute has triggered a nasty legal bout, with Sitrick accusing Kavanaugh of hiding his assets to skirt the judgment. Kavanaugh counters that Sitrick spun that allegation out of thin air and is using it to try to coerce him to pay millions he doesn't owe.

In a recent court filing, Kavanaugh asserts that Sitrick's action could jeopardize a pending 18-movie, $4.5-billion deal from which Kavanaugh and others stand to reap $90 million in profit.

"His hope was that there would be enough of a potential impact or fear of potential impact on my business that I would call him and say, 'I'll pay you X dollars because I've got to move forward.' — I wasn't willing to do that," said Kavanaugh, who declined to elaborate on the $4.5-billion deal. "Mike and I had a settlement agreement, which Mike is breaching, and this is now a matter of principle for me."

Sitrick's lawyer, Patricia Glaser, said the dispute boiled down to this: Was Kavanaugh telling the truth in 2002 when he said he was too broke to make good on the judgment? While offering no specifics, she contends that Sitrick and his lawyers can prove in court that he wasn't.

"If we are wrong, we will go home and take our baseball bat and glove with us," Glaser said. "But if we are right, you owe us a lot of money, Mr. Kavanaugh."

Now lodged in state superior and appellate courts, Sitrick vs. Kavanaugh is rooted in the freewheeling dot-com boom of the late 1990s.

Kavanaugh was then a young venture capitalist whose family was friends with Sitrick's. His KC Capital fund had money both in private start-up firms and "high-tech public companies that had provided enormous returns" to his investors, he stated in court records.

In March 2000, the Sitrick and Co. founder put $6.3 million into the fund, just months before the boom went bust. With it went the fortunes of Kavanaugh's fund — and Sitrick's investment in it.

The loss stands in stark contrast to some of Sitrick's other investments, according to his deposition in a related lawsuit. He testified that he had put $100,000 into prepublic Global Crossing Ltd. and took out $8 million by selling some of his shares well before the ill-fated telecom tumbled into bankruptcy. In the same 2005 deposition, Sitrick pegged the value of his family trust at more than $20 million, not counting real estate holdings.

Widely billed as the king of crisis PR, Sitrick and his company have handled the press for such diverse clients as Global Crossing founder Gary Winnick, the embattled Getty Trust and the Archdiocese of Los Angeles during the pedophile priest scandal.

In 2002, Sitrick sued Kavanaugh, alleging that nearly all of KC Capital fund's money, including his $6 million, had been invested in PreNet, a start-up that marketed prepaid credit cards, on whose board Kavanaugh sat. He alleged that Kavanaugh had previously assured him that no more than 25% of the fund would be invested in such nonmarketable securities, and he demanded his money back.

Kavanaugh disputed Sitrick's allegations and, while his own finances were collapsing, turned for his legal defense to two insurance companies that covered him for liability as a board member for PreNet and another company. The insurers refused to defend him, however, and in court records he states that by late 2001 he was broke and was forced to sell his house.

Apparently convinced that Kavanaugh couldn't pay, Sitrick struck a deal with him to enter "a quick and amicable" arbitration of the case, which resulted in a $7.7-million judgment for Sitrick. If Kavanaugh would agree to help him sue the insurance companies to collect it, the two men agreed, then Sitrick would release him from the debt.

In November 2002, they signed such a covenant, which among other things provided that Sitrick would "never" seek to enforce the judgment.

Kavanaugh provided documents to Sitrick and testified on his behalf in litigation that produced mixed results: Sitrick collected $1.2 million from one insurer, but walked away empty-handed after a jury sided with the other.

That was the end of it, as far as Kavanaugh was concerned, and both sides say that neither Sitrick nor his representatives approached Kavanaugh again about the $7.7 million.

Fast forward to last month, when Kavanaugh learned that Sitrick's lawyers had quietly petitioned a Los Angeles Superior Court judge to enforce the judgment.

In their written pleadings, Sitrick's lawyers alleged that Kavanaugh had hidden the proceeds from the sale of his house in 2001 and asked that his current multimillion-dollar income be applied to the judgment.

But they made no mention of Sitrick's 2002 agreement not to enforce the judgment, only vaguely referring to it in a footnote that read, in part, "Kavanaugh may well argue that Sitrick agreed not to execute on the judgment."

Judge John P. Shook granted Sitrick an injunction, in effect ordering a lien placed on all of Kavanaugh's assets and income, tying his business in knots.

Kavanaugh's attorneys have since secured a stay of the injunction and are petitioning the appeals court to vacate it. They also have sued Sitrick, seeking a ruling that the 2002 agreement is valid and accusing Sitrick of breaching it.

The case is on hold pending a ruling from the appeals court on the injunction. Its ultimate resolution hinges on whether Kavanaugh's net worth at the time of the 2002 agreement was $100,000 or less, as he contended it was.

Until September, Sitrick had not challenged Kavanaugh's assertion about his financial state at the time. His lawyers have recently uncovered "overwhelming evidence that that was an inaccurate statement," Glaser said, but she would not reveal what it is.

Robert S. Draper, Kavanaugh's lawyer, said that's because it doesn't exist.

"I have seen the records," he said, "and there is no possible way that they have evidence that the aggregated value of Ryan's assets was more than $100,000."

For his part, the man this newspaper once dubbed "The Wizard of Spin," is mum on the case. The usually talkative Sitrick, whose mostly high-profile clients pay him $695 an hour to speak for them, declined to comment.