Luke DeCock

Lawsuit raises serious questions about Karmanos, Hurricanes’ future

A lawsuit filed last week alleges Hurricanes owner Peter Karmanos Jr. has defaulted on more than $100 million he borrowed from a trust established for his three adult sons, the plaintiffs, who also allege the trust was used in various ways to “support the Hurricanes.”
A lawsuit filed last week alleges Hurricanes owner Peter Karmanos Jr. has defaulted on more than $100 million he borrowed from a trust established for his three adult sons, the plaintiffs, who also allege the trust was used in various ways to “support the Hurricanes.” cseward@newsobserver.com

While the NHL gets closer to expansion – Las Vegas? Quebec City? Delay? Nowhere? – and persistent relocation rumors continue to swirl around the Carolina Hurricanes, new drama is developing within the franchise itself.

A lawsuit filed last week alleges Hurricanes owner Peter Karmanos Jr. has defaulted on more than $100 million he borrowed from a trust established for his three adult sons, the plaintiffs, who also allege the trust was used in various ways to “support the Hurricanes.”

If Karmanos has been drawing on his sons’ trust fund to keep the Hurricanes afloat, it certainly makes you question what NHL commissioner Gary Bettman said before Game 1 of the Stanley Cup Final.

Mr. Karmanos has been for some time considering whether to take on a partner,” Bettman said Monday. “There’s no issue relating to the Hurricanes.”

Struggling both on the ice and at the box office – the Hurricanes have made the playoffs only once since winning the Stanley Cup in 2006, and attendance has suffered accordingly – Karmanos has been trying to sell his majority share in the Hurricanes for almost two years, with no one yet willing to meet his asking price or his condition that he remain in control of the franchise. Getting sued by his sons isn’t going to help convince anyone the latter is a good idea.

This isn’t the first hint of a rift within the Karmanos family. None of the three sons who filed the lawsuit attended Karmanos’ Hall of Fame induction ceremony in Toronto last fall, and Jason Karmanos, one of the plaintiffs, was fired by the Hurricanes four days before training camp in 2013 without any public explanation.

Peter Karmanos III worked for his father at Compuware, the software company Peter Karmanos Jr. founded in 1972, from 1988 to 2014, rising to the position of chief information officer. Nick Karmanos is the senior vice president of the Karmanos Cancer Institute. Jason Karmanos worked in the Hurricanes’ front office in two stints from 1998 to 2007 and 2008-13 and is now vice president of hockey operations with the Pittsburgh Penguins. All three are from Karmanos Jr.’s first marriage. Karmanos Jr. also has four younger children from his current marriage.

“I’ve tried and tried to work out the issues with you regarding repayment of the monies that you owe to the (trust),” Karmanos III wrote in an April letter to his father included with the filing. “So has Nick and so has Jason. We’d like nothing more than to have worked this out with you. I won’t rehash everything here, but it just hasn’t happened.”

The lawsuit says that starting in 1999, two years after he moved the Hurricanes to North Carolina from Hartford, Conn., Karmanos borrowed more than $353 million from the trust as well as using the trust as collateral for ‘loans and advances from various banks and the NHL’ to ‘support the Hurricanes’ from 2000-13.

In the complaint filed May 26 in Oakland County, Mich., and first reported by Detroit TV station WDIV, they allege Karmanos Jr. borrowed money from the trust, has failed to meet repayment terms and now owes them $105.7 million. According to the filing, the trust fund was created in 1996 with Compuware stock Karmanos owned, for estate and tax purposes. Karmanos owns 34 percent of the trust, and each of the three sons owns 21.6 percent.

The lawsuit says that starting in 1999, two years after he moved the Hurricanes to North Carolina from Hartford, Conn., Karmanos borrowed more than $353 million from the trust as well as using the trust as collateral for “loans and advances from various banks and the NHL” to “support the Hurricanes” from 2000 to 2013. There’s no allegation that Karmanos failed to meet the terms of the loans from the trust until 2013, after he borrowed $104.3 million that he agreed to repay by 2022.

Annual payments of principal and interest were due in June 2014 and 2015; the lawsuit says Karmanos failed to make those payments, at which point the three sons called in the loan.

Jason Karmanos declined to comment Wednesday, as did the NHL. A spokesman said Karmanos Jr. was unavailable, but his lawyer, Kevin O’Shea, said he had no comment. Efforts to contact lawyers representing the Karmanos sons were unsuccessful.

The lawsuit isn’t the only potential capital call Karmanos Jr. faces. This fall, the first nine minority investors in the Hurricanes face a decision whether to get their roughly $22 million back with interest or become full partners, which would make them partly responsible for any losses.

Normally, you wouldn’t think repaying that amount would be an issue for Karmanos. Maybe it will be.

With the NHL only a few weeks away from an expansion decision, the lawsuit raises all the wrong questions about Karmanos’ cash flow and his ability to sustain the Hurricanes.

That’s a big issue related to the Hurricanes, no matter what Bettman says.

Luke DeCock: ldecock@newsobserver.com, 919-829-8947, @LukeDeCock

Carolina Hurricanes owner Peter Karmanos reiterated that he has no plans to move the NHL team out of Raleigh as he speaks at a press conference at PNC Arena in Raleigh on July 1, 2015.

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