Trustee May Seek Sanctions Against David Bergstein and Ronald Tutor (Exclusive)
Ronald Durkin, the trustee appointed to oversee Capitol Film, Thinkfilm, R2D2 and other entities forced into involuntary bankruptcy, has suggested an investigation take place to determine "whether an ongoing insider fraud is taking place."
The trustee appointed by a federal judge to oversee Capitol Film, Thinkfilm, R2D2 and other entities forced into involuntary bankruptcy has sent the strongest signal yet that he may seek criminal as well as civil sanctions against David Bergstein and Ronald Tutor.
“There is good cause to believe that Debtors (the bankrupt companies), under the management of Bergstein, engaged in deceitful misconduct during the cases,” says a federal court filing made on behalf of trustee Ronald Durkin on Friday. “It is essential that creditors and other parties… see for themselves whether an ongoing insider fraud is taking place in connection with possible efforts by Bergstein and Tutor to conceal that Tutor was and remains an insider of the Debtors.”
The filing also raises issues surrounding the lawyers, accountants’ and other professionals who have worked for or represented Bergstein and Tutor, even if they acted in good faith. “The record shows a prima facie case that the Debtors utilized the services of its counsel and accountants in the cases to commit fraud,” says the filing. “It makes no difference whether the Debtors’ professionals knew that they were assisting the Debtors and Bergstein in committing fraud.”
Among the lawyers and law firms that are mentioned are Lucia Coyoca of Los Angeles' Mitchell Silberberg & Knupp, David Weinstein of Richardson & Patel and the firm of Holme Roberts & Owen. Also under scrutiny is the accounting firm which prepared “estimated” tax returns for Bergstein and the bankrupt companies in July 2010 covering 2003 to 2008, The trustee alleges those federal tax returns, which Bergstein says were filed with the IRS, contain false and inaccurate information.
Durkin asks bankruptcy court Judge Barry Russell to relieve him of the obligation to maintain attorney-client privilege, a requirement he inherited when given oversight of the bankrupt companies. He argues that he should be allowed to make public all evidence in the case because the law requires him to uncover insider fraud and this is the only way to do his job.
The motion cites as precedent a 1985 case in which the trustee was allowed to waive those rights because the “goal of uncovering insider fraud would be substantially defeated if the debtor’s directors were able to retain the one management power that might effectively thwart an investigation.”
To prove his motion should be granted, Durkin’s filing lays out in the strongest language ways Bergstein and Tutor have been deceptive, misled and lied in court documents and legal declarations.
Judge Russell only recently lifted orders sealing the files so this is the first time much of what is in the motion and related exhibits has been made public. The exhibits include case rulings, depositions, tax filings and more. It provides the first look at Bergstein’s depositions under oath in August and October 2010, where he was grilled by Durkin’s lead attorney, Leonard Gumport.
Bergstein told Gumport he first met Tutor in 2002 when they went out on a double date together. He said they got into the film business within a year after making a loan of between $4 million and $5 million to Franchise Pictures through newly formed R2D2. Bergstein said Tutor brought the deal to him. They each put up half the money, and when the loan defaulted, they foreclosed on the Franchise library (including Angel Eyes and The Whole Ten Yards) and entered the film business.
R2D2 (named for the partners, not the Star Wars character) became their main holding company for a dizzying number of entities over the next six years. It borrowed millions – mostly from the now liquidated D.B. Zwirn hedge fund – while making deals and acquisitions in movies, media and music.
A key aspect of the trustee’s allegations is when R2D2 came apart.
On May 18, 2010, the trustee received a contract which purported to show that Tutor had sold his half of R2D2 to Bergstein on January 23, 2009 for $10. It arrived about three months after a group of creditors had initiated the involuntary bankruptcy against five companies controlled by Bergstein.
The filing was intended to prove Tutor, the multi-millionaire CEO of Tutor Perini construction and an investor in the new Miramax Films, should not have to give a deposition. Tutor, his lawyer claimed, had not been an owner of R2D2 for nearly a year prior to the start of the bankruptcy action. Thus, he was not legally an “insider” so the trustee should not be able to depose him or hold him responsible.
In fact, Tutor’s lawyer claimed, his client (through a subsidiary, Library Assets Acquisition Corp.) was one of the creditors in the involuntary bankruptcy owed about $45 million.
If the court agreed, that would make Tutor the largest creditor, and give him leverage to buy the assets (a library of over a thousand films) when they came out of bankruptcy.
Still, in October 2010, Judge Russell denied Tutor’s motion to avoid being deposed. The matter of whether he is an “insider” or a creditor remains an issue. Durkin clearly thinks Tutor’s an insider.
In Friday’s filing, the trustee lays out evidence that Tutor and Bergstein backdated the bill of sale and then repeatedly lied about it in legal filings and to the federal court.
Durkin says Tutor still owned half of R2D2 months after he says he signed the sales contract in February 2009. Durkin cites Tutor’s own testimony in other cases and statements made to the court. Durkin suggests strongly that the backdating was done to make it appear Tutor didn’t own R2D2.
“It is vital to open the files that the Debtors have withheld from scrutiny so the creditors can see for themselves,” says the filing, “whether the extensive litigation filed by the Debtors and their subsidiaries are instruments of fraud, designed to obstruct and conceal, rather than to enforce legitimate rights.”
“It is particularly important,” adds the trustee, to see if the debtors “engaged in a scheme to fraudulently conceal, by means of the backdated (sales contract) that Tutor and his controlled entity LAAC are insider/affiliates by reason of Tutor’s ongoing 50% ownership of R2D2.”
Durkin also cites a “crime-fraud exception,” raising the specter that criminal charges could be ahead. He says in the filing: “It is well-established that communications that otherwise would be protected by the attorney-client privilege or the work product privilege are not protected if they relate to client communications in furtherance of contemplated or ongoing criminal or fraudulent conduct.”
No hearing date has yet been set to consider Durkin’s requests, but there are additional upcoming depositions, as well as the continuation of Bergstein’s testimony before creditors.
Attempts to reach representatives for Bergstein and Tutor were unsuccessful.