December 26, 2013 5:11pm PT by Alex Ben Block
David Bergstein Wins Key Legal Victory in Involuntary Bankruptcy Case
Embattled financier David Bergstein won a legal victory when federal bankruptcy court Judge Barry Russell dismissed the last in a series of lawsuits brought by Screen Capital International Corp. acting on behalf of the bankruptcy trustee. It was one of eight cases that personally named Bergstein and his former partner in the movie business, Ronald Tutor, as defendants.
This latest ruling, which came Dec. 12, is significant because it may mark the collapse of a plan by SCIC and the Aramid Entertainment Fund to act on behalf of the court-appointed trustee, Ronald Durkin, to find assets and unlock any value left in the bankrupt entities, including Capitol Films, ThinkFilm and others on behalf of creditors.
SCIC and Aramid, led by hedge fund manager David Molner, had made a deal with the trustee to take over the search for lost assets. The trustee, after nearly three years of fruitless efforts as he faced new legal entanglements at every turn, had made the deal that kept the cases alive.
Bergstein's attorney Alex Weingarten says the entire effort by SCIC and the trustee was "a waste of time and money."
SCIC not only filed cases against Bergstein and Tutor but also threw out a wide net in other suits where it wanted to try and find money that belonged to the bankrupt companies.
"It filed countless cases against [Bergstein's] wife, his mother, his friends and business partners," says Weingarten. "All have been dismissed."
The SCIC plan, says Weingarten, "consisted of nothing more than filing a bunch of lawsuits against Bergstein, Tutor and some selected third parties with ties to them. Those have now all been dismissed -- with prejudice."
With prejudice means SCIC can't refile new versions of the same civil complaints in Russell's court.
However, the ultimate decision on this will likely rest with the appeals courts, where a number of cases that started with Judge Russell are now expected to be decided by Judge Philip Gutierrez, who has previously reviewed a number of related matters.
The fate of the litigation likely will hinge on Gutierrez's review of Russell's rulings.
In this case, in which Bergstein and Tutor were charged with breach of fiduciary duty and other things, Russell ruled Dec. 12 in large part on an unrelated matter -- whether a release Molner signed on behalf of Aramid in return for about $4 million paid by Tutor back in 2009 to settle a movie bridge loan means that his other company, SCIC, can't act with the trustee to file claims to recover lost or missing assets, including hundreds of movies.
SCIC's attorney, David Neale, sees hope because he believes the appeals court will see that Russell changed course during the litigation, starting with saying the release did not matter to giving it a very broad interpretation.
SCIC is also appealing a ruling by Russell that there was no reason for him to step down from these cases after a recorded phone conversation suggested Bergstein intended to tamper with the judge. Bergstein has said he made the statements at the time, knowing they were false, only as a way to test the person he was speaking with. That appeal is also likely to be decided by Gutierrez.
Neale notes that when they sought a preliminary injunction in 2012 to stop the sale of some of the movies by a company controlled by Tutor, Russell ruled that the 2009 release did not apply. He was upheld in that belief by Gutierrez for the appeals court last May. Then later in 2013, Neale says Russell reversed himself when he said the release was, in Neale's words, "so broad as to cover everyone for anything," including suits by SCIC.
Now Aramid and SCIC hope Gutierrez will again say the release isn't that broad, which this time would reverse Russell.
Weingarten says the release is a valid issue but wasn't the only reason for this latest ruling. He says Russell also ruled that the facts presented by SCIC in more than 100 pages of pleadings "were barred by the litigation privilege" and were "insufficient to form a basis to seek to impose liability upon Mr. Bergstein."
Neale contends Russell's ruling was not "made on the basis of litigation privilege." Neale says that what Russell did was place an impossible burden of proof on them: "He imposed on us a standard where we were supposed to show we had the likelihood of success on the merits at the stage of evaluating whether or not the complaint was adequate."
Weingarten not only disagrees but believes Bergstein has shown SCIC acted improperly by buying the debt of companies that became caught up in the involuntary bankruptcy. "Aramid is not and has never been a legitimate creditor in any of these cases," says Weingarten. "It bought claims in order to file them" (which would be illegal under federal law).
Neale says SCIC and Aramid never bought debt from any creditor in the case prior to the start of the involuntary bankruptcy in March 2010. "This is what they have been saying from day one in the case," says Neale, "and they say it to whoever will listen as often as possible in hopes if they say it enough times somebody will buy it."
The next court date is March 5, when Russell will rule on motions brought by Bergstein to stop SCIC and Aramid from being paid on claims for administration and related legal fees.
Weingarten says the real question to be answered is, "Why would David Molner spend millions of dollars buying claims and paying lawyers when his companies are not and have never been actual creditors of these debtors?"
Neale says SCIC had every right to make a business decision to join with the trustee to try and recover assets and money that flowed out of the bankrupt companies. "We believe very strongly in the merits of the appeal," says Neale, "and we hope we are going to be vindicated by the appellate court."