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2 YEARS

Ruling Opens Door to Recovering Millions From David Bergstein Movie Companies

A federal judge Tuesday approved five identical motions filed by the trustee in the nearly three-year-old bankruptcy case involving Capitol Films, ThinkFilm and three other now defunct movie companies — despite vehement opposition from David Bergstein and Ronald Tutor, who formerly owned those entities.

The motions represent an agreement between trustee Ronald Durkin and David Molner, a hedge fund manager who represents a group of creditors that includes the Aramid Entertainment Fund, Molner’s Screen Capital International and two law firms who represent them. The ruling allows Aramid to “step into the shoes” of the trustee to sue insiders (primarily Bergstein and Tutor) and others who siphoned money from the companies before and after the involuntary bankruptcy was declared in March 2010.

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The deal has been in the works since last fall and marks a significant shift in the bankruptcy case. Until now Durkin and his legal team have battled unsuccessfully to take control of the companies and recover assets on behalf of creditors with minimal success. At every turn, Bergstein and Tutor have caused delays by failing to file required documents, extending court deadlines, filing related lawsuits and appealing loses to higher courts. In a legal case against Bergstein’s former lawyer Susan Tregub last year, Bergstein and Tutor testified they had spent more than $15 million on legal fees as of last summer.

In the federal case, Judge Barry Russell compelled Bergstein and Tutor to disclose who was paying the legal bills. Most of the bills have been paid by Tutor, who is CEO of Tutor Perini, a large construction company, and was part of an investor group that bought Miramax. Tutor is selling out his interest in the film company.

Bergstein won a judgment of about $51 million in the Tregub case in Los Angeles Superior Court. He personally was to get $13 million, but that has proven to be uncollectable as Tregub has filed bankruptcy and appears to have no assets.

Bergstein has tried to use the results of the Tregub case in the federal bankruptcy case, claiming the bankrupt companies should sue Aramid because she worked for them as a freelance contractor for several months when Molner was building the case that led to the involuntary bankruptcy.

The trustee has said the Tregub case should not matter in the bankruptcy and Tuesday, Judge Russell agreed with him. He said that the Tregub case is “irrelevant” in his case. However, at the request of the bankruptcy trustee in the Tregub case, the settlement specifies Durkin isn’t releasing any rights that don’t belong to the bankrupt companies.

One argument made in Bergstein’s opposition was that there are still appeals awaiting judgment by the U.S. District Court, so “the settlement is unwise.”

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In his response, Durkin writes: “It is clear now that the Tutor parties’ primary weapons in their arsenal are delay, expense, and obfuscation. Waiting on this settlement for the outcome of future litigation is an exercise in futility. The Tutor parties and Bergstein will always have appeals pending in the hope that creditors, the Trustee, or the Court throw in the towel from despair or fatigue.”

“It is important now,” continued Durkin, “to put the (bankrupt companies) in a position where, notwithstanding considerable harassment and obstruction, an entity with considerable experience in dealing with Bergstein and Tutor undertake litigation with their eyes wide open and incentivized to do battle.”

That is where Aramid comes in. Originally one of the creditors in the case that Molner helped bring to the bankruptcy court, it now takes a new role doing what the Trustee admits he can’t do – trying to claw back money that seemed to disappear from the bankrupt companies. Molner has estimated that there may be as much as $300 million in recoverable claims.

“The insiders have spent tens of millions to thwart the bankruptcy process itself – and nearly succeeded,” Molner told The Hollywood Reporter in a statement Tuesday. “Certainly they’ve outdistanced the Trustee. But simply put, other than our proposal, there is no avenue to recovery for true creditors.  I believe our proposal aligns us squarely with all legitimate creditors – either we all benefit to some degree or none of us do – and we feel the court should see it that way, too.”

The deal Molner and Durkin made last fall, which was approved by the judge Tuesday, doesn’t take the trustee out of the picture completely, but it does turn over the most important role of finding the money to Aramid. If Aramid can recover the money, it gets paid off the top for its expenses (including legal fees), and then the rest is split with 50 percent going to Aramid and 50 percent to the other creditors. In return Aramid agrees to fund all the litigation and is dropping its claims as a creditor.

Durkin also will have a priority position to claim his expenses and legal fees. The trustee works without any payment until money is recovered. According to court documents, Durkin already is out between $4 million and $5 million.

One effect of that is to subordinate the secured claims by Tutor that he is owed more than $100 million, making him the largest creditor in the case. If Tutor is ultimately declared an insider in a legal sense, he could lose all of his claims and investments in several movie libraries he owns through subsidiaries such has Library Asset Acquisition Corp., TLC and Zelus.

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Even before the ruling on Tuesday, Aramid has begun acting on behalf of the trustee, with court approval. Since last November, Aramid has filed about 90 “placeholder” lawsuits against not only Bergstein and Tutor and their many companies, but also against others who got money from the bankrupt movie companies including Bergstein’s mother, Sarah, and various Las Vegas casinos such as  Mandalay Bay, which received payments to cover Bergstein’s debts. Each of those companies and individuals will have to prove the bankrupt companies got fair value for the money, or they will be required to pay it back.

Aramid is sorting through more than 800 transactions involving more than 200 bank accounts, dozens of corporate shells and a number of individuals to seek out the money that was moved from the bankrupt companies into accounts where it could not be seized on behalf of creditors.

They are “placeholders” because the statute of limitations was about to run out, so the suits were filed to keep the clock ticking until they can move forward on the road to recovery. Now with Russell’s approval, they will do that and more.

On Feb. 15, Aramid also filed the first in what is expected to be an additional series of lawsuits on behalf of ThinkFilm, the once successful Canadian-American indie distributor that won an Oscar in 2008 for the documentary Taxi To The Darkside. Aramid is seeking the return of $25 million the company believes was improperly taken from ThinkFilm alone.

The ThinkFilm suit against Bergstein and his companies goes into detail about Bergstein and Tutor’s alleged improper behavior throughout the case, which includes allegedly filing false financial documents with the court, backdating documents, providing misleading information about what assets were in the bankrupt companies, withholding computer files and more.

“The proposed settlement is fair and equitable,” Durkin said in his legal filing. “Indeed, it is designed to promote reorganization, settle disputed and dubious claims, and to address the scorched-earth opposition by (Bergstein and Tutor) whose claims likely merit subordination.”

Lawyers representing Bergstein and Tutor did not respond to requests for comment.