Weinstein Co. Must Face Bankrupt DVD Distributor's Fraud Claim

A judge allows a trimmed-down lawsuit to move forward.
AP Images

A federal bankruptcy judge has substantially pared a lawsuit against The Weinstein Company, but given the green light to a bankrupt home video company to pursue recovery of transferred money due to alleged constructive fraud.

Alfred Siegel, the Chapter 7 trustee of Genius Products, filed the $130 million lawsuit last May. The gist of the complaint is that Genius was hardly an independent company, but rather one that was dominated by Harvey Weinstein's own through its majority stake. Genius asserts that there was "no practical possibility" that it could have operated profitably thanks to an onerous distribution agreement with Weinstein. As Genius ran out of money, Weinstein allegedly used proceeds from Genius' third party licensors for its own benefit.

The trustee aimed to recover huge transfers of money on many different grounds and also asserted that Weinstein breached fiduciary duties.

In a ruling on Friday, U.S. bankruptcy judge Richard Neiter picks apart many of the plaintiff's theories. An actual fraud claim fails, for example, because there was no allegation of concealment and because of disclosures at the time to shareholders. Some of the other claims are barred by a release agreement made when majority ownership in Genius was transferred from Weinstein to the investment firm Quadrant Management in 2008. And statute of limitations also plays a role in trimming the lawsuit.

But the lawsuit nevertheless survives.

Genius not only did business with Weinstein. It also was a distributor of works from ESPN, Discovery, IFC Films, Sesame Workshop, the WWE and others. The lawsuit alleges that Genius borrowed funds and made licensing agreements with these licensors. Weinstein allegedly treated Genius as essentially a piggy bank, taking this money and "thereby turning the third party licensors into unsecured creditors who were not paid timely." 

The plaintiff has offered to show that Genius was already insolvent when this happened, and the judge says that facts have been provided to make this plausible.

The bigger dispute is whether Genius received "reasonably equivalent value" for what was transferred to Weinstein.

Genius contends that it didn't get much, that its "one-sided" deals with Weinstein meant it had to accept lower-than-typical fees, distribute unprofitable titles, not release films on Blu-ray and so forth. In turn, Weinstein wants to point to old SEC filings and press releases to show Genius once hyped the deals, but the judge is limited in how he can take notice of these documents. He can't accept them as true at this stage.

Judge Neiter writes, "While Defendants may have a defense that each transfer resulted in the reduction of Debtor's contractual liability to the Defendants in support of a finding of 'reasonable equivalent value,' the Complaint, as pled, demonstrates that the terms of the agreements may have resulted in the Debtor receiving less than 'reasonable equivalent value' for the transfer made. Accordingly, dismissal of Plaintiff's claim for fraudulent transfer based on constructive fraud is denied."

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