Creditors, Guilds Move to Liquidate Five Former David Bergstein Companies

16 REP NEWS David Bergstein
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A group of creditors led by Aramid Entertainment Fund and the major Hollywood talent guilds have filed a proposal with a federal bankruptcy court in Los Angeles to take over and liquidate R2D2, Capitol, ThinkFilm and two other companies formerly controlled by financier David Bergstein.

The creditors group is offering to loan $4 million (put up by Aramid) to administer the entities while all related properties are consolidated, there is a worldwide search for assets, legal actions are initiated to recover damages and other actions are taken to get whatever value exists in the bankrupt companies. There are 15 creditors in the group at present, and others are expected to join.

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The creditors, according to a source, believe there is more than $40 million that can be recovered.

Most of the money would be expected to come out of the ownership and rights to some 1,300 movies that were part of these companies at various times; and other money would come from lawsuits against anyone who acted fraudulently in the case (which could lead to up to triple damages, making it more than $120 million that could be recovered). The bankrupt companies are no longer operational and have assets of less than $100,000 between them at present.

The creditors propose to appoint John P. Brincko, president of Sitrick Brincko Group, as the new trustee over the companies. If approved, he would replace Ronald Durkin, who was appointed shortly after the companies became involved in an involuntary bankruptcy action forced by the same creditors in March 2010.

Brincko is familiar with Bergstein as he was for five years the trustee in the Franchise Films bankruptcy case. Bergstein had a business relationship with Franchise and eventually acquired a number of the Franchise movies,  which became the basis for the start of his larger movie business interests around 2006.

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Durkin, meanwhile, continues his efforts despite months of frustration in trying to get information from the companies, Bergstein and his former business partner Ronald Tutor, who is also CEO of a large construction company and a major investor in the new Miramax film company.

The creditors say that if they get control, Bergstein and Tutor will be made to account for their actions to delay the legal case.

 “Bergstein and the Debtors (the companies)  have played a shell game with the Debtors’ Assets,” the creditor group writes in a disclosure statement filed with the proposal, “such that it is extremely difficult to determine who owned and had an interest in the Debtors Assets at any given point in time and equally challenging to establish who currently owns or has an interest in the Debtors’ Assets.”

To deal with this “shell game,” the creditors say they will “initiate an investigation and litigation intended to maximize the Debtors’ Assets through, among other things, unwinding or avoiding untoward transactions and/or obtaining damages for such transactions from all available sources.”

It adds that, “The repeated use of newly formed shell companies with names that are deliberately and confusingly similar to the names of existing companies controlled by the Debtors and/or their Affiliates appears to be part of the game.”

They charge that Bergstein and others have transferred assets and moved them around as a way to hide them from the trustee.

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According to David Molner of Aramid, another company he controls, Screen Capital International, would be hired by the new trustee to search out the assets around the globe, and to compile evidence for a series of legal actions to recover funds.

“This represents the creditor’s belief that a comprehensive plan of action is needed,” Molner tells The Hollywood Reporter. “It is time to stop allowing Bergstein and Tutor to stall and to find out where the assets are. This will lead to a real recovery for the creditors.”

Durkin did win a victory in court in late November when he was given oversight of Pangea Media Group, a corporation Bergstein created and operated outside of the companies in the involuntary bankruptcy case. However, Durkin has been frustrated in efforts to actually take control of Pangea or even to see the corporate records. Bergstein filed an emergency motion with the court to block the release of a number of documents and emails related to Pangea, and so the transfer of control has been held up.

There is a hearing on that motion scheduled for Jan 10 in federal court in L.A. before Judge Barry Russell, who has been overseeing the cases since the beginning.

If as expected the judge denies Bergstein’s motion, then a number of documents, including memos and emails between Bergstein and Tutor and their lawyers, would be made available to the other creditors and to the public. The creditors believe those documents may provide important information about how Bergstein and Tutor have conducted themselves during the case.

In their filing the creditors cite evidence uncovered by Durkin that appears to show that Bergstein and Tutor backdated legal documents to hide the extent of Tutor’s involvement with the companies. They say they intend to take legal action to show that this was part of a scheme to defraud the creditors.

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There was a deadline of Jan. 2 for all claims by creditors to be filed. Tutor is the largest single creditor, with total claims (personally and through corporations he controls) for about $145 million. However, the creditors' plan makes clear they intend to show that he is actually an insider who has owned and been involved with the companies and should thus not be treated as a creditor.

“While the full scope of Tutor’s involvement in the improper transactions discussed above (and any others) has not emerged in quite the detail as Bergstein’s has,” say the creditors in their filing, “to the extent Tutor received or otherwise benefited from the improper diversion and use of loan proceeds and the transfer of the Debtors’ assets (or allowed this to happen when he could have prevented it), Tutor also would be subject to claims for fraud, negligence, conversion, unjust enrichment and possibly receipt of fraudulent transfers, accounting, and rescission.”

Bergstein also has claims against the companies, but he clearly is an insider, which under the law means he cannot vote along with other creditors on this proposal.

Just before the deadline, a claim was also filed against Bergstein and the bankruptcy companies by Fortress Value Recovery Fund, which is acting as the agent to collect money that was owed to the defunct New York hedge fund D.B. Zwirn, which loaned millions to Bergstein and Tutor, including financing for their acquisition of ThinkFilm and Capitol Films four years ago.

According to the Fortress filling, Tutor settled their claims against him (reportedly for more than $100 million in total) but they continue to go after Bergstein. They say that they have a secured claim for $62.2 million, which they are pursuing in a state court case as well.

The California Franchise Tax Board also has a claim against R2D2 (which was the main holding company for all the other bankrupt companies) that says it is owed $9.2 million. There is also a claim listed for $7.5 million owed to Stephens, an investment firm based in Arkansas. Other claims include $4 million owed to Allied Advertising and $1.2 million that was owed to the Allied Irish Bank, which has been assumed by Aramid.

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The Hollywood talent guilds, including the DGA, WGA and SAG (and affiliated heath and welfare plans) also say they are owed money for unpaid residuals on movies that were made under their jurisdictions.

There is a hearing scheduled before Judge Russell on Feb. 22, during which he could approve moving the creditors' plan forward. At that hearing, the creditors will attempt to disqualify Bergstein and Tutor’s claims as creditors.

If the proposal is approved by the judge, qualified creditors will vote on whether or not to accept this new plan. If a majority favor it, the plan would go forward.

Bergstein and Tutor are expected to strongly object to the proposal.

Durkin has not said whether he will support the creditor’s group’s proposal; but indications are that he will not oppose it, according to a source.  

Bergstein recently filed two other motions to notify the court that he has two new sets of lawyers, and that his most recent attorneys have withdrawn from the case.

Bergstein and Tutor did not respond to requests for comment.