Hollywood's Creatives Suffer Blow in Appeal Over Weinstein Co.'s Bankruptcy Sale

Silver Linings Playbook - H - 2012

The next few months figure to be a rocky one in Hollywood. And if the coronavirus pandemic gets worse, there could be bankruptcies. If that happens, many Hollywood stars could be at risk of being deprived of expected profits from movies and television shows. Witness a decision made Friday by a Delaware federal court.

The dispute emanates from the Chapter 11 bankruptcy of The Weinstein Co., which itself was precipitated when Harvey Weinstein was outed as a serial rapist. Once in bankruptcy, the debtor sold most of its assets to Spyglass Media (formerly known as Lantern Entertainment) for $287 million. But not everyone was happy with the deal. There were many individuals and companies who wanted assurances they'd be getting everything owed under profit participation deals. The list included Bradley Cooper, Jennifer Lawrence, Robert De Niro, Quentin Tarantino, Meryl Streep, Bill Murray and Julia Roberts.

Spyglass decided to go on offense.

As a test case, Spyglass sued Silver Linings Playbook producer Bruce Cohen and sought a determination that his contract was not executory, meaning that obligations under the deal had been substantially performed. If Spyglass was correct, that meant it could be assigned Cohen's contract free and clear of any claims. Spyglass anticipated that the resolution of this dispute would aid in determining the executory nature of similar contracts.

In January 2019, a Delaware bankruptcy judge ruled in Spyglass' favor.

That decision was appealed by Cohen and many of the stars who worked on Silver Linings Playbook, including Cooper, De Niro and director David O. Russell.

The appeal then attracted an amicus brief from the Directors Guild of America, SAG-AFTRA and the Writers Guild of America West. According to the guilds, the entertainment industry had witnessed a surge of bankruptcies of late (e.g. Relativity, Open Road, etc.) and there should be no "perfunctory per se rule that finds entertainment industry personal service agreements to be nonexecutory once the underlying project is completed."

The guilds added that depriving them of contingent or deferred compensation would be "a severe blow, greatly diminishing their return in exchange for providing the very services that created product value in the first place."

Unfortunately for the talent working on Silver Linings Playbook as well as other directors, writers and actors in the entertainment community, a Delaware district court on Friday affirmed the bankruptcy judge's decision.

"The Court finds no error in the Bankruptcy Court’s application," states the opinion (read here). "First, the primary purpose, or 'root' of the Cohen Agreement, which is self-described as a work-for-hire agreement, was the production of the film and the transfer of rights of authorship such that TWC could exploit such rights without concerns about claims from the Cohen Parties. The Cohen Agreement provides that the transfer of authorship rights occurred upon its execution. The material obligations under the Cohen Agreement were performed in 2011 and 2012 — in 2011, when the intellectual property and other rights to and under the film were transferred to the Debtors at the time the parties executed the Cohen Agreement, and in 2012 when the film was produced and released. The film was released on November 16, 2012, and there is no question that the Cohen Parties performed their production services for the film almost six years prior to the Petition Date. In exchange, the Cohen Parties received fixed compensation and contingent compensation. After the film was released, the only obligations remaining under the Cohen Agreement were ancillary and could not be material."

The federal court rejects arguments that the ongoing nature of contingent compensation and other terms of the contract such as Cohen's ongoing obligation not to interfere with distribution is cause for a different interpretation.

It's possible that the ruling could see further appeal. In the meantime, the outcome here figures to impact future dealmaking in Hollywood and could be a notable development as the industry at large hits rocky economic times brought upon by a health calamity.