Judge to Rule Wednesday on Possible David Bergstein Case Dismissal

Call it Durkin's dilemma.

Ronald Durkin, the trustee appointed by the federal bankruptcy court in 2010 to oversee Capitol, ThinkFilm and three other companies controlled by David Bergstein forced into Chapter 11 bankruptcy (reorganization), has apparently become frustrated after his motion was denied on Sept. 7 to take hands-on control of a dozen subsidiaries where the real assets in the businesses -- including rights to about 1,000 movies -- have been moved.

So Durkin will be in court Wednesday for a hearing on his new motion to convert the entire case into a Chapter 7 bankruptcy liquidation -- which is his recommendation -- but failing that offering the judge the option to dismiss the entire case. Durkin also offers the possibility that the creditors might have a better plan and states a willingness to hear their ideas.

Durkin writes in his pleading that given the judge's ruling denying him control of the corporate off spring and the poor financial condition of the companies he does control (which have about $75,000 in cash and millions in debts), the "bankruptcy estates have no business to reorganize."

That brought predictably mixed responses. The creditors group that originally brought the involuntary bankruptcy action, led by Aramid Entertainment Fund , the major Hollywood guilds and others, angrily responded with motions against the conversion and especially against a dismissal.

Attorneys for Bergstein and his former business partner Ronald Tutor, who according to court filings has bankrolled both his legal team and Bergstein's, filed motions encouraging dismissal of the cases. Tutor's filing notes that he is still the largest secured creditor in the case, since there has never been a ruling that he is actually a corporate insider.

In an opposition filing from Aramid, supported by about ten others owed money by the bankrupt companies, the creditors asked for time to present their own plan for a Chapter 11 reorganization, and said they were working on an offer to inject as much as $4 million into the bankrupt companies to make their plan work – under a new trustee.

"The motion to convert, if granted, would reward David Bergstein and Ronald Tutor for filing demonstrably false and misleading declarations, obstructing all efforts by the Trustee to obtain information and take action in these cases," said the creditors group in their filing, "and diverting (or wrongfully encumbering) all of the assts of these estates to the detriment of all the creditors."

The trustee filed a motion opposing giving these creditors more time to fashion their plan to reorganize. That motion for a delay will be among the first items Judge Russell is expected to rule on Wednesday.

If the judge grants Aramid and those creditors a delay, everything else would be put on hold as well. If he denies the Aramid creditors group request, Judge Russell would be expected to rule on the Trustees motion to convert or dismiss.

In a filing on behalf of the DGA, WGA West and their related pension funds, the guilds note the point of any bankruptcy is supposed to be to help creditors recover what they are owed.

"Only the debtors insiders (former or otherwise) would benefit by dismissal or conversion," said the guilds.

"This is not a case where conversion or dismissal is sought by creditors seeking to vindicate legitimate rights," the guilds stated, "but rather the conversion/dismissal motion demonstrates the limits of the trustees appetite for continuing in an environment poisoned by the tactics of former management."

The Aramid-led creditors also suggest the Trustee is simply tired of the fight, calling Durkin's motion an "acknowledgement of the trustee's 'fatigue' in these cases – not particularly surprising in light of the resources available to Messer's Bergstein and Tutor – and a statement...that the game-playing, stonewalling and malfeasance will continue not withstanding the actions of the Trustee (or this Court)."

The reference to "resources" is because Tutor has shown a willingness to spend seemingly unlimited sums on lawyers to fight these cases and hinder the trustee and other creditors.

There is no question it has been an expensive battle for Tutor, but one he apparently feels he must fight. In a separate case involving the former Zwirn hedge fund, a filing made Oct. 6 in L.A. Superior Court appears to say Bergstein still owes Zwirn at least $2.5 million.

More importantly, it confirms the settlement Tutor reached with Zwirn on May 17, on the eve of a trial, which THR had reported was for $70 million. The filing reveals Tutor actually paid $75 million in that case alone.

In the involuntary bankruptcy, Tutor's attorneys argue, their client remains the largest creditor by far and thus the judge should be doing what is in his interest as a creditor. "These (companies) should never have been in bankruptcy," argues the attorney for Tutor and two companies he controls, "should not be in bankruptcy now, and all parties...would be better served by dismissal rather than conversion."

The Tutor filing dismisses the whole bankruptcy case as "little more than a two party dispute that has been unnecessarily (and expensively) placed into bankruptcy."
In his filing, Bergstein calls on the court to "put an immediate end to these improperly filed Chapter 11 cases," and calls for dismissal, not conversion.

Bergstein gives four reasons for this: that the Trustee says there is nothing to reorganize, that secured creditors (Tutor) who are not petitioners in the case hold massive liens on all assets, that Aramid acted improperly by colluding with his former attorney Susan Tregub (whom he is suing separately in state court) and that the U.S. Trustee said in a filing that he favors dismissal.

The U.S. Trustee's brief filing does support dismissal, but mostly because about $2,500 in fees owed to the trustee's office had not been paid. Since then Aramid paid those fees.

When Russell turned down Durkin's Sept. 7 request, the judge said the trustee could return and file separate requests to take control of each subsidiary.

So in case the judge decides Wednesday not to grant the conversion motion, or to dismiss the case, Durkin separately filed a motion asking for authority to take control of Pangea Media Group, which was until the bankruptcy Bergstein's main operating company among more than 75 inter-locking corporations. That is scheduled to be heard on Nov. 30.

If he gets control of Pangea, Durkin said he will immediately put it into bankruptcy so the court can appoint a trustee to manage those assets.

This Pangea motion is seen as a test case. If it goes forward, the trustee would then begin to file other motions, making his case to take control of each subsidiary and its assets.

Unless the Judge does choose to support Trustee's motion to take control of Pangea, the end could be in sight for Durkin's involvement in the case. If there is a conversion to Chapter 7, the creditors would have the right to elect a new trustee – and it seems unlikely either the Aramid led group or the Tutor side would want Durkin again, since he has frustrated both sides.

That means after some 19 months of labor, Durkin would have to walk away without ever being compensated for his work or that of his team of lawyers and accountants – all of whom were paid for out of his own pocket. That's how the law works. Durkin only gets paid if he can extract the assets from the businesses placed in Chapter 11 and under his trust. His motion to convert or dismiss suggests he doesn't believe he can ever do that.

Durkin knew when he took on these complicated cases with bitterly adversarial parties on all sides that there was a risk he might never be paid. Now that is his dilemma.