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From the Archives: Hollywood or Bust — What If Your Producer or Distributor Goes Bankrupt?

This article, written by Bergen Swanson, originally appeared in our Winter, 2002 issue.

YOU’VE DONE IT! The screenplay you’ve been slaving over for months has finally been optioned by an edgy production company noted for offbeat films. Or, the movie that has consumed your life for the past two years has been picked up by a noted distributor. Emptying out your savings, selling your comic book collection, sleeping on friends’ couches – it’s all been worth it. But then the unthinkable happens. The company that bought your film or script files for bankruptcy, and your project gets thrown into legal limbo, possibly never to see the light of day.

A far-fetched scenario? The sudden demise of companies like The Shooting Gallery and, most recently Propaganda Films, the noted commercial and film production house and home for filmmakers like Spike Jonze, reminds us all of the financial instability of independent film. And although ex-executives and lawyers are reluctant to comment on record, these companies — and the scores of lesser known ones that have been cratered during this entertainment industry recession — controlled dozens of projects, whether they be acquired books, optioned screenplays or produced or acquired films. The acquisitions or production executives, the “friends of the filmmaker,” who brought those projects into their companies and have been pink-slipped away, and anxious independents have now been left to bargain with bankers and court appointed trustees in order to regain the rights to their material.

Although it can be difficult to disentangle one’s work once a company has entered bankruptcy, by understanding bankruptcy and its legal workings when first negotiating his or her deal, a filmmaker can obtain some degree or protection should a production or distribution company go belly up.

There are two types of bankruptcy that affect a filmmaker: chapter 11 and chapter 7. In chapter 11 bankruptcy, a company is reorganized so that it will continue to operate. In this scenario, those that are owed financial compensation “line up” with everyone else in that same situation. As profits are generated from the company’s operations, then the creditors, which may include you if your project previously generated revenue which you have yet not received, are paid off.

In chapter 7 bankruptcy the company ceases to operate and its assets — not only its real estate, computers and copy machine but also your screenplay or movie — are liquidated to pay off debts, which may include everything from bank loans to distribution overages. A recent example of this situation concerns Julie Johnson, a film starring Lili Taylor, Courtney Love and Spalding Gray. The Shooting Gallery financed the project from a Wendy Hammond play for Bob Gosse to direct. It has played in several key festivals, including Sundance and Berlin, and picked up some awards. But as an arrangement with Universal Focus, part of The Shooting Gallery’s overall output deal, for an October release was being worked out, things went sour. Serious financial issues caught up to The Shooting Gallery, and the company was forced to file bankruptcy.

Amy Nickin, a lawyer currently of Barnes, Morris, Klein, Mark & Yorn who formerly ran business affairs for the entertainment division of The Shooting Gallery, explains: “Julie Johnson was never actually released. What will happen [to that film] is that people in the film community will go to the bank, or in this case the [court-appointed] receiver, and the receiver will determine what a fair market value is for that project, and people will negotiate. Basically, they’ll get a deal on buying that film” “But in practice that’s not what is going on,” Gosse claims. “I don’t know if [the receiver] just hasn’t gotten to it yet, which is entirely possible. I’m sure it’s a tiny piece of paper on a desk. We’ve had bids on Julie Johnson from Strand (Releasing), Home Box Office and Showtime. Why wouldn’t they want to liquidate the [companies] assets, even if it’s just pennies on the dollar?”

Although Gosse was paid his director’s salary, he still isn’t comfortable with the situation. “it’s horrible. It’s very disappointing because it’s a good film. I’m very proud of it.” Yet, the hope is still there, when he adds, “Maybe it’ll still come out.”

But Gosse also understand the nature of the business. “I have no claim to [the film], because who am I?” he says. “I just wrote it and directed it. They paid me and [said], “‘Thank you and goodbye.'”

Philosophically, he adds, “The business has changed so much since The Shooting Gallery started. These kind of events, these consolidations and bankruptcies, are an inevitable part of the shifts in the business.”

To anticipate the risks, and to prevent one’s material from being tied up in a bankruptcy court, there are precautions a filmmaker can take. “Obviously, investigate and research the reputation of the company,” advises Nickin. “Determine how the companies finances their development, how they generally finance production. Is it through private investors or bank investors? What you’re tying to do is determine who is going to own these rights at the end of the day. If everything fails in the company, where are the right going to end up? Indeed, filmmakers who have signed a deal with a Vans-wearing CEO may really discover that their rights are really controlled by a bunch of investment bankers in the midwest. (Something similar happened to Propaganda Films when the Pennsylvania investment group that bought the company abruptly decided to pull the plug.)

Another strategy would be to include a “key man” clause in an option or purchase agreement. This basically states that a particular project or element is tied to a particular person remaining at that company. If that person is no longer at the company then the owner of the company has a contractual right to terminate the agreement. But this negotiation point is usually very difficult to earn because it goes against the broader corporate interests of the studio or production company the contract is with.

Also important is the length of the option or license period. For the filmmaker in all cases, shorter is better. Nickin cites a recent example. “Everyone knew [a certain company] was in trouble because they weren’t paying writers. So, now would not be the time to enter into a deal with them. But if you were going to enter into one, then you would do a short option period. You could be assured if something were to happen [with your project] it would happen sooner rather than later when the entire company fell apart.

“Really pay attention to the reversion and turnaround,” Nickin continues. Applying to mostly screenplay deals, “reversion” means that if, after a certain period of time, the company does nothing with the project, the rights to it revert back to the whomever originally controlled it. Or, filmmakers can ask for a “progress to production” clause, which obligates the company to steadily to move the project along (by hiring casting directors, making offers to actors, etc.) or else have the project revert back to its original rights holder. A “turnaround” clause ensures that, if the project is “abandoned” by the acquiring company, the filmmaker or the original rights holder is able to shop it around to other companies who can then acquire it by reimbursing, in some form, development costs. “Turnaround should always be negotiated for if you have the ability,” Nickin advises.

Andrew Hurwitz, an entertainment attorney with Epstein, Levinsohn, Bodine, Hurwitz & Weinstein, adds that there is one key concept filmmakers should keep in mind when trying to protect themselves from a future bankruptcy. “A lot of filmmakers are advised to add language to the contract saying that in the event of bankruptcy it’s terminable,” he notes. “And that’s basically unenforceable because the courts will not allow you to terminate contracts because of financial condition of the debtor. For example, add the language that says, ‘In the event you cease to distribute the film or you don’t distribute the film in 25 markets or you don’t pay x amount of P&A….’ If they don’t meet those things you can go to the bankruptcy court and ask to have license terminated by arguing that they breached contract, and not because their financial condition is such that you need relief. That’s very important distinction for people to be aware of.”

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