Weinstein Affair Demonstrates Difficulty Tracking Complex Bankruptcy Sales | Dorsey & Whitney LLP

Everyone is probably familiar with The Weinstein Company Chapter 11 bankruptcy (“TWC“), a former film and production studio that previously produced and distributed feature films and premium television content internationally. March 19, 2018 (the”Date of petition“), TWC was forced to file for bankruptcy following numerous private misconduct complaints against its co-founder, Harvey Weinstein, which disrupted TWC’s operations.

TWC’s bankruptcy filing was intended to facilitate the sale of TWC’s assets to Spyglass Media Group, LLC. (“Telescope“), in accordance with Article 363 (f) of the Bankruptcy Code, which allows the sale of various classes of assets free of any lien, claim, interest or charge.

Once the sale was completed, a group of film investors (the “Opposing investors“) requested that the bankruptcy court unwind the sale and determine that Spyglass has in fact acquired and assumed several investment contracts with the opposing investors. See In re Weinstein Company Holdings LLC, et al., Case n ° 20-1878 (3rd Cir. May 21, 2021) (previous). The bankruptcy court and the district court disagreed.

On appeal, the Third Circuit asserted, but attributed much of the confusion to the nature of complex bankruptcy sales, which are consumed quickly and require the use of specialized terminology. The study of the file demonstrates the complicated nature of this operation and the reason for diligence of the Objecting Investors.

Complex business

Prior to bankruptcy, TWC was a complex, multi-dimensional entertainment company, the business of which consisted of many separate entities for many individual projects and assets. Funding for these individual projects and assets was also complex, consisting of corporate and project-level debt.

TWC’s assets were not traditional durable assets; instead, they consisted primarily of intellectual property, distribution rights, and cash flow from TWC’s film library, television production, and portfolio of unreleased films.

For example, TWC owned the rights to over 275 films and each typical film could involve hundreds of contracts with continuing obligations. TWC estimated that the net cash flow of its film library alone could have reached $ 151 million in 2018.

To further complicate its business, the ownership of some rights to 191 films was transferred to an independent entity, as part of a debt restructuring in 2010.

Asset purchase contract

As of the date of the petition, TWC entered into an asset purchase agreement (the “APA“) with Spyglass, under which Spyglass ultimately paid $ 287 million for substantially all of TWC’s assets.

The APA contained, in a relevant part, a subcategory of purchased assets, made up of assumed contracts, which Spyglass would designate as the agreement it wished to purchase and assume. More specifically, Article 2.8 of the APA provided:

Section 2.8 (a) of the Disclosure Schedule sets out a list of all Binding Agreements relating to the Business or the Purchased Assets to which one or more Selling Parties [TWC] are parties (the “Available Contracts”). . . and which may be updated from time to time after the execution date by the selling parties to add any contracts not included in this schedule to the execution date. . . . Before the closing date, the buyer [Spyglass], in its sole discretion by written notification to the Selling Parties, will designate in writing which Contracts Available. . . relating to the business or assets purchased that the purchaser wishes to “assume” (the “deemed contracts”) and subject to the rights of the purchaser, at any time before the closing date, the purchaser may, at its At its sole discretion, decide not to “assume” any available contract previously designated as a supported contract. Any binding selling party contracts that are listed in section 2.8 (a) of the Disclosure Schedule at the Closing Date and which the Buyer does not designate in writing for takeover will not be considered to be assumed contracts or contracts. assets purchased and will automatically be considered “Excluded Contracts” (and for the avoidance of doubt, the buyer will not be responsible for repair amounts related to excluded contracts).

The sale was completed four months after the date of the petition, but Spyglass was given an additional four months after closing to designate the contracts it would assume.

Investment contracts

The Opposing Investors had provided funding to TWC through twelve sets of investment agreements (the “”Investment contracts“), each relating to a different film. In return for their initial contribution under the investment contracts, opposing investors were to receive a share of the profits of the funded film. But no intellectual property from TWC on the films covered by the investment contracts were not ceded to them. In addition, while the film’s profits were promised to opposing investors, the parties were not deemed to take these promises seriously, as none of the collateral granted was perfect at the time. of the petition.


The dispute with opposing investors revolved around the alleged contracts Spyglass had effectively chosen to purchase and stemmed from muddled opinions filed with bankruptcy court.

For example, a few months after entering into the APA, TWC filed in bankruptcy court a final list of suspected potential contracts that purported to identify the alleged contracts Spyglass had chosen. This final list was over 2,000 pages long and listed tens of thousands of contracts. While the final listing included investment contracts, it contained a disclaimer stating that it was not an admission that a listed contract was, in fact, enforceable (and therefore presumed).

TWC then attempted to withdraw the investment contracts by subsequently filing a pre-close list of non-enforceable contracts that were removed from the final list of supported contracts. This list identified eight investment contracts as non-enforceable.

After the close, Spyglass also filed a list of excluded contracts that were not supported, but this time identified nine investment contracts. In the last two opinions, not all investment contracts were identified as being excluded.

Opposing investors remained silent on everything until about six months after the close, when they sent Spyglass a demand for payment due under one of the investment contracts. When Spyglass refused to pay, opposing investors filed a petition in bankruptcy court for a judgment that Spyglass had purchased all of the investment contracts.

The bankruptcy court rejected the petition of the objecting investors and the district court upheld on appeal. On a new appeal, the Third Circuit Court of Appeals confirmed the same.

The Third Circuit ruled that the investment contracts were not deemed contracts under the APA for several reasons, based on the language of the APA and bankruptcy law.

First, the Court concluded that Article 2.8 of the APA, the applicable provision, clearly limited the deemed contracts to enforceable contracts and therefore could not include investment contracts, which were admittedly not enforceable (since the opposing investors had already fulfilled all the resulting obligations).

Second, apart from the APA, the Court concluded that (a) the Bankruptcy Code only allowed debtors, like TWC, to assume and assign enforceable contracts (which, again, could not include contracts investment) and (b) the opposing Investors had failed to demonstrate that the APA had departed from the restrictions provided for in the Code.

Third, the Court concluded that, regardless of the erroneous listings and opinions filed by TWC and Spyglass, since non-enforceable contracts could not be deemed contracts, as defined in the APA, investment contracts were not could not be deemed contracts under the ABS, and external lists and opinions could not change this result.

Fourth, while recognizing that non-enforceable contracts could be sold and purchased under section 363 of the Code – as evidenced by a contract with another party (Cohen), the Court concluded that such treatment required an intention clear of Spyglass, which was missing in this case. Indeed, the Court declared:

. . . mistakenly listing non-enforceable contracts on a giant calendar supposed to include only enforceable contracts barely suffices as an explicit intention to buy them.

The Court finally addressed the roundabout argument that the investment contracts must have been purchased by Spyglass, because they were not specifically listed or identified as “excluded liabilities” or “excluded assets” in the APA and the related annexes. Here, the Court concluded that the APA definition of “excluded liabilities” expressly excluded “all liabilities arising out of any contract which is not a assumed contract. [as defined in the APA]”And the definition of“ excluded assets ”in the APP contained a similar reference. In any case, the Court found this roundabout argument to be illogical and defied common sense, as it would render any contract presumed unenforceable by default, unless it is expressly excluded.

The third circuit was concluded:

Ultimately, investor arguments are an “embarrassment”: Spyglass accidentally bought the investment deals due to a foot fault. In order for us to conclude that he has agreed to assume significant responsibilities under non-binding contracts without obvious benefit, we need clear language in the APA or an unambiguous indication of the intention to Spyglass to do it.

Bankruptcy sales involving large companies are often complicated by several factors and therefore can be difficult to track by non-debtor parties who might be affected by such sales. For example, as demonstrated in Weinstein Company In this case, different provisions of the Bankruptcy Code govern the transfer of different types of assets, whether they are material goods or contractual rights. Even within the category of contractual rights, the applicable provision of the Code depends on whether contracts are enforceable and not enforceable.

Added to this is the notion that an asset purchase contract may not be fully concluded until a bankruptcy filing occurs. There are often negotiations going on after an asset purchase contract is concluded, with the goal of determining what exactly is purchased or assumed as a liability.

In addition, above all, there is the common need to consume bankruptcy sales quickly, due to the administrative costs involved in maintaining bankruptcy. Often, buyers will not agree to finance these administrative costs, and debtors often cannot afford to finance these costs themselves. This “need for speed” is conducive to situations where asset purchase agreements are not “fully concluded” when they are first announced in bankruptcy court, which means that these agreements continue to be negotiated for. for business reasons, at the same time that the parties try to comply with the restrictions of the Bankruptcy Code.

As demonstrated by Weinstein Company In this case, the “need to speed up” often leads to a mismatch between what is filed with the court and what is agreed upon by the parties. The only solution for a non-debtor party, such as Investing Investing in Objecting Weinstein Company, is careful vigilance every step of the way.

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