Intro

Everyone is likely familiar with the chapter 11 bankruptcy of The Weinstein Company (“”TWC“), an former film and production studio that previously produced and distributed featured films and premium television content internationally.  On March 19, 2018 (the “Petition Date“), TWC was forced to file bankruptcy following numerous claims of private misconduct against its co-founder, Harvey Weinstein, that disrupted TWC’s operations.

TWC’s bankruptcy filing was intended to facilitate the sale of TWC’s assets to Spyglass Media Group, LLC. (“Spyglass“), pursuant to section 363(f) of the Bankruptcy Code, which allows various categories of assets to be sold free and clear of any liens, claims, interests or encumbrances.

After the sale was consummated, a group of film investors (the “Objecting Investors“) requested that the bankruptcy court unscramble the sale and determine that Spyglass actually acquired, and assumed liabilities under, several investment contracts with the Objecting Investors.  See In re Weinstein Company Holdings LLC, et al., Case No. 20-1878 (3rd Cir. May 21, 2021) (precedential).  Both the bankruptcy court and district court disagreed.

On appeal, the Third Circuit affirmed, but attributed much of the confusion to the nature of complex bankruptcy sales, which are consummated quickly and require the use of specialized terminology.   A study of the case demonstrates the complicated nature of this transaction and the cause for diligence by the Objecting Investors.

Facts

Complex Business

Prior to its bankruptcy, TWC was a complex, multidimensional entertainment company, whose business consisted of numerous, separate entities for many individual projects and assets.  The financing for these individual projects and assets was also complex, consisting of corporate-level and project-level debt.

TWC’s assets were not traditional hard assets; rather, they consisted primarily of intellectual property, distribution rights, and cash flows related to TWC’s film library, television production, and portfolio of unreleased films.

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

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

Asset Purchase Agreement

On the Petition Date, TWC entered into an asset purchase agreement (the “APA“) with Spyglass, pursuant to which Spyglass ultimately paid $287 million for substantially all of TWC’s assets.

The APA contained, in pertinent part, a subcategory of purchased assets, consisting of assumed contracts, which Spyglass would designate as being those agreement that it wanted to buy and assume. Specifically, Section 2.8 of the APA provided:

Section 2.8(a) of the Disclosure Schedule sets forth a list of all executory Contracts relating to the Business or the Purchased Assets to which one or more of Seller Parties [TWC] are party (the “Available Contracts”) . . . and which may be updated from time to time after the Execution Date by the Seller Parties to add any Contracts not included on such schedule as of the Execution Date.  . . .  Prior to the Closing Date, Buyer [Spyglass], in its sole discretion by written notice to the Seller Parties, shall designate in writing which Available Contracts . . . relating to the Business or the Purchased Assets that Buyer wishes to “assume” (the “Assumed Contracts”) and subject to the right of Buyer, at any time prior to the Closing Date, Buyer may, in its sole discretion, determine not to “assume” any Available Contracts previously designated as an Assumed Contract. All executory Contracts of the Seller Parties that are listed on Section 2.8(a) of the Disclosure Schedule as of the Closing Date and which Buyer does not designate in writing for assumption shall not be considered Assumed Contracts or Purchased Assets and shall automatically be deemed “Excluded Contracts” (and for the avoidance of doubt, Buyer shall not be responsible for any related Cure Amounts related to any Excluded Contracts).

The sale closed four months after the Petition Date, but Spyglass was given an additional four months after closing to designate which contracts it would assume.

Investment Contracts

The Objecting Investors had provided funding to TWC through twelve sets of investment agreements (the “Investment Contracts“), each relating to a different film.  In exchange for their upfront contribution under the Investment Contracts, the Objecting Investors were to receive a share in the funded film’s profits. But, they were not assigned any of TWC’s intellectual property in the films covered by the Investment Contracts.  Furthermore, while the film profits were pledged to the Objecting Investors, the parties were not deemed to take such pledges seriously, as none of the security interests granted were perfected on the Petition Date.

Dispute

The dispute with the Objecting Investors revolved around which assumed contracts Spyglass actually elected to purchase and stemmed from confusing notices that were filed with the bankruptcy court.

For example, a couple of months after entering into the APA, TWC filed with the bankruptcy court a final list of potential assumed contracts that purported to identify the assumed contracts that Spyglass had chosen.  This final list was over 2,000 pages long and listed tens of thousands of contracts.  While the final list included the Investment Contracts, it contained a disclaimer that it did not constitute an admission that any listed contract was, in fact, executory (and thus assumable).

TWC later tried to remove the Investment Contracts by subsequently filing a pre-closing list of non-executory contracts that were being removed from the final list of assumed contracts.  This list identified eight Investment Contracts as being non-executory.

Post-closing, Spyglass similarly filed a list of excluded contracts that were not being assumed, but this time identified nine Investment Contracts.  In the last two notices, not all of the Investment Contracts were identified as being excluded.

The Objecting Investors had been silent about everything until about six month after the closing, when they sent Spyglass a demand for payment owed under one of the Investment Contracts.  When Spyglass refused to pay, the Objecting Investors filed a motion in the bankruptcy court seeking a judgment that Spyglass had purchased all of the Investment Contracts.

The bankruptcy court denied the Objecting Investors’ motion and the district court affirmed on appeal.  On further appeal, the Third Circuit Court of Appeals similarly affirmed.

Analysis

The Third Circuit held that the Investment Contracts were not assumed contracts under the APA for several reasons, based on the APA language and bankruptcy law.

First, the Court found that Section 2.8 of the APA, the governing provision, clearly limited assumed contracts to executory contracts and thus could not have included the Investment Contracts, which were admittedly not executory (as the Objecting Investors had already performed all obligations thereunder).

Second, irrespective of the APA, the Court found that (a) the Bankruptcy Code only allowed debtors, like TWC, to assume and assign executory contracts (which, again, could not include the Investment Contracts) and (b) the Objecting Investors had not demonstrated that the APA had deviated from the restrictions under the Code.

Third, the Court found that, irrespective of the flawed lists and notices filed by TWC and Spyglass, because non-executory contracts could not be assumed contracts, as defined in the APA, the Investment Contracts could not be assumed contracts under the APA, and external lists and notices could not change this result.

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

. . . mistakenly listing non-executory Contracts on a behemoth schedule meant to include only executory Contracts hardly suffices as explicit intent to purchase them.

The Court lastly addressed the back-door 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 related schedules.  Here, the Court found that the APA’s definition of “excluded liabilities” expressly excluded “all liabilities arising under any Contract that is not an Assumed Contract [as defined in the APA]” and the definition of “excluded assets” in the APA contained a similar cross-reference.  In any instance, the Court found that this back-door argument was illogical and defied common sense, as it would make every non-executory contract assumed by default, unless expressly excluded.

The Third Circuit concluded:

Ultimately, the Investors’ arguments amount to a “gotcha”—that Spyglass accidentally purchased the Investment Agreements due to a foot fault. For us to conclude that it agreed to assume significant liabilities under non-executory contracts with no obvious benefit, we need clear language in the APA or an unambiguous indication of Spyglass’s intent to do so.

Takeaway

Bankruptcy sales involving large companies are often complicated by several factors and thus may be challenging to follow by non-debtor parties that might be affected by such sales.  For instance, as demonstrated in the Weinstein Company case, different Bankruptcy Code provisions govern the transfer of different types of assets, whether hard assets or contractual rights.  Even within the contractual rights category, the applicable Code provision depends on whether contracts are executory and non-executory.

Layered on top of that is the notion that an asset purchase agreement may not be fully-completed before an actual bankruptcy filing occurs.  There are often ongoing negotiations after an assets purchase agreement is entered into, in attempts to ascertain what exactly is being purchased or assumed as a liability.

Furthermore, overlying everything is the common need to consummate bankruptcy sales quickly, due to the administrative costs of remaining in bankruptcy.  Buyers often will not agree to fund these administrative costs, and debtors often cannot afford to fund such costs themselves.  This “need for speed” is conducive to situations where asset purchase agreements are not “fully-baked” upon their first announcement to a bankruptcy court, meaning such agreements are continuing to be negotiated for business reasons, at the same time that parties are attempting to comply with Bankruptcy Code restrictions.

As demonstrated by the Weinstein Company case, the “need to speed” often leads to a disconnect between what is filed with the Court and what is agreed to by the parties.  The only solution for a non-debtor party, like the Objecting Investors in Weinstein Company, is careful vigilance at every step in the process.