The buyer was not responsible for the production agreement’s pre-closing liabilities because it was a non-executory contract.
M&A Stories
August 25, 2021
Introduction:
When a buyer purchases a distressed business out of bankruptcy, there are specific rules that apply, especially concerning the acquisition of the seller’s contracts. These contracts are categorized as either executory or non-executory under bankruptcy law, and the distinction has significant implications for the buyer’s liabilities.
The Deal:
In 2018, a bankrupt film company owned by Harvey Weinstein underwent a sale of its assets. Among the contracts acquired was a production agreement for the film “Silver Linings Playbook,” signed in 2011. The agreement granted the producer the rights to the film but obligated the seller to pay the producer $250,000 initially and a share of the net profits.
The buyer took over the production agreement during the bankruptcy sale, and while there was a $400,000 liability in unpaid contingent compensation owed to the producer at the time, the buyer believed the agreement was not executory, meaning the buyer was not responsible for the $400,000 liability.
The Lawsuit:
In 2018, the buyer filed a declaratory judgment against the producer, seeking a ruling that the production agreement was not executory, and thus, the unpaid contingent compensation was no longer a liability. The stakes were raised when other parties with similar contracts joined the dispute, claiming their contracts were executory, potentially leading to millions in contingent compensation claims against the buyer.
The Resolution: The dispute hinged on whether the producer had any significant remaining obligations under the production agreement. The court determined that the main purpose of the agreement was for the producer to produce the film in exchange for payment. As the producer had already fulfilled this crucial obligation by producing the movie, the court found that the remaining obligations were non-material, leading to the production agreement being classified as non-executory.
This case is referred to as In Re Weinstein Co. Holdings LLC, Nos. 20-1750 and 20-1751, United States Court of Appeals, Third Circuit, (Argued January 13, 2021. Opinion filed: May 21, 2021).
Conclusion:
The buyer of the bankrupt film company successfully acquired the production agreement free from the pre-closing liabilities, as the court ruled that the agreement was non-executory. The case highlights the importance of clarifying post-production obligations in contracts to avoid potential complications in similar situations.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
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