Production on Digital Domain Media Group’s animated feature “The Legend of Tembo” shut down when DDMG declared bankruptcy last September, and many of its freelance artists lost not only an important client but weeks of back pay.
Now some of those artists are facing the possibility of having to return some money they did receive.
Numerous artists, mainly people who were working remotely for DDMG and were considered independent contractors, have received letters asking them to return any payment they received from DDMG or face the threat of a lawsuit to recover those funds.
The letters are from law firm Brown Rudnick of New York, which represents the court-appointed Unsecured Creditors Committee in the DDMG bankrupcty. Brown Rudnick is trying to claw back any preferential payments DDMG sent out in the 90 days prior to the company’s September 11 bankruptcy. Any recovered fundswould go back into the DDMG bankruptcy estate to be split among all unsecured creditors.
That pool of unsecured creditors would then include all of those same artists, but they might receive far less than they originally were paid or were due.
Brown Rudnick provided Variety with a template for the letter. It reads in part: “The Debtors’ books and records indicate that your company received one or more Preferential Transfers in the aggregate amount of (Amount) (the “Preference Amount”) within the 90 days preceding the Petition Date. The Preference Amount, unless you have any valid defenses, must be returned to the Debtors’ estates.”
The letter asks that either payment or defenses and supporting documents be provided by April 30. It goes on to say that should they not be able to reach a resolution, the Committee “would have no choice but to commence an action” to recover those funds.
The legal issue in the case is that payments from an insolvent company not made “in the ordinary course of business” or “made according to ordinary business terms” can be considered a “preferential” payment, and therefore can be clawed back. It falls on the payees to show their payment meets the definition of “ordinary.”
However payments can only be considered preferential and subject to clawback if they’re for work done before that 90-day period. Payment for new work done during that period isn’t recoverable by the estate.
According to Brown Rudnick, such letters are going out to all companies and individuals, other than salaried employees, who were paid by DDMG during the 90 days before the Sept. 11 bankruptcy filing. Artists who can show their payment was made according to a regular schedule specified in their deal should have no problem. However if payment was irregular or long delayed, then they could be considered preferential.
Some artists and their reps report delays in payment from DDMG ranging from days to months before the bankruptcy. Payment to individuals may not be worth the legal fees it would take to recover them, but agencies or other reps who process payment for multiple clients might represent a large enough pool of funds to make litigation worthwhile.
The letter from Brown Rudnick did offer some small consolation to artists facing the possibility of having to return money they’ve been living off of for six months: A discount of 10% should they return the payments in question before the April 30 deadline.