Weinstein Company Bankruptcy Would Be a Costly, Drawn-Out Mess

Harvey Weinstein

If the Weinstein Co. follows through on its plan to declare bankruptcy, it would be a costly and painful process that would leave banks, investors, creditors, and sexual harassment victims scrambling to get paid.

The company announced Sunday that it was preparing the paperwork to file for bankruptcy, following the collapse of negotiations to sell the company to an investor group backed by billionaire Ron Burkle. Though the talks may well resume, the company is in an extremely precarious financial position.

The indie studio’s looming financial failure is an ignominious turn of events for a company whose brand has been fatally tarnished by a sexual misconduct and abuse scandal involving its co-founder Harvey Weinstein. However, Chapter 11 protection could complicate the efforts of Weinstein’s alleged victims to receive financial compensation for the abuse they claim they endured, legal experts say. After lawyers are compensated and creditors are paid back, there may be little money left over to settle lawsuits. With hundreds of millions in debts and liabilities, there are plenty of people in line before legal settlements are even factored into the equation.

“The company has borrowed a lot of money,” said Mark S. Scarberry, a professor at Pepperdine University School of Law. “Depending on what their assets are, their lenders could take all of it.”

It could also be a long, drawn out process that leaves everyone the worse for wear. The $500 million deal to sell the company to the Burkle group, which is led by former Small Business Administration head Maria Contreras-Sweet, was set to be announced two weeks ago. But the pact collapsed after New York Attorney General Eric Schneiderman filed a discrimination lawsuit against the studio. Over the weekend, the Weinstein Company board announced it was ending sales talks and preparing to file for bankruptcy protection.

Larry Hutcher, an attorney at Davidoff Hutcher & Citron, criticized Schneiderman for “throwing a monkey wrench” into the potential sale with his suit. Doing so created a cash flow shortage, he argued.

“This is not a good thing for anyone,” Hutcher said. “There is absolutely zero benefit to them filing for bankruptcy. This is an act of desperation.”

The indie studio has produced Oscar-winning hits such as “The King’s Speech” and “The Artist,” but its financial picture grew stormy after reports broke that Weinstein had harassed, assaulted, or raped dozens of women. Angelina Jolie, Mira Sorvino, Rose McGowan, and Ashley Judd are just a few of the high-profile women who have shared stories of harassment by Weinstein, although his alleged victims also include former employees who are not household names. Not everyone who has accused the indie mogul has filed a lawsuit.

Any bankruptcy proceeding will take months to resolve, and will require the beleaguered company to line up bridge financing, while securing court approval to use any cash it has on its books. It is also possible that some of its remaining 130 employees will have to be let go as the process winds on and as the Weinstein Company creates a timetable for a possible auction of its assets.

Bankruptcies typically operate under a waterfall structure when it comes to paying people back from the proceeds a possible sale. The professionals who run a sale, such as attorneys and accountants, are paid in full. That is followed by secured creditors who have liens on assets, and later by unsecured creditors who are also owed money. Some legal experts believe that Weinstein’s alleged victims would fall under the unsecured creditor heading.

Other bankruptcy experts argued that any bankruptcy proceeding will carve out a compensation fund as part of any sales process. There are historical examples. During the Catholic sex abuse scandal, several dioceses filed for bankruptcy. Victims were compensated out of pools of funds with oversight from the bankruptcy court. A pool of money was set aside when Bernie Madoff’s investment firm went belly up after its Ponzi scheme was exposed or when General Motors had to file for bankruptcy while dealing with claims about faulty ignition switches on its vehicles. The GM settlements were later contested.

Before the deal collapsed, Contreras-Sweet and Burkle’s group was willing to pay $500 million and to set aside $90 million for victim compensation. It is possible that taking the company through bankruptcy will drive up the price because some bidders weren’t willing to buy the studio when there were so many liabilities associated with it, some legal experts argue.

“In a company that’s in such significant financial distress, you can see a bankruptcy increase the value received in connection with a sale,” said Robert S. Marticello, partner at Smiley Wang-Ekvall. “The price could be higher because of bankruptcy, which would therefore make it more likely that everyone suing Weinstein receives more money.”

Others were skeptical that there will be enough money to go around.

“The amount of claims will likely exceed the amount the company gets for its assets,” said Roger Friedman, an attorney at Rutan & Tucker. “The amount recovered may be insufficient to cover all the claims.”

Of course, a corporate bankruptcy won’t inoculate Harvey Weinstein from personal legal liability. That avenue will still be open to women seeking financial restitution, and the former producer has been busy off-loading seaside mansions and other properties as he braces for a legal reckoning. Nor is a possible Chapter 11 filing taking people by surprise. Jeff Herman, an attorney for two of Weinstein’s alleged victims, said his clients have been anticipating a possible bankruptcy and even see a silver lining to the tortured process.

“It kind of puts a freeze on the assets, which is not necessarily bad for us,” he said. “We’ll look at what we need to do to protect our clients’ rights.”