It’ll Be Back

You’ll find egos in any business, but—and with apologies to Irving Berlin—there are no egos like show egos.

When most companies go bankrupt, for example, rarely do outside parties weigh in. But that’s exactly what happened in the late 1990s when the rights to make Basic Instinct 2 were being auctioned and Paramount Pictures told the bankruptcy court that the star, Sharon Stone, had committed to make the movie for them but not for any other studio. Of course, when the rights were purchased by MGM, Stone wound up making the film anyway.

That’s just one of the many stories from Howard Weg and David Shemano, of Peitzman, Weg & Kempinsky, a Los Angeles-based bankruptcy, restructuring and business litigation firm that represents entertainment companies such as Warner Bros. Pictures and the Motion Picture Corporation of America, as well as oil and gas, real estate, and other industries.

Business in Hollywood, says Weg, “is among the most risky of businesses, because there is no rhyme or reason. No one can tell you why one film becomes a huge commercial success or failure.”

Weg and Shemano saw this firsthand when they represented Carolco Pictures, which produced the hugely successful Rambo movies in the 1980s and Terminator 2: Judgment Day in 1991. Then it made Cutthroat Island, a 1995 pirate movie starring Geena Davis and directed by her then-husband Renny Harlin. The movie cost $100 million and took in less than $10 million—and the company didn’t have the liquidity to survive.

“This is not fixtures or equipment,” Weg says. “It’s not gas in the ground and electricity in the wires. It’s so ephemeral. Somebody thinks something up in their heads and turns it into a script, or they take a Philip K. Dick story and turn it into a franchise like Total Recall.”

Because of this, Weg and Shemano’s practice requires them to understand other areas of law in order to break up companies and sell off assets that you can’t hold in your hands—including Spider-Man and The Terminator.

“The interaction of intellectual property with the bankruptcy code and insolvency is very unique and complex,” says Shemano. “We’re required to know just as much about IP as IP lawyers.”

“Sometimes more,” adds Weg.

The most familiar bankruptcy pattern in the movie industry, according to Weg, is the production company that starts out small, conservative and under budget until it has its first success—after which it begins gambling. They sign bigger names, pay too much for rights and take on larger and larger monthly expenses with money borrowed against films in production. Shortly thereafter they need Weg and Shemano.

“Can we restructure the debt or bring in new investors?” Weg says. “Cut off production or sell assets? Sometimes we have to conclude that no one will do business with this company again.”

“It’s cold-blooded economics mixed with personalities and relationships,” says Shemano.

The key, both men say, is understanding the dynamics of the industry, who the players are, and how they will react to proposals. This is where the movie industry is very much like any other business.

“Your best bankruptcy lawyers, in any industry, ask ‘How do you help people create a solution where they … are getting the most they can possibly get?’” Weg says. “You need to convince them that if they band together they will get more than if they go after each other.”

Among the projects they have seen through more than one bankruptcy is the Terminator movie franchise.

In 1996, after Carolco filed for Chapter 11, two of its former partners, Mario Kassar and Andrew Vajna, formed C2 Pictures, which purchased the company’s half-interest in the property for approximately $8 million. Then it purchased the other half, also for approximately $8 million, from producer Gale Anne Hurd, Terminator director James Cameron’s ex-wife.

After making Terminator 3: Rise of the Machines, Vajna and Kassar went their separate ways and C2 Pictures sold the rights to make all future Terminator films to Halcyon Holding Group, which borrowed $30 million from a hedge fund named Pacificor in order to finance films in production, including Terminator Salvation.

Though that film ultimately grossed $375 million after its release in early 2009, Pacificor threatened to foreclose on Halcyon’s debt and the company was without sufficient income to make the large payments. So Halcyon’s corporate counsel, along with entertainment attorney Tom Hunter, brought in Weg and Shemano’s firm to protect the company’s most valuable asset: the right to make more Terminator movies.

By filing for Chapter 11 and utilizing its automatic stay provision—which puts all actions against the debtor on hold—the firm was able to keep the creditor from seizing the movie.

“The hope is that there will be assets left for the equity holders in the company after all the claims have been satisfied,” says Hunter, a Los Angeles-based solo practitioner. “They were able to reach a very creative settlement with Pacificor where Halcyon was able to keep any money that came in from the exploitation of Terminator 4 to pay off creditors and then sell the [future Terminator rights] in a way that maximized the return to the company.”

Ultimately the hedge fund used $29.5 million of the now $38 million debt it claimed it was owed to purchase the rights to make Terminator 5. Additionally, it agreed to pay $5 million each time a sequel began production.

It’s a scenario that plays out time and again. All of the money, risk and ego involved take everyone’s eye off the ball and leave the two bankruptcy attorneys asking a question that reminds everyone why they came to Hollywood in the first place.

“Are we going to make more litigation?” they ask. “Or are we going to make a movie?”