Transactional Lessons from the Bankruptcy Battle Over Silver Linings Playbook

• Publication year: 2022
• Author: Zev Shechtman and Daniette Gabai

TRANSACTIONAL LESSONS FROM THE BANKRUPTCY BATTLE OVER SILVER LININGS PLAYBOOK

AUTHORS

Zev Shechtman and Daniette Gabai

I. INTRODUCTION

In Spyglass Media Group v. Cohen (In re Weinstein Co. Holdings LLC),⁰¹ the United States Court of Appeals for the Third Circuit ruled that a work-for-hire contract to produce the 2012 film Silver Linings Playbook in exchange for a share of the film's future receipts was not an executory contract in the Weinstein Company's ("TWC") 2018 bankruptcy case.

An executory contract under section 365 of the Bankruptcy Code⁰² may only be assumed and assigned to a buyer if all defaults are cured or the debtor provides adequate assurance of prompt cure.⁰³ Thus, the determination that a contract is executory can make the purchase of assets from a bankruptcy estate more expensive. Whether a contract is executory can mean the difference between a contract counterparty getting paid in full, versus getting paid much less, or nothing, as a general unsecured creditor of a debtor in bankruptcy.

If a contract is determined to be non-executory, the rights of the debtor under the contract may be sold to a buyer pursuant to section 363 "free and clear" of the debtor's past obligations.⁰⁴ Accordingly, a debtor may transfer its rights and obligations under the contract, and existing defaults under the contract need not be cured.⁰⁵ If a contract is not executory, claims for breach or default existing as of the petition date are rendered unsecured claims against the debtor's estate. Holders of general unsecured claims receive a pro rata distribution of funds remaining after payments in full to holders of higher priority claims.

In this article, we discuss the implications of the Third Circuit's ruling in the TWC bankruptcy case .

II. BRUCE COHEN'S AGREEMENT WITH TWC TO PRODUCE SILVER LININGS PLAYBOOK WAS NO LONGER EXECUTORY SIX YEARS AFTER THE FILM WAS RELEASED

In 2011, Bruce Cohen ("Cohen") entered into an agreement (the "Cohen Agreement") with a special purpose entity formed by TWC for the production of the film Silver Linings Playbook. Under the agreement, Cohen would produce the film in exchange for $250,000 of fixed compensation and contingent future compensation of about 5% of the film's net profits. The film was released in the fall of 2012, and became a critical and financial success.⁰⁶

In March of 2018, TWC filed for chapter 11 bankruptcy protection, following the revelation of allegations of sexual misconduct by Harvey Weinstein, one of its principals and founders. In bankruptcy, TWC sold its assets to Spyglass Media Group,

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LLC (formerly known as Lantern Entertainment LLC) under section 363 of the Bankruptcy Code.

After the sale, Spyglass filed a declaratory relief action against Cohen in the bankruptcy court. Spyglass sought a determination that the Cohen Agreement was not an executory contract under section 365 of the Bankruptcy Code. Under section 365, an executory contract cannot be assumed or assigned unless all defaults are cured. If Spyglass prevailed in its argument that the contract was not executory, Spyglass would not be required to pay $400,000 in unpaid contingent compensation owed to Cohen. By purchasing the rights to a non-executory contract under section 363, Spyglass would only be required to pay contingent compensation on a go-forward basis. Various similarly situated parties joined in Cohen's briefing, thus multiplying the value of the dispute. The bankruptcy court granted summary judgment in favor of Spyglass and the district court affirmed.⁰⁷

Reviewing the district court's ruling, the Third Circuit began its analysis with the definition for an executory contract, which is not defined in the Bankruptcy Code. Consistent with its prior rulings, the Third Circuit uses the definition of executory contracts provided by Professor Vern Countryman: "[A] contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other."⁰⁸ Synthesized with other authorities, the court summed up the test for executoriness as: "whether, under the relevant state law governing the contract, each side has at least one material unperformed obligation as of the bankruptcy petition date."⁰⁹

New York law governed the Cohen Agreement. Thus, the court considered whether there was at least one material obligation owed by both parties the breach of which "would constitute a material breach under New York law."¹⁰ New York law provides that a "material breach" is a failure to perform an obligation that "defeats the essential purpose of the contract."¹¹ Further, New York's "substantial performance doctrine" provides...