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Who Says There Are No More Big Los Angeles Chapter 11 Cases?

On July 30, 2015, Relativity Media, along with 144 of its affiliates, filed a Chapter 11 bankruptcy.  The multi-million dollar entertainment company, which produced films such as The Social NetworkThe FighterLimitless, and others, is headquartered on Beverly Blvd. in Beverly Hills.  As of the date of the bankruptcy, according to its court filings, Relativity and its affiliates had approximately 89 full- and part-time employees and approximately 760 temporary production personnel in the film and television side of the business.

Lead bankruptcy counsel for Relativity are Rick Wynne, Bennett Spiegel, and Lori Sinanyan, three well-known Los Angeles bankruptcy lawyers.  The most recent hearing in the case on August 25 was an all-day affair to consider Relativity’s request for debtor-in-possession financing and for approval of procedures so that it can sell all of its assets within the next six weeks.  At that hearing, Relativity’s lenders — who are owed $350 million on account of pre-petition obligations and another approximately $50 million which they have advanced or committed to advance since the filing and who are also the proposed buyers of all of the assets for a credit bid of approximately $250 million — were represented by Mark Shinderman, another prominent Los Angeles bankruptcy practitioner.   At that same Court hearing, Mr. Wynne and Mr. Shinderman sparred for hours with Evan Jones, another noted Los Angeles bankruptcy attorney, who represents a hedge fund that had also advanced money to Relativity.

Others making appearances at the Court hearing were veteran Los Angeles bankruptcy attorneys Joseph Kohanski, representing the directors’, screen actors’ and writers’ guilds, and Ted Stoleman, on behalf of a licensor of the film Act of Valor.  A review of the case docket shows notices of appearance in the case by many other Los Angeles bankruptcy lawyers including Brian Davidoff of our office, Peter Gilhuly, Pamela Webster, Sam Newman, and others, representing a variety of Los Angeles-based production companies, talent, or other creditors or contract parties of Relativity.

So Los Angeles finally has its next big bankruptcy case, right?  Well, not exactly.  The hearing was held at One Bowling Green, New York, NY, the home of the United States Bankruptcy Court for the Southern District of New York.

While one can argue about the merits of filing this LA-centric bankruptcy case in New York, in a recent opinion, the Honorable Russell Nelms, United States Bankruptcy Judge from the Northern District of Texas discussed the practice of filing large cases in New York and Delaware when the main operations of the debtor company are elsewhere. 

Under bankruptcy law, a company can legally file bankruptcy wherever it is headquartered or has its principal place of business.  However, it can also file bankruptcy in the state of its formation or incorporation.  Moreover, it can legally file bankruptcy for the main company and a large group of affiliates in any state, so long as one of the affiliates, no matter how small or insignificant, was formed or incorporated in that particular state and files first.   In his opinion, Judge Nelms explains that the bankruptcies of retail concerns Radio Shack and Quicksilver, each of which were headquartered in Fort Worth, were nevertheless filed in Delaware.

Others, such as UCLA Law Professor Lynn LoPucki, have studied the impact of bankruptcy forum shopping.  Professor LoPucki has challenged the practice, which often results in a bankruptcy case being adjudicated in a locale far away from where most employees and creditors reside. 

No one knows whether these venue rules in bankruptcy will ever be changed.  But until they are, debtors will continue to file bankruptcy cases in what they perceive to be the most advantageous forum.

Categories: Chapter 11, Entertainment, Intellectual Property, Trends