On Monday, New York Attorney General Eric Schneiderman wrote an open letter urging anyone who might bid on the Weinstein Co., the now-bankrupt studio founded by Harvey Weinstein, to include money to compensate the Hollywood mogul’s accusers. On Tuesday, a proposal surfaced that would do just that, from Broadway producer Howard Kagan.
But by Tuesday afternoon, the Weinstein Co. had rejected that proposal and announced that its preferred buyer, a Texas private-equity company with no experience in the entertainment industry, was the only entity it would allow to bid for its valuable film library and other assets.
Which means the 80-plus women (and at least one man) who say Weinstein assaulted or abused them are likely to find that there’s little or no money left on the company’s books to compensate them by the time the process is finished. I studied rapid bankruptcy sales, like the kind the Weinstein Co. is using, while on a fellowship at Harvard. They can be a taxpayer-supported path for companies to arrange insider sales while ditching corporate responsibilities — to workers, to the environment and, as in the Weinstein case, to alleged victims of misbehavior and sexual abuse. The set-up also could make it harder for law enforcement to determine who facilitated Weinstein’s predations.
The Weinstein Co. bankruptcy had initially looked fair: When the company filed in March , it publicly released employees who say they were victims of or witnesses to Weinstein’s actions from nondisclosure agreements they’d been pressured to sign. And it gave two of the women who accused him of wrongdoing a seat at the table for the negotiations. Bob Weinstein, Harvey’s brother and the studio’s co-founder, said the company was pleased to have a plan for “pursuing justice for any victims.”
But in bankruptcy, as in the movies, appearances can be misleading.
The company is using a playbook that has become routine in Chapter 11: a 363 sale. It’s named for a brief section of the U.S. Bankruptcy Code that allows companies to sell some of their property during a bankruptcy. It was originally meant to help filers who had to sell some of their holdings quickly, before they lost their value — which would shortchange creditors. For example, a failed brewery whose vats of beer needed to be sold before they went bad might be able to unload them.
Congress didn’t intend for the section to cover the sale of entire corporations, as the legislative history shows. But in the late 1980s, companies began to argue that the language of Section 363 didn’t rule out a comprehensive sale in an emergency. And judges, first in corporate-friendly Delaware and New York, and then elsewhere, began going along. Over time, going along became standard practice, and what counts as “an emergency” expanded. Few question the legality or fairness of these sales anymore — especially since the Obama administration used them in the bailouts of GM and Chrysler to keep the auto giants in business.
Private-equity firms love these fast sales, which allow them to shed debt they’ve piled on the companies they buy and to dump workers’ pensions or union contracts in the process. Just as the Weinstein Co. did, a bankrupt firm spends down its cash before it comes to court. Claiming a financial emergency, it demands that the judge approve a sale that it has mapped out ahead of time. It insists that sale is the only way to “maximize value” for all its creditors.
And, just as in the Weinstein case, the company typically argues that its assets are already spoken for by banks and other lenders — leaving little left over for anyone besides the lawyers and others who work on the bankruptcy, who by law have to be paid in full.
A traditional Chapter 11 plan requires the company to share a lot of detail about its finances and operations with creditors, and to give them time to study them to see if everyone is getting a fair deal. Then it lets the creditors vote on the plan. But a fast 363 sale skips the steps meant to make Chapter 11 fair to everyone — in other words, it skips due process.
What makes things even worse in the Weinstein case is that Chapter 11 rules encourage insiders to control the firm in bankruptcy. The rules presume that the company’s managers are its best stewards — and the best stewards of the interests of everyone it owes. Judges almost always defer to the managers’ business judgment. So the same people who presided over the company during the years of Weinstein’s exploits (his brother Bob and two remaining board directors) remain in charge.
The Manhattan District Attorney’s Office is investigating whether the Weinstein Co. committed fraud or other financial crimes in its handling of Harvey Weinstein’s behavior. Separately, the New York attorney general has sued the company, alleging “repeated, persistent, and egregious violations of law” that it says allowed Weinstein to engage in years of sexual misconduct and abuse. At least 10 other sexual assault and sexual harassment lawsuits name the Weinstein Co. or its parent company as a defendant, along with Harvey Weinstein.
Yet a successful 363 sale would mean there was no longer a Weinstein Co. to sue. The claims against Bob and Harvey Weinstein as individuals would survive, but there would be far less to recoup: The two men don’t own the valuable film library, TV shows like “Project Runway” or the other assets that could fund compensation for victims.
The company’s partners in court are some of its traditional lenders, who have stayed in charge during the bankruptcy. That’s important, because the company and the lenders, by controlling the deadlines and budget of the committee representing the women and other creditors, control their access to the records that reveal who was complicit in Weinstein’s crimes. When insiders run a bankruptcy, it is a terrific conflict of interest — and it has become standard practice in these fast sales.
Weinstein’s accusers have made clear that they’re not giving up. The bankruptcy plan “in no way addresses the victims of Harvey Weinstein’s sexual assault enterprise, and would sweep the 100+ instances of sexual assault, rape and more under the rug,” Elizabeth Fegan, an attorney representing some of the women, said in a statement Tuesday. “We’re here to show them the assault survivors will not go away quietly.”
But there is nothing in bankruptcy law that requires that they get justice. Melissa Jacoby, a bankruptcy scholar who has pushed for protections for creditors in these fast sales, says the Weinstein case shows what’s wrong with them. “It’s not fair that a company that has been hiding this atrocious behavior for years can shield itself” in Chapter 11 without following basic due process rules, she argues.
If the Weinstein Co. and its board hope to head off a close investigation of the firm, its officers or its lenders in connection with Harvey Weinstein’s alleged abuse, a fast 363 asset sale is the smartest tactical move they could make.
Because once a sale goes through, it’s better than money in the bank. It’s final and unappealable, and it’s backed by the U.S. Bankruptcy Code and the supremacy clause of the Constitution. Even in Hollywood, you can’t beat that for a deal.
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