In a “test case,” Lantern filed a motion for summary judgment against Bruce Cohen, who had previously entered into an agreement with TWC to produce Silver Linings Playbook ("Agreement"). Cohen claimed that the Agreement was executory and, as such, Lantern was required, as a condition to assuming the Agreement, to pay the unpaid profit participations as “cure amounts.” Lantern alleged it had no obligation to pay the unpaid profit participations in order to acquire the Agreement because the Agreement was non-executory. The U.S. Bankruptcy Court for the District of Delaware granted Lantern’s motion and held that the primary purpose of the Agreement was the production of the film, not the payment of profit participations and that the Agreement had been substantially performed since the film had been produced. Therefore, it constituted a non-executory contract under the U.S. Bankruptcy Code, and Lantern had no obligation to cure any of the payment defaults in order to acquire the Agreement. As a result, other producers, actors and talent seeking payment of unpaid profit participations that were outstanding prior to Lantern’s assumption of their respective agreements will likely face the same result.
Should Talent Seek a Security Interest for Profit Participations?
In light of the court’s findings, how can artists protect their rights to profit participations? Artists could demand a lien in the film rights to secure their claims in bankruptcy. As a secured party, an artist would be better positioned to demand that its unpaid profit participations need to be addressed in the bankruptcy in order for a purchaser to acquire the underlying agreement. The film and any future proceeds could be collateral for existing and future participation obligations owed under their agreements.
However, securing such a lien is not practical. Producers and distributors will aggressively resist such a request because imposing a lien on a film complicates chain of title and would require subordination and standstill agreements with distributors and lenders, which are very complicated issues that will not be considered except perhaps for a few A-listers. Moreover, the major studios are the obligors for most profit participations and there are no real concerns regarding the solvency of the major studios. With respect to independent distributors, artists should be diligent in pursuing their claims for unpaid profit participations before the amounts become significant.