Recently, the U.S. Bankruptcy Court for the District of Delaware issued a memorandum opinion in support of oral ruling pursuant to Local Bankruptcy 8003-2, granting the motion of Robert Weinstein for entry of an order enforcing the sale order and granting related relief. In this decision, the Bankruptcy Court had to interpret arguably conflicting provisions contained within a certain asset purchase agreement that the debtors and Spyglass Media Group LLC (f/k/a Lantern Entertainment LLC), the purchaser of the debtors’ assets, had entered into during the course of the debtors’ bankruptcy cases.

Prior to the commencement of the bankruptcy cases, Robert Weinstein, the brother of Harvey Weinstein, had entered into a certain employment agreement with one of the debtors, The Weinstein Company Holdings LLC. By its terms, Weinstein’s employment agreement expired Dec. 31, 2015. Pursuant to the terms and conditions of this employment agreement, Robert Weinstein, in addition to his salary, was granted “an interest in certain net revenues received by the debtors from some of the films which [Robert Weinstein] had produced” (the participation interest).

Subsequent to the expiration of the employment agreement, on March 19, 2018, The Weinstein Company Holdings, together with certain of its affiliates, each filed voluntary petitions for relief under the Bankruptcy Code with the Bankruptcy Court. On that same day, the debtors filed a motion seeking approval of a sale of substantially all of their assets to Spyglass pursuant to a certain asset purchase agreement (the APA). On May 19, 2018, the Bankruptcy Court entered an order approving the sale of assets to Spyglass pursuant to Section 363 of the Bankruptcy Code as well as the assumption and assignment of certain contracts pursuant to Section 365 of the Bankruptcy Code (the sale order).

Subsequent to the approval of the sale and the closing of the transaction contemplated thereby, Weinstein, on June 26, filed the motion seeking a determination, inter alia, that he was entitled to payment from Spyglass on account of his participation interest in the film “classic” “Scream 4,” which was one of the assets sold to Spyglass pursuant to the terms and conditions of the APA. Spyglass opposed the motion, and after oral argument Aug. 5, the Bankruptcy Court granted the motion. On Aug. 9, an order granting the motion was entered on the docket and Spyglass filed a notice of appeal that same day. On Aug. 12, the Bankruptcy Court issued its opinion in accordance with Local Bankruptcy Rule 8003-2. Pursuant to Local Bankruptcy Rule 8003-2, which provides that a “a bankruptcy judge whose order is the subject of an appeal may, within seven days of the filing date of the notice of appeal, file a written opinion that supports the order being appealed.”

As an initial matter, the Bankruptcy Court first addressed whether it had jurisdiction to adjudicate the motion. The Bankruptcy Court found that it had jurisdiction pursuant to the sale order, which provided, among other things, that the Bankruptcy Court retained “jurisdiction to, among other things, interpret, implement, and enforce the terms and provisions of this Order and the APA … and to adjudicate, if necessary, any and all disputes concerning or relating in any way to the sale.” In addition, the Bankruptcy Court also noted that it has subject matter jurisdiction over the matter because it was a core proceeding “dealing with the interpretation of the court’s order authorizing sale of property of the estate” (citing 28 U.S.C. Sections 1334(b), 157(b)(2)(A) & (O) (citations omitted)).

Having determined that it had jurisdiction over the motion, the Bankruptcy Court then turned its attention to the arguments articulated by the parties. In particular, Weinstein argued that because he owned a 1.875% participation interest in “Scream 4,” the debtors did not own 100% of that film and, as such, could only sell what they owned to Spyglass. In his motion, Weinstein also referenced a schedule to the APA which specifically listed his participation interest in the film as being an obligation owed by the debtors.

In opposition, Spyglass asserted that the APA expressly provided that it did not assume any liability to Weinstein for anything. In particular, Spyglass asserted that Section 2.4(b) of the APA provided that “‘notwithstanding any other provision in this agreement or any other writing to the contrary,’ Spyglass does not assume ‘any amounts due to affiliates of any seller party, including any declared dividends or distributions.’” Spyglass also argued that pursuant to Section 2.4(f) of the APA, it expressly excluded “all liabilities arising under any contract that was not an assigned contract.” As the employment agreement was not assumed or assigned to Spyglass, Spyglass contended it had no liability to Weinstein for the participation interest in “Scream 4.”

Weinstein countered and argued that Spyglass’ interpretation was contradicted by numerous sections of the APA, including Section 2.3, pursuant to which Spyglass assumed “all liabilities arising from operation of the purchased assets.” Weinstein argued that since the film was a purchased asset, his participation interest was a liability that arose from the operation/distribution of the film. Weinstein also asserted that Section 2.4(j) of the APA supported this interpretation because Section 2.4(j) provided that “only pre-closing participation interest payments were excluded liabilities,” which, according to Weinstein, meant that post-closing participation interest payments are not excluded liabilities. In opposition to these arguments, Spyglass contended that Section 2.4(b) was the more specific provision of the APA and thus had precedent over the more general provisions of Sections 2.1, 2.3 and 3.1 of the APA, which Weinstein relied on in support of his motion.

While the Bankruptcy Court agreed with the premise that “the specific provisions of a contract control the more general ones,” the Bankruptcy Court disagreed with Spyglass’ contention that Section 2.4(b) was the more specific provision. Rather, the Bankruptcy Court determined that that this provision was very broad and that the more specific provisions of the APA, Sections 2.1, 2.3 and 3.1, were the controlling provisions and that those provisions provided that Weinstein’s participation interest was, in fact, preserved and was not an excluded liability.

In support of its determination, the Bankruptcy Court examined Section 2.1 of the APA and paragraph 12 of the sale order, which provided that while the debtors’ assets were sold free and clear of nearly all interests, they were not sold entirely free and clear of all interests. Rather, the APA carved out permitted liens from the free and clear language of both the APA and the sale order. The Bankruptcy Court further found that permitted liens were defined in the APA to include Weinstein’s participation interest. Furthermore, the Bankruptcy Court found that Schedule 3.1(a) of the APA expressly identified Weinstein’s participation interest as a permitted lien. Indeed, the Bankruptcy Court questioned how it can interpret the APA to relieve Spyglass of its obligation to pay Weinstein for its participation interest when both the APA and the sale order specifically provided that the sale of the film was subject to that interest. In rejecting Spyglass’ contention, the Bankruptcy Court “likened Spyglass’ argument to the suggestion that a buyer could purchase real estate under Section 363 subject to a mortgage but nonetheless relieve itself of any obligation to pay that mortgage.” The Bankruptcy Court “could find nothing in Section 363 that would allow that result and nothing in the sale order that suggested that while the sale of the film to Spyglass was subject to the movant’s participation interest [sic], Spyglass nonetheless was absolved of paying that interest.” Accordingly, the Bankruptcy Court concluded that Spyglass’ interpretation of Section 2.4 of the APA was “not reasonable.” The court also found that Weinstein’s interpretation of the interplay among the various provisions of the APA was the “more reasonable and internally consistent interpretation [and] that Sections 2.1, 2.3, 2.4(j) and 3.1(a) of the APA and paragraph 12 of the sale order were the more specific provisions dealing with what interests in the assets sold to Spyglass were preserved.” Id. at 10. As such, the Bankruptcy Court concluded that the sale of the debtors’ assets were not free and clear of Weinstein’s participation interest in “Scream 4.”

As noted herein, this decision is currently the subject of an appeal by Spyglass and, thus, the district c ourt may reach a different conclusion. Nevertheless, this opinion should be a cautionary tale to proposed purchasers of debtors’ assets and, in particular, that proposed purchasers be careful as to what assets and obligations are actually being purchased and assumed pursuant to a proposed sale.

Lawrence J. Kotler is co-chair of the bankruptcy and fiduciary representations division of Duane Morris’ business reorganization and financial restructuring practice group. He represents Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors’ committees, secured creditors and large institutional unsecured creditors in all facets of bankruptcy.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.