Citing 'overwhelming evidence,' judge appoints trustee over Bergstein companies

By Alex Ben Block

In a rare legal action, a U.S. bankruptcy court judge Tuesday appointed an interim trustee to seize control of David Bergstein's Capitol, ThinkFilm and related entities after an attorney for the creditors repeatedly referenced the way the producer operated his global web of businesses as "the Enron of the entertainment world."

Creditors attorney David Neale of Levene, Neale detailed accusations including operating without proper accounting systems, use of company funds to cover personal gambling losses, failing to file tax returns or remit payroll taxes to the government, bouncing checks, defaulting on legal judgments, failing to pay talent participations and Bergstein denying his own execs information needed to do their jobs.

After listening to both sides for more than two hours in a courtroom crowded with creditors and their lawyers, veteran bankruptcy court Judge Barry Russell said that when the hearing began, he never would have thought he would actually appoint an interim trustee to take over. After all, according to Neale, it has only been done in a U.S. bankruptcy case three times during the past 45 years.

However, said the judge, he was appointing an interim trustee to take over, examine the books and report on what is going on because "what I have heard is overwhelming evidence from the creditors," while the response from Bergstein's side is "not overwhelming as far as the issues."

Bergstein and his show business partner, billionaire construction executive Ron Tutor, were not present in the 16th floor courtroom downtown. Bergstein had filed a statement that said he did not take a salary. That brought a response from Neale, "There is no need to take a salary because all the cash is being siphoned off by him anyway."

Bergstein was represented by attorneys David Weinstein of Richardson Patel and Lucia Coyoca, his longtime legal representative from Mitchell, Silberberg and Knupp. Weinstein called the legal action "something of a fire drill" and said: "It's really about bringing down Mr. Bergstein. That isn't an appropriate use of the bankruptcy law."

Neale said it indeed is appropriate because Bergstein has operated for years in "a fraudulent manner," adding that this action is the result of "an overwhelming groundswell of creditors who have simply had enough. The Enron of the entertainment world has to be brought down just like the real Enron."

Weinstein charged that Bergstein is under fire because "his business model is to acquire film libraries through foreclosure," and his personal and business style in handling distressed properties has made him enemies.

The judge couldn't resist interrupting to comment that Bergstein might make enemies, but "usually not the people running your company."

That referred to a number of former executives, including a COO, a CFO, a controller and an attorney, all of whom told creditors that Bergstein ran the company in an unorthodox and chaotic fashion, one that made it impossible for them to properly account for revenue or pay bills. They said that when revenue did arrive, he did a daily "sweep" to move the cash to other accounts. That kept them in the dark about where the money went.

Weinstein said Bergstein had to do that because those employees were "incompetent" and "disgruntled."

Coyoca said many of the creditors were not credible and should not have standing with the court. She said several of the Bergstein-controlled entities being sued are holding companies and don't actually operate the business. She also complained about the short time they were given to respond to the involuntary bankruptcy filing last week and insisted that the Hollywood talent guilds are "third parties," not directly involved with most of the companies.

Last week, there were 13 creditors, led by David Molner of Aramid and Screen Capital International, who filed suit. By Tuesday morning, they were joined by 14 others as parties to the suit or in support of the action. Those now include SAG, the DGA, the WGA West, the guild pension funds and the Motion Picture Industry Pension & Health Plans. A legal representative for the guilds spoke briefly to support their contention that Bergstein and his companies have consistently failed to pay residuals to actors, writers, directors and producers of the 1,300 movies they control through various entities.

In a statement, the three guilds said they "welcome the judge's appointment of a trustee in this situation. We will continue to keep a watchful eye on this matter and protect the interests of our members."

Neale noted that the Capitol Film entity in the U.K. already is in administration, the British version of bankruptcy, and that it is being run by an administration, which also provided a declaration on behalf of the creditors.

If Bergstein has operated this way for years, Russell asked, why is there is now an emergency need to appoint a trustee? "It's a question of leaving the fox in charge of the chicken coop," responded Neale, who added, "It's ironic to say there is no emergency just because it has been going on for years."

One key trigger to the action was the plan last week to auction off 805 movies that had been the subject of a foreclosure by a debtor. Tutor had paid $45 million toward an estimated $105 million settlement on a $130 million debt to get back the movies. They were to be auctioned off by an entity owned by Tutor, under the supervision of Bergstein's attorney. After the involuntary bankruptcy was filed, the auction was canceled.

Coyoca said appointing a trustee to operate Bergstein's companies would be "disruptive" to these businesses and charged that the action was about one creditor, Aramid, trying to win lawsuits involving financial disputes by moving it into bankruptcy court, which would be an improper use of the bankruptcy law.

Russell said he wanted to see the case move swiftly thorough the courts to determine whether a permanent trustee should be appointed. A hearing has been set for May 25, but the judge indicated he might want to move more quickly. He also said was appointing one trustee to oversee all five entities because they are all related and run by Bergstein. He also said he wouldn't require a large bond be put up by the creditors as Bergstein's team had sought.

The judge declined to make a ruling on charges by Bergstein's side that his former attorney, Susan Tregub, violated attorney-client confidentiality and aided creditors in their legal action, saying that was a matter for the state court to decide.