by Neal Yonover
In a day and age where litigation is not only common but often interminable, and the pay-off is invariably a major disappointment, here's a story that involves plenty of attorneys, a grand total of about $50 mill ion in residuals and has a happy ending ¬ especially for DGA members.
By 1992, Carolco, one of the high flyers of the '80s, was facing an uncertain financial future. Despite the success of blockbusters like Terminator 2, Universal Soldier and the Rambo series, the company had bee n forced to reorganize three times in order to stay in operation. Traditionally, in cases like this, one of the first areas to suffer is future-oriented expenses, that is, residuals.
What saved this story from becoming an epic case of "Ramb-owe," was the pre-emptive work performed by a team of legal and financial commandos, led by Jay D. Roth, who is now the DGA's national executive director . At that time, he was a partner at the law firm of Taylor, Roth, Bush & Geffner, now called Geffner & Bush.
Acting on behalf of the DGA, along with the Screen Actors Guild (SAG), Writers Guild of America (WGA) and the Motion Picture Industry Pension and Health Plans (MPIP), the team quickly detected residuals underpa yments and enacted concrete steps to secure payment, including a security interest in all of Carolco's productions. As a result, all residual monies owed, with interest and collection expenses, were paid. Several individual DGA members received accrued residuals in excess of $1 million, while others collected upwards of $100 thousand.
The DGA residuals department first noticed missed payments in 1992. At the same time, the Guild was also hearing reports circulated in the industry about Carolco's precarious financial position. A "strike force" of auditors was quickly dispatched and soon discovered that Carolco had failed to pay residuals because the "creative" formulas they'd used to calculate residuals payments were incorrect. By March of that year, Carolco collectively owed over $8 million.
Veteran auditor Mickey Segal, managing partner at Nigro, Karlin & Segal in Century City, was one of the first to go in. "Usually multi-million dollar numbers like this don't jump off the [ledger] paper very often, because most little companies don't have such big blockbusters," Segal said. "You take the Rambos, Universal Soldiers, and Cliffhangers, and a little 'mistake' can generate a whole lot of money."
As payment was being negotiated, Carolco went into a financial tailspin and tried to raise capital by selling the television rights to its film library to Spelling Entertainment.
The Guild's standard security agreement (see accompanying story, page 19) ¬ already in place on a number of Carolco films authorized it to foreclose on the film library in lieu of payment. As a result, the Spelling deal was stopped until Carolco agreed to pay the guilds in order for them to release the liens and permit the transaction to proceed.
Carolco made an agreement to make past and future payments and provided a security interest in the assets of its company to make the promise to pay enforceable. The guilds then released the films, and the Spell ing deal went through.
The Spelling deal was used to leverage a security interest in all of Carolco's assets, past and future.
While Carolco continued to make the agreed-upon payments over the next three years, Roth said the company had a strong incentive. "We were in a position to foreclose on Carolco's assets in the event of a default," he explained.
When the company eventually filed for bankruptcy in late 1995 and finally sold its assets, the DGA and the other guilds were paid in full.
As a result of the security interests and aggressive monitoring of residuals payments, Roth said a total of $50 million in residuals was collected with the final payment of $15.9 million just being made in April of 1996. On top of that, he added, the guilds were paid interest on the money owed, as well as the fees involved in the collection.
Segal was impressed by the collection. In his experience, complete payments are not common.
"This is a perfect example where, by having the Guild and its various professional representatives in touch with the problem as it was occurring, they were able to deal with it in such a way that everybody did g et 100 percent." Reflecting on the addition of interest and collection fees, he concluded, "The participants did better than great here."
As Teri Benton, DGA residuals administrator, described the situation, "It was one thing after the other that was going wrong."
Over the years, she said, the DGA had "many, many dealings with Carolco. We audited them. They were going under. [Then] they weren't going under. [Then] they were. Plus, they purchased an old bankrupt company, DEG."
Looking back, Benton was impressed that the DGA was able to stay on top of the situation so effectively. "It's pretty unique that we were able to continually gauge their financial health and go to the company a nd say, 'We have a problem; we fear that you're not going to be around much longer. And we need to talk now about making an arrangement to ensure that you pay your residuals properly for all your future use,'" she continued.
It was anticipating the future problems, Benton said, that saved the day.
Neal Yonover is a freelance writer based in Southern California.