In the matter of Division Entertainments, LLC and Wicks Walker v. Spring Breakers LLC and Muse Productions, Inc. et al., Mr. Walker asserts that he was denied a return of his investment, along with an additional profit, because of Defendants’ breach of contract via improper business practices and faulty accounting. Mr. Walker, a technology entrepreneur and first-time film investor, provided $700,000 to fund the film “Spring Breakers” (approximately 15% of the locked budget of roughly $5 million). Like many neophytes to the perils of “Hollywood accounting”, Mr. Walker has been disappointed that the film has not returned his investment nor distributed profits despite reasonable commercial success for a film of its type.
Spring Breakers is a feature film starring James Franco, Vanessa Hudgens, Selena Gomez and Ashley Benson. It was released in 2013 and grossed over $14 million in domestic box office (in addition to approximately $18 million overseas for a total of $32 million per Box Office Mojo). Yet Mr. Walker has not been provided required quarterly accountings nor has he been repaid any of his investment, aside from a $433,773 tax credit (which was allegedly represented would be $700,000).
One of Mr. Walker’s allegations is that Defendants siphoned off the revenues through side agreements and “sweetheart” deals for the benefit of themselves, their friends and their business associates. As an example of the failure to act in the interests of investors, Mr. Walker alleges that Defendants turned down a $2.25 million minimum guaranteed payment for domestic distribution rights by the Weinstein Company, in favor of the following offer from A24:
- No minimum guarantee to investors
- A24 recoups virtually unlimited prints and advertising costs (“P&A”) plus a 20% return
- Side deal whereby Defendants could exploit the P&A deal and obtain a 20% return on their own expenditures
An additional area of contention involves the failure to deposit film revenues into an established collection account, or enter into a collection account management (“CAM”) agreement in order to ensure that all revenues are accounted for and distributed according to the contractual waterfall. This type of control is important for completeness and accountability.
Plaintiffs are asking for minimum damages of $1,391,227, comprised of:
- $216,227 related to the undelivered portion of the tax credit
- $175,000 related to the unpaid 25% premium on the original $700,000 investment
- $1 million estimated for amounts due from Gross Revenue collections and
- Any additional amounts due under the Waterfall contained in the agreements
In circumstances such as those described above, there may or may not be distributable profits based on the underlying contract. We have seen many entertainment products with far more success than Spring Breakers who (at least initially, i.e. pre-audit) report losses to their participants. In some cases, the participant is simply stuck with a bad agreement. In others, such as the over $300 million judgment described here, the participant successfully proved to a jury that the contract was unreasonably interpreted and/or applied.
In particular, the allegations that Defendants has failed to provide accounting records or consistently use a collection account/CAM provide significant red flags that must be investigated. Without such reporting and with a known lack of independent controls, initiating litigation and beginning discovery may be the best path to forcing production of records otherwise withheld and understanding the different ways in which film proceeds were potentially improperly diverted.