Market Data Approach   ‘  Particular Unsuitable  ’   to Valuing Feature Film  Holder v. Howe, 2016 Cal. App. Unpub. LEXIS 8989 (Dec. 14, 2016)

A bankruptcy-related suit in front of the California Court of Appeal turned on the issue of how to value an aged film that never made any money. The trial court dismissed the plaintiff expert’s approach as “illogical.” The appeals court agreed the method was ill-suited for valuing a piece of art but also rejected the trial court’s effort to sidestep the valuation conundrum.

Reliant Pictures had an ownership interest in West Texas New Mexico Films (WTNMF), which produced and wholly owned the contested film. The main funding came from third-party investors (individuals and a group). The film was never released and never generated any income. However, it caused over $470,000 in debt.

In 2009, shortly before filing for bankruptcy, Reliant Pictures transferred the rights in and to WTNMF and the film to the investors. In early 2010, the plaintiff bought Reliant Pictures’ “disputed ownership interest” in the film at a bankruptcy auction for $140,000. He later sued the investors and Reliant Pictures’ board members alleging a fraudulent transfer of the company’s assets and breach of fiduciary duty by the company’s directors.

A jury decided the value of Reliant Pictures’ ownership interest in WTNMF, the film, and the corresponding copyright was $3 million.

The plaintiff’s media and entertainment industry expert contended the value of an independent film was “a percentage of the cost of making it.” Based on the assumption that an independent film in 2009 could expect to recoup a maximum of 65% of its budget, the value of this particular film was $2.73 million.

The defendants offered testimony that said the film was “worth” $500,000 in 2006.

The trial court said it “defies common sense” to value a film solely on the basis of how much it cost to make it. To sidestep the valuation issue, as a remedy, the court required the defendants to return the film and production company to the plaintiff “in such form and conditions as they existed in” May 2009, the transfer date.

The appeals court, in turn, found the trial court’s choice of remedy “unworkable and inequitable.” This solution would require the defendants to return the film to the condition it was in at the time of the transfer, before the investors modified it. Further, returning the film to its 2009 state would not give the plaintiff the value of the asset transferred “if only because the film’s timeliness has faded,” the appeals court observed.

However, the appeals court agreed with the trial court that the plaintiff expert’s “attempt to assess the film’s future income as a factor of its production costs was pure speculation.” The expert did not show how market data related to all independent films could reliably predict the value of a particular film, the appeals court noted. The market data approach was “particularly unsuitable” to valuing art such as a feature film.

The appeals court sent the case back to the trial court requiring a valuation of the film on the transfer date and a determination of the ownership interest Reliant Pictures had in the transferred assets. Based on those calculations, the trial court should determine the plaintiff’s award.