Postproduction House’s Founder Calls for Action

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While the fall of the once-prolific Hollywood postproduction house Modern Videofilm Inc. was seemingly swift, litigation over who’s responsible for its demise rages on.

Last summer, after 35 years and work on productions such as “Game of Thrones,” “Avatar,” and “Star Wars: The Phantom Menace,” the private company’s assets were sold to rival postproduction firm Point.360 for an undisclosed sum. While the company still exists on paper, according to sources familiar with the situation, its business operations have ceased.

But a lawsuit filed Aug. 29 on behalf of Modern Videofilm Holdings – a related firm controlled by 68-year-old company founder Moshe Barkat – claims the postproduction business was driven under after a takeover in 2014 by Medley Capital Corp. Medley essentially foreclosed on the business when Barkat failed to meet several benchmarks of a $50 million loan it gave Modern Videofilm, Barkat claims.

The complaint, filed in Los Angeles Superior Court, alleges the publicly traded hedge fund caused a loss of $100 million after it sabotaged a partnership deal with postproduction giant Technicolor and then ousted Barkat.

Modern Videofilm Holdings’ lawyer, Louis “Skip” Miller of Century City’s Miller Barondess, said Medle’s actions were part of a predatory “loan-to-own” scheme that went terribly wrong.

“Medley took total control of the company, ousted its founder, and then destroyed it,” Miller said.

But Barkat also finds himself staring down a countersuit brought by Medley in June stemming from a previous suit brought by Barkat himself. Medley alleges the Modern Videofilm founder used the company as a “personal piggy bank” and defrauded the hedge fund after securing the loan.

“If anyone was harmed, it was the lender who Mr. Barkat defrauded,” said Michael Betz, a partner at Allen Matkins Leck Gamble Mallory & Natsis in San Francisco, who represents Medley. He called the lawsuits filed on behalf of Barkat a corporate shakedown and an abuse of the legal system.

Posting loss

Founded in 1979 by Barkat, Burbank-based Modern Videofilm at its height employed more than 500 people and worked with some of the largest Hollywood studios – and later online content distributors including Apple, Amazon, and Netflix – providing postproduction and distribution services.

But according to Medley’s countersuit, the business was far from healthy by the time the hedge fund made the $50 million loan.

Medley’s filings detail a series of “self-dealing” transactions Barkat made with company money beginning in 1992, which allegedly ballooned into widespread corporate malfeasance. Modern Videofilm money was used to pay for Barkat’s household staff, a family member’s car, international vacations, wine, and opera tickets, according to the cross-complaint, in addition to millions in loans that were never repaid.

Those alleged indiscretions were compounded as the business went south. Medley’s filing claims that from 2005 to 2015, Modern Videofilm posted losses in eight of 11 years, and generated cumulative financial losses totaling more than $56 million, excluding debt forgiveness.

“Laughably, the only financial ‘positives’ during this timeframe were the product of a tape vault fire at a customer’s location, a significant advance from a customer, and deferment of a principal pay down on the Company’s primary debt service,” Medley’s filing reads.

The hedge fund alleges Barkat hid his company’s financial troubles and inflated revenue projections in order to secure the $50 million loan. The firm also claims it gave Modern Videofilm further cash infusions after the loan to keep it afloat and took control of the company only when the business failed to meet several loan covenants. All told, Medley claims Barkat owes the firm $77 million in principal and interest based on misrepresentations and breaches in fiduciary duty.

Miller, Barkat’s lawyer, said the claims are smoke and mirrors and that everything about the business was fully disclosed to the hedge fund before the loan was made.

The crux of Modern Videofilm Holdings’ shareholder suit is that Medley scuttled a 2013 deal Barkat was brokering with Technicolor, which would have been worth $100 million, effectively ensuring that Barkat would not be able to pay back the loan and result in the firm’s takeover. Barkat also alleges that Medley installed executives who didn’t understand how to run a postproduction business.

While a mediation session is scheduled this month, Miller sounded unconvinced much would come of it.

“This case is heading to trial,” he said. “Ultimately a jury is going to hear all this and have to decide whether this is a lender who did everything right or … overstepped.”

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