How do you value a film that never made a dime for the production studio and investors? The California Court of Appeal, which recently looked at this issue in a bankruptcy-related case, did not exactly come up with the answer, but the court was clear on what valuation approach did not work.

Over 10 years ago, Reliant Pictures set up a production company that made and wholly owned the contested film. Most of the money for the film, which cost about $4.2 million to make, came from third-party investors. Just before declaring bankruptcy, Reliant transferred the rights to the production company and the film to the investor group. Reliant’s ownership interest in the film became a point of contention. In early 2010, the plaintiff bought Reliant’s ownership interest in the film at a bankruptcy auction for $140,000. He then sued the investors and Reliant board members, claiming they had engaged in a fraudulent transfer. A two-phase trial followed in which the plaintiff’s media and entertainment industry expert stated the value of an independent film was “a percentage of the cost of making it” and proposed this particular film was worth $2.73 million. The jury awarded the plaintiff $3 million.

‘Illogical’ expert testimony: The trial court dismissed the expert testimony as “illogical” and rejected the jury verdict as unsupported by the record. The court sidestepped the valuation issue by prescribing a different remedy: requiring the investor defendants to return the film to the plaintiff in the condition in which it was in on the date of transfer, 2009.

The state Court of Appeal, in turn, called the trial court’s remedy “unworkable and inequitable.” After the transfer, the investor owners had re-edited film; undoing the later changes was problematic. Also, the appeals court said, the plaintiff would not get the value of the film “if only because the film’s timeliness has faded.” However, the appeals court agreed that the plaintiff expert’s “attempt to assess the film’s future income as a factor of its production costs was pure speculation.” This calculation contradicted “the inescapable fact that the film generated no income in the two years since its completion, despite extensive marketing.” The Court of Appeal went on to say that a “film, as art, is particularly unsuitable to the market data method.” Since none of the other witness statements represented reliable evidence of the film’s value, the appeals court sent the case back to the trial court, ordering it to determine the value of the interest Reliant Pictures had in the fraudulently transferred assets, including the film as it was in 2009.

The case is Holder v. Howe, 2016 Cal. App. Unpub. LEXIS 8989 (Dec. 14, 2016). A digest and the court’s opinion will be available soon at BVLaw.

Extra: In 2007, Variety, the leading trade publication, panned the contested film mercilessly and predicted it would go straight to DVD, a death knell in terms of revenue. Apparently, that’s what happened. For curious readers, the film is available for free on YouTube, under the title “Have Dreams, Will Travel.”