-173-
the distribution rights were contingent on SMP’s generating
excess cashflow, there was no guarantee that SMP would ever make
distributions. It was highly unlikely that SMP would generate
excess cashflow. In the first place, SMP was not an operating
company. As a practical matter, it could not and would not
generate operating cashflow; its only assets were the $20 million
in cash and the SMHC receivables and stock. SMP’s purported film
distribution business was in SMHC, a separate corporate entity
that was, by and large, devoid of assets and completely
insolvent. Inasmuch as Mr. Lerner controlled both SMP and SMHC,
if the banks failed to exercise their put rights, it is highly
unlikely that Mr. Lerner would allow SMP to generate excess
cashflow, triggering these distribution rights.124 Instead, if
SMHC were to generate any income, Mr. Lerner could effectively
lock up that income in SMHC, wait out the put period, and convert
the banks’ preferred interests into preferred debt, which could
then be redeemed for $5 million.
124 The LLC agreement appointed Mr. Lerner manager of SMP and
authorized him to manage the business and affairs of SMP. Mr.
Lerner was given the ability to act on behalf of SMP in
connection with its day-to-day affairs or otherwise. His powers
included, specifically, the power to convert the preferred
interests into preferred debt or to redeem the preferred
interests (in the case of conversion notice), and to appoint
employees, officers, or additional managers of SMP.
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