CALDERWOOD & HARKNESS LLP 725 South Flower Street, Suite 4200 Los Angeles, California 90017 Telephone: (213) 555-8200 Facsimile: (213) 555-8201
October 10, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED
Mr. Desmond R. Rennick 438 Georgina Avenue Santa Monica, CA 90402
Re: Coastal Meridian Productions LLP — Demand for Accounting and Payment of Withheld Distributions
Dear Mr. Rennick:
This firm represents Marguerite D. Fonseca in connection with her interests as co-managing partner in Coastal Meridian Productions LLP ("CMP"), EIN 83-2197644, a California limited liability partnership. We write to demand, on behalf of Ms. Fonseca, a full and complete accounting of all partnership revenues, expenditures, distributions, and intercompany transactions between CMP and Rennick Slate Ventures LLC ("RSV"), EIN 84-3056178, from the inception of CMP through the date of this letter. We further demand the immediate payment of all amounts improperly withheld from Ms. Fonseca's partnership distributions, as described in detail below. Ms. Fonseca's preliminary investigation has revealed serious irregularities in the financial management of CMP that warrant your immediate attention and response.
BACKGROUND
Formation and Governing Agreement
Ms. Fonseca and you formed CMP pursuant to a Partnership Agreement dated March 8, 2017 (the "Partnership Agreement"), which was subsequently amended on January 15, 2019 (the "First Amendment," and together with the Partnership Agreement, the "Agreement"). CMP is a California limited liability partnership formed and operating under the California Revised Uniform Partnership Act, California Corporations Code §§ 16100 et seq. CMP's principal office is located at 1140 N. La Brea Avenue, Suite 300, Los Angeles, California 90038. The partnership's registered agent for service of process is Pacific Coast Registered Agents, Inc., located at 4200 Wilshire Boulevard, Suite 610, Los Angeles, California 90010. CMP was organized for the purpose of developing, producing, financing, and exploiting motion picture properties and related intellectual property rights.
Equity and Capital Structure
Under the Agreement, Ms. Fonseca holds a fifty-five percent (55%) equity interest in CMP, reflecting her initial capital contribution of Two Million Eight Hundred Fifty Thousand Dollars ($2,850,000). You hold the remaining forty-five percent (45%) equity interest, reflecting your initial capital contribution of Two Million Three Hundred Thirty-One Thousand Eight Hundred Eighteen Dollars ($2,331,818). The total capitalization of CMP at formation was therefore Five Million One Hundred Eighty-One Thousand Eight Hundred Eighteen Dollars ($5,181,818). In addition to her capital contribution, Ms. Fonseca personally guaranteed a One Million Four Hundred Thousand Dollar ($1,400,000) revolving credit facility extended to CMP by Ridgeline Commercial Bank, thereby undertaking substantial personal financial risk on behalf of the partnership. You provided no corresponding personal guaranty for this or any other CMP obligation.
Distribution and Fee Terms
Section 5.1 of the Agreement provides that, after recoupment of each partner's capital contributions and payment of all permissible partnership expenses, net profits of CMP shall be distributed fifty-five percent (55%) to Ms. Fonseca and forty-five percent (45%) to you, in accordance with the partners' respective equity interests. Section 6.2 of the Agreement expressly caps management fees payable by CMP to any designee of a partner — including any entity owned or controlled by a partner — at five percent (5%) of gross receipts per film property. This cap was a material, negotiated term of the Agreement, intended to ensure that neither partner could extract disproportionate value from the partnership through affiliated-party transactions. Section 7.1 further requires that all expenditures in excess of Fifty Thousand Dollars ($50,000) receive the prior written approval of both managing partners, and Section 8.4 mandates that all intercompany transactions be conducted on arms'-length terms and properly documented.
Film Properties and Revenue
Since its formation, CMP has produced and commercially exploited four feature film properties, which have generated the following aggregate gross receipts through the second quarter of 2022:
These figures are drawn from CMP's own internal records, quarterly financial statements, and distribution reports provided by the partnership's domestic and international distribution partners. The aggregate gross receipts of Twenty-Three Million Two Hundred Twenty Thousand Dollars ($23,220,000) represent a substantial commercial success for the partnership and reflect the significant value of both partners' respective contributions of capital, creative talent, and professional expertise.
Mr. Rennick's Role and Relationship to RSV
Under the Agreement, you have served as CMP's day-to-day Managing Partner, with primary responsibility for overseeing the partnership's operations and, critically, with sole signing authority over CMP's operating bank accounts at Ridgeline Commercial Bank and First Western National Bank. You are also the sole member and manager of Rennick Slate Ventures LLC, a California limited liability company organized on June 22, 2018, and located at 1925 Ocean Park Boulevard, Suite 200, Santa Monica, California 90405. Since its formation, RSV has invoiced CMP for a wide range of services, including production management, post-production supervision, festival representation, and distribution coordination services. As set forth below, the fees charged by RSV to CMP far exceed the amounts authorized under the Agreement, and many of the invoiced services appear to duplicate work performed by third-party vendors already engaged and paid directly by CMP.
IRREGULARITIES IDENTIFIED
Ms. Fonseca's preliminary review of CMP's available financial records, conducted with the assistance of Tillerman Forensic Advisory LLC — under the direction of its principal, Greta Sørensen, CPA, CFF, who was engaged on August 15, 2022, for this purpose — has identified two categories of significant irregularities in CMP's financial records. These irregularities, summarized below, have had the cumulative effect of materially reducing the distributions to which Ms. Fonseca is entitled under the Agreement.
Category 1: Excess Management Fees Paid to RSV
CMP's financial records reflect that, between 2018 and mid-2022, CMP paid management fees and service-related invoice payments to RSV totaling Two Million Six Hundred Ninety-Four Thousand Five Hundred Dollars ($2,694,500). Under Section 6.2 of the Agreement, the maximum aggregate management fees payable to a partner's designee are capped at five percent (5%) of gross receipts per film property. Applied to CMP's aggregate gross receipts of $23,220,000, the permissible fee total is no more than One Million One Hundred Sixty-One Thousand Dollars ($1,161,000) (i.e., $23,220,000 × 5%).
The difference between the amounts actually paid to RSV and the maximum amount authorized under the Agreement is One Million Five Hundred Thirty-Three Thousand Five Hundred Dollars ($1,533,500) (i.e., $2,694,500 − $1,161,000). This excess was paid without Ms. Fonseca's knowledge, authorization, or consent, and in direct contravention of the fee cap set forth in Section 6.2 of the Agreement.
Ms. Sørensen's review has further revealed the following:
•  All one hundred forty-two (142) invoices submitted by RSV to CMP bear only your approval signature. Not a single invoice was countersigned or otherwise approved by Ms. Fonseca, as required under Section 7.1 of the Agreement for expenditures exceeding Fifty Thousand Dollars ($50,000).
•  A substantial number of the RSV invoices appear to be either materially inflated in amount or duplicative of services already provided by third-party production companies, post-production facilities, and distribution consultants engaged and paid directly by CMP under separate agreements. For example, RSV billed CMP for post-production supervision services on Salt Wind during periods when the post-production work was being managed by Lighthouse Post, Inc. under a fixed-fee contract with CMP, and RSV billed CMP for festival strategy and distribution coordination on Nightjars during months when those services were being performed by Rialto Distribution Advisors under a separate engagement letter.
These facts strongly suggest that the excess fees were not paid in good faith for bona fide services rendered to the partnership, but rather constituted a mechanism by which you extracted unauthorized funds from CMP for your personal benefit, through your wholly owned entity RSV.
Category 2: Improper Revenue Reclassifications
Ms. Sørensen's review has also identified that domestic distribution revenues totaling Eight Hundred Forty-Seven Thousand Two Hundred Dollars ($847,200), attributable to the film properties Salt Wind and Iron Lullaby, were improperly reclassified on CMP's waterfall schedules from "distributable revenue" to "recoupable producer-advance repayments." The specific reclassifications are as follows:
•  *Salt Wind*: Five Hundred Thirty-Eight Thousand Two Hundred Dollars ($538,200) in domestic home-entertainment revenue received during the third quarter of 2020 was reclassified as a producer-advance repayment.
•  *Iron Lullaby*: Three Hundred Nine Thousand Dollars ($309,000) in domestic subscription video-on-demand (SVOD) revenue received during the first quarter of 2021 was reclassified as a producer-advance repayment.
Ms. Fonseca contends — and CMP's own quarterly financial statements, prepared by CMP's outside accounting firm, Clearfield & Moss CPAs (Howard Moss, CPA, partner-in-charge), confirm — that the relevant producer advances for both Salt Wind and Iron Lullaby had been fully recouped no later than the fourth quarter of 2019. The reclassifications at issue occurred nine to fifteen months after the producer advances had been fully recouped, rendering the reclassifications entirely without basis under the Agreement or CMP's established waterfall methodology.
The practical effect of these reclassifications was to remove $847,200 from the pool of distributable partnership profits, thereby depressing the distributions payable to both partners and, in particular, reducing Ms. Fonseca's distributions by an amount proportionate to her 55% equity interest. There is no legitimate accounting or contractual justification for these reclassifications, and Ms. Fonseca was neither informed of nor asked to approve them.
Quantification of Damages to Ms. Fonseca
Based on the foregoing, Ms. Fonseca's preliminary calculation of the damages attributable to these irregularities, measured solely by reference to her 55% equity share of the improperly diverted and withheld amounts, is as follows:
Ms. Fonseca's total damages to date are therefore no less than One Million Three Hundred Nine Thousand Three Hundred Eighty-Five Dollars ($1,309,385). These figures are exclusive of pre-judgment interest, which will continue to accrue at the applicable statutory rate, and exclusive of attorney's fees and costs to which Ms. Fonseca will be entitled in the event of litigation.
Legal Characterization of Mr. Rennick's Conduct
Your conduct, as described above, constitutes a breach of the fiduciary duties owed by a partner to the partnership and to co-partners under California Corporations Code Sections 16403 and 16404. Specifically, your actions violate the duty of loyalty set forth in Section 16404(b), which prohibits a partner from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership, and which requires a partner to account to the partnership for any benefit derived from the partnership's business. Your conduct also violates the duty to account to the partnership and to the other partners for all partnership transactions, as required by Section 16403(c).
In addition, your self-dealing through RSV and your manipulation of CMP's revenue waterfall schedules constitute breaches of Sections 6.2, 7.1, and 8.4 of the Partnership Agreement, each of which was specifically negotiated to guard against precisely the type of conduct at issue here. We further note that Section 12.3 of the Agreement provides for the recovery of reasonable attorney's fees and costs by the prevailing party in any dispute arising from a material breach of the Agreement.
DEMANDS
In light of the foregoing, Ms. Fonseca hereby demands that, within thirty (30) days of the date of this letter — that is, no later than November 9, 2022 — you comply fully with each of the following:
(a) Full Accounting. Provide a full and complete accounting of CMP's financial affairs from the inception of the partnership through the present date, including but not limited to:
(i) All invoices issued by RSV to CMP, including all one hundred forty-two (142) invoices identified to date and any additional invoices not yet produced to Ms. Fonseca or her representatives;
(ii) All revenue waterfall calculations for each of the four CMP film properties (Iron Lullaby, The Perdition Room, Salt Wind, and Nightjars), including all underlying schedules, assumptions, and supporting documentation;
(iii) All domestic and international distribution agreements, license agreements, and related revenue reports, statements, and accountings received from distributors, licensees, and sub-distributors;
(iv) All bank statements for each of CMP's operating accounts at Ridgeline Commercial Bank, First Western National Bank, and any other financial institution at which CMP maintains or has maintained accounts, for the period from inception through the present date;
(v) All bank statements for RSV's accounts at any financial institution, to the extent such statements reflect payments received from CMP or transactions related to CMP's business;
(vi) All correspondence, memoranda, workpapers, and communications between you, RSV, and Clearfield & Moss CPAs (or any representative thereof) regarding the reclassification of Salt Wind and Iron Lullaby revenues from distributable revenue to recoupable producer-advance repayments.
(b) Payment. Pay to Ms. Fonseca the sum of One Million Three Hundred Nine Thousand Three Hundred Eighty-Five Dollars ($1,309,385), plus applicable interest at the statutory rate of ten percent (10%) per annum pursuant to California Civil Code Section 3289(b), accruing from the respective dates on which the excess management fees were paid to RSV and the improper revenue reclassifications were made.
(c) Independent Accountant. Agree to the immediate engagement of an independent certified public accountant, to be mutually selected by the partners, to (i) administer the CMP revenue waterfall on a prospective basis for all four film properties, and (ii) conduct a complete audit of all prior waterfall calculations and partnership distributions from inception through the present date.
CONSEQUENCES OF NON-COMPLIANCE
Please be advised that if these demands are not fully satisfied within the specified thirty-day period, Ms. Fonseca will pursue all available legal remedies without further notice to you. Such remedies will include, but are not limited to, the commencement of an action in the Superior Court of the State of California, County of Los Angeles, asserting claims for:
(1) Breach of fiduciary duty against you individually;
(2) Breach of the Partnership Agreement against you individually;
(3) An accounting under California Corporations Code Section 16405(b);
(4) Constructive fraud;
(5) Unjust enrichment against RSV, as the entity that received and retained the improperly diverted partnership funds.
In any such action, Ms. Fonseca will seek the recovery of all compensatory damages, disgorgement of improperly obtained fees and revenues, pre-judgment interest, and reasonable attorney's fees and costs pursuant to Section 12.3 of the Partnership Agreement and California Code of Civil Procedure Section 1021.5, as applicable. Ms. Fonseca expressly reserves all rights and remedies available to her at law and in equity, including but not limited to the right to seek injunctive relief, the appointment of a receiver, or judicial dissolution of the partnership, should circumstances so warrant.
INVITATION TO RESOLVE
Ms. Fonseca trusts that this matter can be resolved without the necessity of protracted and costly litigation. She remains willing to engage in good-faith discussions aimed at reaching a prompt and equitable resolution of the issues set forth in this letter. Accordingly, we invite you, or your counsel, to contact the undersigned at the telephone number listed above at your earliest convenience to discuss a path toward resolution.
Nothing in this letter shall be construed as a waiver of any of Ms. Fonseca's rights, claims, or remedies under the Partnership Agreement, at law, or in equity, all of which are expressly preserved and reserved. Similarly, this letter does not constitute an exhaustive recitation of all irregularities or claims that may be identified upon completion of a full accounting and audit, and Ms. Fonseca reserves the right to supplement the claims and damages set forth herein as additional information becomes available.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Jeffrey Park For the Firm
cc: Marguerite D. Fonseca
2817 Cheremoya Avenue Los Angeles, CA 90068
Film Property | Release Year | Aggregate Gross Receipts (through Q2 2022)
Iron Lullaby | 2018 | $6,420,000
The Perdition Room | 2019 | $4,110,000
Salt Wind | 2020 | $8,740,000
Nightjars | 2021 | $3,950,000
Total | $23,220,000
Category | Total Amount | Ms. Fonseca's 55% Share
Excess management fees paid to RSV | $1,533,500 | $843,425
Improper revenue reclassifications | $847,200 | $465,960
Subtotal | $2,380,700 | $1,309,385