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07/24/22 10:17 AM
ARKANSAS NEWS BREAK: HANNOVER HOUSE OWES MILLIONS
Hannover House Owes Millions, Seeks New Investors
by Mark Friedman
A Fayetteville penny-stock film distributor dealing with millions in legal judgments and a state securities fraud finding is framing a comeback story: trying to raise $8 million to launch a video streaming service.
But the plot details may not add up for Hannover House Inc. and its one full-time employee, CEO Eric Parkinson, who face million-dollar judgments in both New York and California, not to mention a 2019 cease-and-desist order from the Arkansas Securities Department for securities fraud.
Parkinson told Arkansas Business last week that he’s working to reverse the judgments and have the ASD order “expunged.”
He blamed Hannover’s troubles largely on an illness that struck its longtime president, Don Frederick Shefte of Fayetteville, in 2017. Shefte, who is in his 70s, was hospitalized for 18 weeks in 2018, Parkinson said, and retired from Hannover earlier this year. Then he filed for personal Chapter 7 liquidation.
“I have taken control over the matters that were neglected,” Parkinson said. “And we seem to be making progress.... We’re comfortable enough to move ahead with our offering.”
The multi-studio streaming service, called MyFlix, was announced in May 2018, and Parkinson hopes to have it launched by the end of September or “we could hold it all the way to Thanksgiving.”
Beneath the talk of moving on, however, the legal problems remain.
Hannover House suffered a setback last month when a New York judge denied a request to vacate a $1.5 million default judgment entered against Parkinson, Shefte and the company in October 2018.
Parkinson said in a court filing that he didn’t learn of the judgment until February, after Shefte filed for bankruptcy. But New York attorney Steven Gold, representing plaintiff Bruce Lewin of New York, offered evidence that Hannover House and Parkinson have known of the judgment for more than two years: Parkinson mentioned the Lewin judgment in an email from January 2019, and Hannover House acknowledged the judgment in a U.S. Securities & Exchange Commission filing for the year ended Dec. 31, 2019.
“The Defendants are wasting plaintiff’s time and resources and abusing the process of the Court and should have sanctions entered against them for the costs Plaintiff has incurred to oppose their frivolous motion,” Gold wrote.
The judge subsequently rejected vacating the judgment, ruling that Hannover House had waited too long to object. Parkinson, the CEO, said he was appealing that ruling as well.
Another hurdle to Parkinson’s MyFlix offering and an eventual Hannover happy ending is the Arkansas Securities Department’s cease-and-desist order. Parkinson said he’s seeking a hearing from the ASD to re-examine the order.
The order says a private investment firm in Texas invested a total of $146,000 in Hannover House from July 2014 to June 2015. The order didn’t name the firm, but court documents show it is J&J Investments Inc. of Dallas. J&J Investments, which didn’t return a call for comment, sued Hannover House in 2015 in a Texas state court to recover the money it invested, plus lost profits and other damages. J&J received a judgment of nearly $370,000 in 2016.
The Arkansas Securities Department found that Hannover House, Parkinson and Shefte failed to disclose to J&J “certain pertinent and material information that a reasonable investor would want to know prior to making an investment.” The ASD said Hannover House also didn’t disclose “several judgments and pending civil suits existing and filed against Hannover House” before the investment was made.
After receiving the investment, Hannover, Parkinson and Shefte “made several ‘lulling statements’ that were false and misleading and designed to cover up the fraudulent omissions related to [J&J’s] investment,” the filing said.
ASD accused Parkinson of posting a “fake legal pleading designed to convince the public that the Texas Judgment would be dismissed” on the company’s blog in June 2019. The department said “no such pleading has ever been filed with the court.”
In a cease-and-desist letter, the state ordered Hannover House, Shefte and Parkinson to stop “committing fraud or deceit in connection with the offer or sale of any securities in the state of Arkansas.” The department also ordered Hannover House to stop selling securities in Arkansas unless they are registered.
Parkinson told Arkansas Business last week that Hannover House had never made unregistered securities offerings to Arkansans. He said that one of Shefte’s last official acts at the company was to talk to Campbell McLaurin, the Securities Department’s associate general counsel, seeking an explanation for the letter.
“And they could not find any factual basis for issuing a cease-and-desist letter for something we have never done,” Parkinson said.
Parkinson added that the department said the order could not be removed without a hearing, and that no hearing could be held because of the COVID-19 pandemic.
He said Hanover House deserves a hearing. “They made allegations which are demonstrably untrue,” Parkinson said.
In an interview with Arkansas Business last week, McLaurin disagreed with Parkinson’s take on the events.
“We have never said that we could not have hearings as a result of coronavirus issues,” he said.
He also said that the department stands by the allegations in the order. He said Parkinson and Shefte were never told the department couldn’t “substantiate the allegations in the order, or that we have any plans to undo the order at a hearing or otherwise,” McLaurin said.
Business Model
When Parkinson bought Hannover House of California in 2002, it was involved in book publishing, he said. He moved the company to northwest Arkansas and added distributing DVD movies to its portfolio “because DVD was hot as a pistol back then,” said Parkinson, a nearly four-decade veteran of the film distribution and marketing business.
Since 2002, Hannover House has released more than 400 titles, including “Twelve,” “Grand Champion” and “Savage Land.”
To distribute DVD movies, Hannover gave producers a royalty advance of $50,000 to $100,000, then sold the DVDs. The company would deduct the distribution fees and the cost of marketing, and the rest would go to the producer.
“And I would say the DVD business was a really good meat-and-potatoes business … until about 2014 or 2015,” Parkinson said.
Dealing with Walmart Inc. became a blessing and curse, he said. If Hannover House placed a DVD title in the Bentonville retail chain, it would need about 25,000 copies to cover more than 4,000 stores nationwide. “They don’t want empty shelves,” Parkinson said. “Well, who’s going to pay for the manufacturing and the freight? It’s good old Hannover House.”
But if only 3,000 copies of the movie sold, then 22,000 units would be returned to Hannover.
Still, the producer would want money for the 25,000 copies, Parkinson said. “So we ended up getting some lawsuits from people who wanted to know how come they didn’t get a check from Hannover,” he said. “It’s, like, ‘You didn’t earn one.’”
He said that model became too difficult “because you can’t sustain a business selling 3,000 copies of a movie.”
Then he said the company went to what he called the Netflix model. That involved opening a movie in enough theaters that Netflix would then buy the rights to the film for more than enough to cover the costs.
But around 2016, Netflix stopped buying movies and started making its own. Netflix would buy a film only if it had “a substantial box office performance,” Parkinson said. “Well, you’re back to that same old formula. How do you get somebody to choose an independent film instead of the new Avengers movie? It’s really, really hard.”
He said that is why Hannover House began to distance itself from the distribution model and focus on streaming programs.
MyFlix Announced
Parkinson said MyFlix was announced at the Cannes Film Festival in May 2018.
“MyFlix is huge,” Hannover House said in a May 23, 2018, blog post. “The unanimous supplier support for this streaming venture — including support of on-boarding fees and supplier provided marketing — indicates that this venture is the right business model (and finally) at the right time. We believe that Cannes 2018 will be marked as the point in time that [Hannover House] evolved into primarily a streaming portal.”
Parkinson told Arkansas Business last week that the delay in getting the service launched was partly caused by having to “earn the trust of the program suppliers, because we’re not paying them royalty advances. We’re basically saying to them, ‘You’ve got 500 titles in your film library, 50 of them are on Netflix, what are you doing with the other 450 titles?’”
Hannover House hopes to get permission to place titles on MyFlix and pay the content creators out of revenue from subscribers.
COVID added to the delay in getting the service launched. “We just couldn’t do anything during the pandemic year because you couldn’t even get people to come in,” Parkinson said.
There are eight contract employees working on MyFlix, and Hannover has spent about $275,000 on the project, Parkinson said. Last week, Hannover shares were trading just over 2 cents (HHSE).
Shefte’s Illness
In 2017, Hannover’s president’s health problems became worse. Shefte, a former partner in the San Diego law firm Seltzer Caplan, joined Hannover House in 2007. He said in a June court filing that he has been battling health problems for about 10 years. “In the summer of 2017, my condition worsened, making it hard to catch my breath, even on modest exertion,” he wrote.
He said he wasn’t at the office for the last 10 weeks of 2017 and was hospitalized starting in June 2018 for a total of 18 weeks.
At that time he said he was incapacitated and unaware of the “gravity and urgency” of the New York lawsuit in connection with the 2015 movie “Dancin’ It’s On!” Shefte referred questions from Arkansas Business to Parkinson.
Bruce Lewin of Southampton, New York, was the executive producer of “Dancin’ It’s On!” He hired Hannover House to release and distribute the film. He then sued Hannover House in New York state court in 2016.
According to Lewin’s suit, Hannover House, Parkinson and Shefte forecasted that the movie would generate net income between $1.4 million and $5.6 million. In 2015, Lewin provided $1.3 million to advertise and distribute the film. Under the terms of the agreement, Lewin was to be paid in full first before anyone else received any proceeds from the film’s revenue.
New York film producer Bruce Lewin hired Hannover House of Fayetteville to release and distribute “Dancin’ It’s On!” in 2015. In 2018 he received a $1.3 million judgment plus costs that Hannover House CEO Eric Parkinson has been unsuccessful in overturning.
By January 2016, Lewin hadn’t received any money, the suit said. For the next several months, Lewin continued to ask about the return of his money and a percentage of the movie’s profits.
“On each occasion, Defendants provided excuses as to why funds had not yet been provided,” the suit said. “None of these excuses was acceptable.”
Parkinson said in a follow-up email to Arkansas Business that film distribution tends to be a litigious business. “Independent producers always think they have the next big ‘Blair Witch’ surprise hit — and if a film doesn’t perform, it’s easier to blame the distributor than to look at the poor reviews,” he wrote referencing the 1999 indie horror film that cost about $60,000 to make but generated nearly $250 million at the box office.
He wrote that Hannover House has released more than 450 titles since 2002 “and only faced 17 producer lawsuits.” He said while that might seem like a high number, it’s low compared with other studios and independent distributors.
In 2018, Lewin received a judgment for $1.3 million plus interest and costs that totaled $1.5 million against Parkinson, Shefte, Hannover House and its subsidiary, Medallion Releasing Inc.
“I tried to collect for a few years, nothing happened,” Steven Gold, a New York attorney representing Lewin, told Arkansas Business last week.
A lawsuit over “Union Bound” seeks $930,000 from Hannover House.
Another attorney, Marc Lazo of Irvine, California, said he’s trying to collect on a $963,000 default judgment in 2019 from California against Hannover House that has ballooned to $1.8 million after interest, attorneys’ fees and other costs.
The court fight is related to a 2016 movie called “Union Bound.” Lazo alleged that Hannover House and its officers defrauded his client, Michael Davis, president of Uptone Pictures Inc. of North Carolina, by “basically taking control of the film and acquiring the distribution rights without actually distributing it.”
That case was settled in state court, but Lazo alleged the defendants breached the settlement agreement, which triggered the suit that resulted in the default judgment.
Parkinson said he also is working to have the judgment overturned on the grounds that there was already a settlement agreement in place.
Parkinson said if the judgments stand, “we’ll pay them. The upside is so big for the MyFlix site that these little things are … a little bit annoying matters from the scope of things.”
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