VidAngel files for bankruptcy protection — from its own customers

 

SALT LAKE CITY — Over 100,000 VidAngel customers in Utah and across the country — who are owed money — have become creditors following a bankruptcy filing last week by the embattled Utah video filtering company.

The move also puts a pending legal dispute involving the company over copyright infringement in California on hold until the Chapter 11 proceeding is resolved.

In a posting to VidAngel’s website, CEO Neal Harmon said the Oct. 18 filing should be viewed as “good news” for both the company and the business of filtering objectionable content from videos of films and television shows.

“First, Chapter 11 is simply a reorganization and part of our legal and business strategy,” Harmon said. “Per federal law, Chapter 11 reorganization automatically pauses our lawsuit with Disney and the other plaintiffs in California. This strategy also allows us to continue our new lawsuit in Utah, where we are seeking a legal determination that our new filtering system is legal.”

While the latest lawsuit, filed in Utah federal court by VidAngel in September, is seeking legal clarification on the company’s newest business model of filtering content that streams from licensed providers like Amazon and Netflix, the California proceedings began when the company’s approach still involved decrypting disc-based content before streaming it to customers. While both parties await an outcome on that case, VidAngel has been enjoined from streaming content owned by the plaintiffs, which include Disney, 20th Century Fox, Lucasfilm and Warner Bros.

Harmon said just in case it loses those legal battles and ends up owing damages to the plaintiff companies, the pause afforded by the bankruptcy proceeding will allow VidAngel to accrue “enough revenue from our new system to pay any damages.”

In a statement to the Deseret News, a representative from the joint plaintiffs’ group in the California case said VidAngel’s legal maneuvers amount to stalling tactics.

“VidAngel’s bankruptcy filing is part of a self-described ‘strategy’ to delay the inevitable outcome of a lawsuit that a federal district court and a unanimous Court of Appeals have already determined VidAngel will likely lose,” the statement read. “VidAngel itself, in a recent SEC filing, admitted it is “probable” it will lose the case. We will continue to pursue our legal action against VidAngel for operating an unauthorized streaming service and are confident the courts will see through VidAngel’s litigation gamesmanship and hold it accountable.”

The money VidAngel owes to customer-creditors stems from the company’s original business model, where customers were required to pay $20 to purchase a movie disc, which the company would decrypt, filter and stream back to the buyer. They would then grant that customer a $19 credit, retaining the $1 as the filtering fee.

While VidAngel declined to detail how much is owed to customers via unused credit balances, their bankruptcy filing indicates financial liabilities between $1 million and $10 million and assets in the same range.

University of Utah David Eccles School of Business finance Professor Elizabeth Tashjian said Chapter 11 proceedings are widely used by U.S. businesses due to the procedure’s wide-ranging flexibility with outcomes that can include re-organization, liquidation or a buy-out by another company. She also noted bankruptcy courts have a lot of latitude when it comes to deciding who gets their money first.

“Different types of debt are viewed differently,” Tashjian said. “Bankruptcy courts have a lot of discretion about who gets paid and in what order.”

While Harmon highlighted that the bankruptcy proceeding “should give us time to take care of our customers and investors,” VidAngel customers who want to cash out their unused credits are out of luck, for the time being.

A customer who identified himself as Wesley Vaz said in an Oct. 19 VidAngel website posting he had been trying to get his $19 back from the company but had been unsuccessful and was frustrated by a lack of communication.

“I understand you guys are facing a terrible lawsuit, but that does not mean you have to put your customers aside,” Vaz wrote. “I loved old VidAngel, but now your service does not appeal to me anymore. So, please, I am only asking to receive my $19 back. I have already sent many emails.”

A posted response credited to Harmon said the matter was being referred to customer support but that if the original request was submitted after the Chapter 11 filing, he’d just have to wait. However, Harmon also said the filing would protect Vaz’s right to eventually collect the money VidAngel owes him.

“While cash outs will need to be paused for the time being, in fact, this filing actually protects customers from having a judge prioritize the studios over customers,” Harmon wrote. “It also ensures that a Chapter 11 reorganization judge balances the parties as this is worked out.”

The same web page also indicates that while VidAngel customers with outstanding cash balances won’t get refunds for now, they can use the credit to purchase more filtering services from the company.