Danny Fisher was riding high in 2008. As a principal in City Lights Media, one of the largest independent film and television companies in the world, Fisher’s company financed and distributed movies, created, sold and produced 63 TV shows, and had over 400 employees. Then the economy collapsed, and with it almost every indie film company in the country, including Fisher’s. When the dust settled, Fisher owed over $15 million in debt he had personally guaranteed on behalf of City Lights and he had only $1,700 to his name. He had little choice but to file bankruptcy.
One of the principal public policies behind the bankruptcy laws is to give an honest but unfortunate debtor a “fresh start” by allowing discharge of most debt. The “fresh start” policy is not without controversy. Some scholars and policy wonks assert that it’s not sound public policy, and increases the ‘moral hazard’, a situation in which people systematically – and rationally – underestimate the real costs of engaging in risky activity, as some of the costs are borne by someone else.
Fisher’s company was deeply leveraged. Knowing that in the tightest pinch he could discharge his personal liability through bankruptcy may have encouraged Fisher to take the financial risk. The creditors bore the costs of the discharge of Fisher’s debt. The creditor bears increased risk that it will lose its investment, which in turns results in higher costs to everyone, as the creditor seeks to spread its risk across all of borrowers.
But on the other hand, we can also see that the ”fresh start” policy promotes entrepreneurial risk, which in turn may provide great benefit not only to the individuals associated with it, but to the larger society. Bill Gates and Steve Jobs never needed to discharge their way out of debt, but I suspect they knew the option was there in the event their businesses went south.
Fisher emerged from bankruptcy with his $15 million debt expunged, but a sullied financial reputation that had once been his stock in trade. He did his research to determine where his next opportunity might lie. In the few years since he received his bankruptcy discharge, Fisher started up FilmRise, a digital distribution company. Fisher called upon investor contacts he had in the film business, and two of them stepped up, investing $200,000, despite the bankruptcy blemish to his reputation. FilmRise currently has over 5,000 titles and has raised over $3 million in capital with 30 investors and a growth rate of 1,000%.
From being saddled with $15 million in debt to starting a new enterprise with other people’s money, Fisher is a prime example of the “fresh start” concept at work. Is this a great country, or what?