Ticketfly beaten in court case that shows Pemberton Music Festival lost $47.7 million over three years
After the Pemberton Music Festival was cancelled in May 2017, many ticket holders were furious that they wouldn't be able to see such acts as Chance the Rapper, Muse, and A Tribe Called Quest.
But many of these music fans were mollified when they could collect refunds from their credit-card companies.
However, the exclusive ticket seller for the music festival down the highway from Whistler, B.C., Ticketfly Canada, was not so lucky.
The credit card companies simply transferred these charges back to the ticketing company, forcing it to try to recover this money.
Naturally, Ticketfly sought to get these funds back from the trustee in bankruptcy, Ernst & Young.
But the trustee wasn't prepared to put Ticketfly in front of other creditors, so Ticketfly went to court, alleging "unjust enrichment".
According to a recent B.C. Supreme Court ruling, Ticketfly's assignee, Pandora Media Inc., argued that "the debtors misled the ticket-purchasing public".
It alleged that the Pemberton Music Festival promoters did this "by authorizing the sale of tickets when they had no firm intention of proceeding".
However, Justice Paul Pearlman dismissed these arguments, concluding that the evidence fell short of "establishing bad faith or other misconduct".
Therefore, Pearlman ruled that it was "unnecessary to decide whether the ticket sale proceeds, although co-mingled with other funds, constitute specific, identifiable property".
Ticketfly has been left holding the bag pending the outcome of bankruptcy proceedings unless this ruling is reversed on appeal.
It's an ominous court decision for anyone considering selling tickets to major B.C. music festivals in the future.
Pemberton festival was already drowning in red ink
The first Pemberton festival was held in 2008 and then it was revived for three consecutive years from 2014 to 2016, when it lost $47.7 million.
In 2016, the operating loss was approximately $14 million, according to Pearlman's decision, on ticket sales of just $15.2 million.
In 2015, the operating loss was even larger: $16.8 million. And in 2014, the Pemberton Music Festival was $16.9 million in the red.
That caused the Canadian investors in the Pemberton Music Festival Limited Partnership (PMFLP) to rethink how things would proceed in 2017.
In his judgment, Pearlman wrote that New Orleans–based Huka Entertainment LLC was the "exclusive producer", starting in 2013, when the festival was about to be revived.
The operating company, PMFLP, was initially jointly owned by Huka and local investors.
PMFLP's limited partners were initially Jaspec Holdings (25 percent) and H1 Canada Events Corp. (75 percent), which was a subsidiary of H1 Events LLC.
The initial general partner was Twisted Tree Circus GP Ltd., which was 75 percent owned by H1 Events.
"All of Twisted Tree's directors were senior executives of Huka," Pearlman wrote in his ruling.
Ownership changes occurred in 2014
In 2014, a B.C.-registered numbered company bought a 20 percent stake in the limited partnership units, including 15 percent from H1 Canada. The same year, another local investor bought Jaspec Holdings' remaining share.
This left local investors owning 40 percent of the limited partnership units and H1 Canada, which was linked to Huka, owning 60 percent.
"Following three years of substantial losses, the Canadian Investors arranged for an experienced Canadian producer to review the 2016 Festival to determine the source of its losses," Pearlman wrote. "On the Canadian producer's recommendation, the Canadian Investors approached two well-known producers to produce the 2017 Festival; however, neither was prepared to do so if Huka continued to be involved.
"Through 2017, relations between the Canadian Investors and Huka became increasingly strained," the judge added. "In early 2017, the Canadian Investors offered to purchase the interest of Huka and of the individual shareholder in H1 Events at fair market value, but received no response to their offer."
In February 2017, Ticketfly began selling tickets for last year's doomed festival "on Huka's instruction", according to the ruling.
"On March 3, 2017, the Canadian Investors informed Huka in writing that they were not prepared to proceed with the 2017 Festival if Huka remained the producer of the Festival and retained control of the general partner," Pearlman revealed. "Through March 2017, the Canadian Investors insisted that Huka relinquish its role as producer of the Festival, and demanded as a condition for moving forward with the 2017 Festival that they acquire control of the general partner."
That was followed by mediation in April when "Huka agreed to replace Twisted Tree with a new general partner".
Ticket revenue from 2017 paid 2016 debts
However, Huka also "negotiated to continue its role as producer with the assistance of an experienced producer chosen by the Canadian Investors".
This led to the incorporation of a numbered company, 111 B.C. Ltd. It became the new general partner of PMFLP.
"PMFLP continued, albeit unsuccessfully, to attempt to attract new investors," Pearlman wrote. "These activities are consistent with the debtors making an honest and persistent effort to stage the 2017 Festival..."
This attempt "continued until May 16, 2017, when the directors of 111 B.C. Ltd. determined that PMFLP lacked the necessary funds to proceed and decided to make the assignments in bankruptcy".
On May 18, 2017, the numbered company and PMFLP filed for bankruptcy protection and Ticketfly stopped selling tickets.
The ruling revealed that $873,690 in 2017 ticket sales for the Pemberton Music Festival was used to cover outstanding expenses from the previous year's festival.
But the judge didn't have a concern about that.
"The Trustee has advised that amount included $563,001 for GST owing and $304,018 for production expenses paid to key vendors to ensure their continued involvement with the 2017 Festival," Pearlman noted. "I am unable to say those expenditures were imprudent, let alone wrongful."