Written by: Robert DeMarco
There are countless websites that state, rather unabashedly, that Walt Disney filed for bankruptcy. That is simply not the case. See disney.wikia.com; wikipedia.org. Unfortunately, too many people regard the internet as gospel. While Walt Disney never filed for bankruptcy, a business enterprise that he and several associates formed in Kansas City was placed into bankruptcy.
Walt Disney, William Lyon, Fletcher Hammond, W.F. Hammond and Edmund Wolf formed Laugh-O-Gram Films, Inc., in May, 1922 [“Laugh-O-Gram”], a Missouri corporation. Laugh-O-Gram was created to develop short animated films that would be distributed to movie theaters to run before the main feature. Unfortunately, Laugh-O-Gram was undercapitalized from the beginning. The Articles of Association on file with the Missouri Secretary of State reflect that Laugh-O-Gram was initially capitalized with $2,700.00 in cash and $5,000.00 in personal property.
On September 16, 1922, Laugh-O-Gram entered into a contract with Pictorial Clubs, Inc., a Tennessee corporation [“Pictorial”]. Pictorial agreed to pay $11,100.00 for the right to distribute six black and white silent animated shorts (commonly referred to as “laugh-o-grams”) for distribution to schools and other non-theatrical venues. Walt Before Mickey: Disney’s Early Years, 1919-1928, Timothy S. Susanin (University Press of Mississippi, 2011). Unfortunately for Laugh-O-Gram, the Pictorial contract allowed Pictorial to receive the rights to all six “laugh-o-grams” for a down payment of $100.00, the remaining balance due on January 1, 1924. Id.
Throughout 1923, Laugh-O-Gram continued to face a variety of financial challenges. As a result, on October 4, 1923, at 4:55 p.m., Ubbe Iwwerks “[Iwwerks”], one of the Laugh-O-Gram animators and a close friend of Walt Disney, filed a Creditor’s Petition forcing Laugh-O-Gram into bankruptcy. Two days later, Iwwerks requested the appointment of a bankruptcy Receiver. The First Meeting of Creditors was calendared for October 30, 1923. The bankruptcy schedules [“Bankruptcy Schedules”] were subsequently filed on November 13, 1923, by certain petitioning creditors on behalf of Laugh-O-Gram.
The Bankruptcy Schedules reflect secured claims of $501.65 due and owing to Fred Schmeltz, unsecured claims in the aggregate sum of $12,325.23, and assets totaling $6,586.62 exclusive of any claims against Pictorial. As reflected in the Petition for Receiver filed by Iwwerks, it was his opinion that “its only asset consists of a contract and contract rights with one Pictorial Clubs, Inc.; that the moneys due from said Pictorial Clubs, Inc., to the bankrupt under said contract are being or will shortly be received and paid out to certain creditors whom the bankrupt has attempted to secure by an assignment of said contract and contract rights, and that the proceeds of said contract will thus be dissipated and expended to the injury and prejudice of other of the bankrupt’s creditors….”
It was Iwwerk’s fear that a chattel mortgage entered into by and between Laugh-O-Gram and Fred Schmetlz [“Schmeltz”] would bar any dividend being paid to the unsecured creditors because of his claim of lien upon the Pictorial contract. Iwwerk’s fear was shared by the Bankruptcy Referee and a Receiver was appointed.
As can be imagined, the Bankruptcy Referee faced a number of obstacles in trying to collect on the Pictorial obligation. In January of 1924, the Receiver learned that there existed not only Pictorial, but also Pictorial Clubs, Inc., a New York corporation [“Pictorial NY”]. Unfortunately, Pictorial was also insolvent and sold all of its assets to Pictorial NY.
The Receiver and Pictorial NY spent much of January negotiating a resolution to the situation involving the laugh-o-grams. On January 26, 1924, the Receiver filed an Application for Authority to Enter Into Contract with Pictorial NY. The contract referenced in the Application memorialized the terms of the settlement by and between Pictorial NY and the Receiver.
This, however, was only half of a solution. As stated supra, Schmeltz asserted the Pictorial contract secured his claims against the Bankrupt. On August 15, 1924, Schmeltz filed an Intervening Petition in order to clarify his rights in certain assets of the Bankrupt, including the Pictorial contract. The Receiver filed a Brief in opposition to the intervention. The brief, though not dated, appears to have been filed after the hearing on the matter. The Bankruptcy Referee filed his Certificate of Referee to Judge on January 9, 1926, holding that Schmeltz had no secured claim against the Bankrupt. Further, to the extent such a security interest did arise, it constituted a preference. The District Judge affirmed the ruling of the Bankruptcy Referee.
Alas, the Receiver was successful. The Receiver successfully recovered the primary asset of the Bankrupt and successfully liquidated that asset for the benefit of the unsecured creditors. The Receiver filed his final accounting with the Bankruptcy Referee on August 23, 1927, and the case was subsequently closed.
Now you know the truth about Walt Disney and his foray into bankruptcy. He never filed bankruptcy, but instead was a principal in Laugh-O-Gram; an entity that was eventually forced into bankruptcy.
NOTE: This post is dedicated to my brother-in-law, Michael R. Gerard. Mike was an animator on a couple of Walt Disney Feature Animation productions, including Beauty and the Beast and The Prince and the Pauper. But for the successes and failures of Walt Disney, Mike might never have pursued his dream and for that I am very thankful.