Will the curtain fall on Habimah?

After decades of ignoring financial problems, the theater is fighting to remain open. Changing views about corporate reorganizations may help.

By YONAH JEREMY BOB
Will the curtain fall on Habimah? (photo credit: MIRIAM ALSTER/FLASH90)
Will the curtain fall on Habimah?
(photo credit: MIRIAM ALSTER/FLASH90)
The show must go on.
At a November 24 hearing before Tel Aviv District Court Judge Eitan Orenstein, famous actress Gila Almagor scolded the now ex-management of Habimah Theater and any of the performing arts center’s creditors seeking to collect, regardless of the consequences.
Her message was that there were many powerful parties lording it over the actors and employees of Habimah without taking their financial well-being into account, when the actors and employees’ stability and future should rightly come first.
“The theater is its actors, it’s the workers of Habimah; and without us, there is nothing,” said Almagor.
“An actor says, ‘I don’t have money to buy a bus card to get to the theater, I don’t have money to buy milk for my children,’ [and] then you are fed up and want to scream. Should we go out with hats to the public square to collect money? What is this?” she continued.
Pretty depressing-sounding situation. It gets more depressing when you hear the numbers.
In the “best”-case scenario put forth by Habimah’s now ex-management, the theater may be “only” around NIS 45 million in debt. More likely official estimates place the debt at around NIS 75m., but some estimate that the debt may even run over NIS 100m. The trustees currently administering Habimah by court order would not even comment to The Jerusalem Post Magazine as to what the real number is.
So, will there be shows continuing deep into 2020 and beyond, or will the curtain finally fall a last time on Habimah? It is hard to say at this point, but there is some room for optimism despite Almagor’s fiery rebuke.
As of a January 5 court hearing, Habimah still has a chance to fight for its survival. The court-appointed trustees hired Noam Semel to be Habimah’s new CEO. Days after the January 5 hearing, Semel hired acclaimed public relations specialist Ron Granot, who handled the Eurovision Song Contest and has worked for the Tel Aviv Theater, to rehabilitate Habimah’s brand. Granot did not even want to comment to the Magazine about Habimah’s future prospects.
BEFORE PREDICTING the theater’s prospects, it is important to understand the story of how it fell into such serious jeopardy.
Habimah was established in Russia in 1917, and eventually moved to Israel. Its modern financial problems date back around 30 years, with the government sweeping in to rescue it from financial ruin in October 1995.
That rescue came at a price, which kept Habimah in a sort of chronically ill financial condition. Essentially, the Finance Ministry, instead of continuing to unconditionally sponsor its activities, signed Habimah on high-interest loans.
This financial model meant that Habimah spent a large amount of its revenue to pay off the loan interest without being able to pay down the principal, and effectively enshrined its debt. From 1995 to 2012, Habimah went through three recovery plans. But when it failed to meet certain preconditions for additional funds from the government, the state denied it tens of millions of shekels in further aid.
Additionally, from 2006 to 2011, Habimah undertook major renovations. Whereas major theaters in other countries only do such renovations with contingencies for maintaining performances and revenues at standard levels, Habimah did not have sufficient contingencies. During those five years, Habimah lost between NIS 6m. and NIS 28m., with NIS 18m. in losses as a middle figure.
There were other signs – “the writing on the wall” – which went ignored.
A 2016 state comptroller’s report slammed the state and the theater’s management – especially CEO Odelia Friedman – for a host of issues. The report flagged Habimah’s failure, even then, to transfer sums withheld from employee salaries for pension, social security and training purposes. The comptroller said this was potentially a criminal offense. Moreover, the comptroller stated that Habimah did not fully pay its trade union fees and taxes.
Friedman was employed at Habimah for a long time, starting out as a bookkeeper, but she worked her way up, by the mid-2000s she already was mostly running the theater, and by 2011-2012 she officially became the CEO. Until the court-appointed trustees fired her, she had been expected to receive a three-year contract extension, despite Habimah’s woes.
The Magazine also confirmed with the Foreign Ministry in January that the theater failed to pay for the rights to stage plays originating from overseas. The US, England and Croatia have complained, with some filing formal complaints to the Foreign Ministry. Granot declined to explain how this issue would be remedied.
In December 2016, the state established a commission run by Yigal Emdi to make recommendations to solve the financial issues. According to a court summary, Emdi mostly stayed within a paradigm of cutting costs in exchange for NIS 10m. in emergency aid. Since then, the state and Habimah have wrangled about whether the state simply failed to transfer funds or whether Habimah had failed to meet the conditions set for the transfer of funds.
In recent years, the news was awful and just kept getting worse as the full extent of Habimah’s debt – tens of millions of shekels – became clear.
Habimah stopped paying its employees during the September-October period, as it faced a motion in court in September from some of its creditors that it should be liquidated.
In November, around 60 employees and actors announced a labor dispute in coordination with Shaham (The Israeli Actors Guild), an organization that defends actors’ rights.
Uri Rashtik, coordinator of activities for Shaham, responded, “The Habima Theater has been in crisis mode for a long time. Despite the severe crisis, however, to our delight, we at Shaham have managed to take care of all the theater actors’ financial issues so far. Although the past can no longer be repaired, we look forward with hope and will do everything we can to put the National Theater on its feet. We are currently focused on protecting the actors’ rights.”
Still, the situation remains highly complicated. The veil that the ex-management of Habimah had placed over the financial situation, and its extended efforts to sugarcoat just how bad things had gotten, made it nearly impossible to improve the situation.
This is what Orenstein ruled in late November.
THE GOOD news for showgoers is that Orenstein does not want to give up on Habimah and neither do the performers and workers at the performing arts center.
Although the court-appointed trustees, attorney Dorit Levi-Tiller and CPA Chen Berdichev, declined to be interviewed, their legal briefs project optimism that major parties that can help Habimah survive financially will step in.
The state provided NIS 2m. in immediate survival funds in December, and as of early January, an additional NIS 2.5m. was transferred.
Beyond this, if Habimah can survive the court reorganization proceedings, the state will likely have to fork over several more million shekels that it should have paid the theater in 2019.
How is that enough to cure between NIS 45m. and NIS 100m. in debt? It isn’t. But in reorganizations of an entity that is insolvent in the long term but can survive in the short term, you do not need to pay off all of the debt. You just need to solve the much smaller critical short-term debt and change aspects of the operations so that the long-term debt stabilizes.
Not a small amount of credit for this debtor-friendly atmosphere of encouraging reorganization could go to David Hahn.
Hahn was the official receiver for the State of Israel in charge of bankruptcy issues nationally until 2017. He is now a professor at Bar-Ilan University and advises the law firm of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. in the area of financial distress. Most importantly, he was one of the leaders of reforms to Israel’s bankruptcy laws in recent years to make it more amenable to debtor-corporations reorganizing, as in the US and much of the West.
Financial problems are never a good thing, but from the perspective of getting help through more debtor-friendly bankruptcy laws, the timing for Habimah could not have been better.
The largest reform in decades was passed into law in March 2018, and went into effect in September 2019, just as Habimah’s issues were finding their way into the court system.
Hahn explained to the Magazine that the approach of the new act is to help business debtors reorganize, countering Israel’s past reputation as being more pro-creditor than the US and other Western countries.
Additionally, he said that moves for “salvaging distressed entities have been happening in Israel for a while with amendments to old legislation. These reforms were intended to facilitate reorganization as [an] alternative channel to straightforward liquidation.”
He noted that the first moves occurred in 1995 when courts were empowered to stay all creditor lawsuits against an entity where that debtor entity presented a viable reorganization plan to the court.
In 2012, he said, Amendment 19 to the Companies Law authorized courts to appoint trustees to run a debtor entity and to force suppliers and others to maintain their contracts with a debtor entity even if that entity had violated the contract’s original terms.
For example, Hahn explained that a debtor entity may be behind on its rent for its place of business. If it is evicted from that space, the entity may fall apart. The new reform allowed the court to force the commercial landlord to allow the entity to remain in the space, provided there is a viable chance to reorganize and to eventually return to paying the commercial rent.
However, the 2018-2019 reform impacted every area of the law and included a preamble that said the first purpose of the law was to help rehabilitate debtor corporations, with maximizing value to creditors being only its secondary (though still important) goal.
These pro-debtor trends were in full force when Habimah asked Orenstein to give it the breathing room to rehabilitate itself. After various failed financial models for Habimah, some more business-oriented and some with a more free-spending, state-sponsored approach, Hahn said Habimah “is now coming full circle.” The court clearly “wants to facilitate a reorganization, but unlike the US, where they have Chapter 11, in Israel they have to appoint a trustee.”
“Habimah fell into a deep financial hole. To negotiate calmly with creditors, employees, actors, administrative staff, suppliers, service providers is difficult.... They needed the assistance of the court,” said Hahn.
“The court understands the cultural and social implications of Habimah. It is not just another for-profit organization. It’s a business, but [it] has a cultural role and a nationally important cultural role,” he explained.
“In some situations, you have institutions... which have other goals which are important to society on top of the plain economic business aspects. Courts take this into consideration and don’t rush to dissolve such entities. It’s the last resort,” said Hahn.
Hahn said that even new financial restrictions would need “to go hand in hand with the general picture and approach of the theater providing a repertoire to the general public.”
He said that the main recent parallels of courts giving special treatment in reorganization legal proceedings were “insolvency cases... of medical institutions – Bikur Holim in Jerusalem, Hadassah in Jerusalem.”
“Obviously, you want to save the institution; you don’t want to dissolve the hospital service for a whole region,” he continued. “So they must implement financial responsibility.... But always look at the public and social role in providing medical services to the general public.”
Changes could relate to restrictions on investments in new buildings, bonuses for overtime hours and generally raising questions in areas that led to the insolvency.
“That’s what they did in medical insolvencies, and perhaps that is what they need to do with Habimah,” he said.
HOW ARE these trends concretely helping Habimah?
Habimah’s trustees are trying to work out a temporary situation in which the company either does not pay rent or pays reduced rent until it becomes financially healthier. Orenstein has frozen lawsuits against Habimah, requiring any further legal actions to get his approval. Orenstein wrote that his decision on this issue exemplified his hope that the trustees can turn Habimah around if they are given sufficient breathing space.
The theater’s main sources of income are government funds, subscriptions, ticket sales and some additional funds from renting its premises for other organizations’ lectures or performances.
At the root of the rehabilitation is a change in the philosophical characterization of Habimah. The organization has been viewed in recent years in strictly hard-nosed business terms of trying to make a profit. Yet the trustees say this concept is not viable, and that Habimah should be viewed as a cultural asset of the nation, which the state will stand behind to keep viable.
They say the key is to back away from the financial model of charging high-interest loans and forcing Habimah to compromise artistic standards to cut costs, and to revert to the original model of the state sponsoring the theater as an institution that is a source of national culture and pride.
In a report filed by the trustees, they said, “Dealing with the theater with ‘business’ eyes and with financial terminology is a fundamental error. A theater is not a business. A theater must remain true to creative and cultural standards which do not always jive with ‘making profits.’
“Internalizing and adopting this new conclusion will lead... to a new paradigm which will ensure the existence of a lively and healthy national theater for the next 100 years,” said the trustees.
With a mix of realism and hope, the trustees wrote, “Despite the grievances and feelings of injustice as well as the continuing dire financial situation and the day-to-day hardships – the theater has a significant number of employees and actors... who are deeply committed to rehabilitating the theater.”
Diagnosing aspects of the problem and how to extricate Habimah from its financial woes, the trustees described a process in which Habimah’s management struck a range of contracts for short-term revenue which saddled it with additional long-term debt. Paying for these contracts also led management to ignore the artists who are the theater’s foundation.
“The outcome was a massive violation of its obligation to its employees, actors, artists and suppliers,” said the trustees in their report to the court.
One example was that Habimah would sell tickets at a discount to marketing groups in order to receive some form of a constant flow of cash, however low. In addition, Habimah handed out far too many free tickets to employees and others with whom they wanted to network. The trustees said these practices need to be cut off or heavily reduced.
Some have accused the Habimah management of nepotism. In an interview with Haaretz, Friedman has admitted that there are various instances where two employees are related, but she also has explanations for each instance, and no criminal charges have been filed. In the spectrum of nepotism, it is unclear whether there were any clear conflicts of interest where someone unqualified was hired for a job.
The trustees had few kind words for Habimah’s ex-management. They wrote, “Unfortunately, the management of the theater already years ago changed, and made violating contracts and dragging its feet on fulfilling financial obligations part of the organization’s culture.”
Friedman has rejected much of the criticism, blaming Habimah’s woes on the way that the state set up the high-interest loans and the fact that the state did not find a proper place for Habimah to perform during the 2006-2011 renovations.
In circular finger-pointing, she even alleged that Culture and Sport Minister Miri Regev had promised an additional NIS 10m. to her. Friedman said that this fell through because of the absence of a functioning government and constant rounds of elections. In turn, some criticized Habimah for trying to get close to Regev in order to win over her financial support, and Regev blamed Habimah’s ex-management.
Friedman said that anything she did that was below expected standards came only after the heavy burdens that preceded her reign had been drowning Habimah financially, and that in any event nothing she did was illegal.
The full scale of the management’s financial cover-up did not become clear until the court’s involvement in mid-November led Habimah’s ex-management to give full access to its financial documents to Hagit Georgi, an accountant commissioned by the Finance Ministry and Culture and Sport Ministry.
Part of the reason that the exact debt numbers are still unknown and could go beyond NIS 75m. is that Georgi found that even the company’s full financial books did not properly record all of Habimah’s expenditures.
Georgi found that Habimah’s largest creditors include the state, Bank Leumi, Bank Mizrahi, its employees and a variety of other creditors.
After all of the negative symptoms and diagnosing, we turn back to hope.
On January 5, Orenstein endorsed the trustees’ rehabilitation plan and additional fund transfers to Habimah to further help with the plan. Orenstein emphasized that his approval was not final, and that it was still too early to speak with any certainty about rehabilitation.
But by January 5, Almagor was not hurling anger and expressing desperation. In the six weeks and multiple hearings that passed from November 24, Habimah’s transformation was already under way.
This month, Habimah presented the shows Spring Awakening, The Traitor and Masada 1942.
The theater is still not out of danger, and the curtain could still come down at any moment if there are any new missteps. But, for the first time in years – and with continued support from the state, the trustees, the actors and supporters of the arts – it is possible that at the end of the theater’s bleak financial tunnel, spotlights could still brighten Habimah’s stage.


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