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Ilshin Investment Co., Ltd v. Buena Vista Home Entertainment

May 13, 2011


(Los Angeles County Super. Ct. No. BC347911) APPEAL from a judgment of the Superior Court of Los Angeles County. Aurelio Munoz, Judge. Reversed in part and remanded with directions.

The opinion of the court was delivered by: Chaney, J.


Ilshin Investment Co., Ltd. (Ilshin), a Korean company, loaned funds to Last Patriot Productions, Inc. (Last Patriot) to enable production of The Patriot, a film starring Steven Seagal. Last Patriot obtained the necessary bank financing and completed the film, but was unable to repay its obligations to Ilshin and others.*fn2

When the completed film failed to obtain theatrical distribution, Last Patriot entered into an exclusive agreement (the Agreement) for its home video distribution by Buena Vista Home Entertainment, Inc. (Buena Vista), for an eight-year term ending approximately June 2007. The Agreement provided that Buena Vista's fee would be a percentage of the distribution proceeds, and permitted Buena Vista to recoup its expenses before paying the balance of the proceeds to Last Patriot. But the Agreement expressly required Buena Vista to obtain Last Patriot's consent before incurring recoupable distribution expenses in excess of $900,000.*fn3

Buena Vista distributed The Patriot from mid-1999 until October 2005, with sales far exceeding the parties' expectations.*fn4 Between May 1, 1998 and September 30, 2006, United States distribution receipts were almost $13.5 million, from which Buena Vista earned fees of $3 million and paid over $4.7 million to Last Patriot and its creditors. But when distribution costs reached the $900,000 threshold early in the venture, Buena Vista did not seek or obtain Last Patriot's consent to continue incurring expenses, as the Agreement required.

In February 2006, Ilshin filed suit against Buena Vista. As a judgment creditor standing in Last Patriot's shoes, Ilshin alleged that Buena Vista had breached the Agreement by incurring and recouping distribution costs above the $900,000 threshold without Last Patriot's consent, and by ending the film's distribution before the natural expiration of the Agreement's eight-year term. Its complaint also included a cause of action for conversion. For its contract claims Ilshin sought to recover the excessive costs Buena Vista had deducted, and the profits Last Patriot would have earned from continuing sales; for its tort claim, Ilshin sought the same compensatory damages, plus punitive damages.

After bifurcation of the conversion claim and a bench trial of the contract claims, the trial court awarded Ilshin contract damages for all the costs above $900,000 that Buena Vista had deducted during the two years preceding Last Patriot's 2001 inquiry about the cost deductions, totaling $3,775,197 plus prejudgment interest. The court also awarded Ilshin another $800,000 for its lost profits from October 2005, when Buena Vista ended the film's distribution, until the end of the Agreement's eight-year term.

And it awarded Ilshin attorney fees and costs totaling $1,492,643.71.

Buena Vista appeals from these damage awards, and from the trial court's award of attorney fees. Ilshin, too, appeals from the judgment, challenging a ruling that limited the period for which Ilshin could recover excess costs, and rulings that prevented it from seeking punitive damages based on its tort claim against Buena Vista.

With respect to Buena Vista's appeal, we reverse the trial court's damage award in part with respect to the amount of contract damages, and lost profits damages. The attorney fee award must also be set aside, for the law does not authorize the award of attorney fees for a prevailing plaintiff in an independent creditor's suit.

With respect to Ilshin's appeal, we affirm the trial court's imposition of a two-year limitation on the period for which Ilshin could recover damages for Buena Vista's excessive recoupment of distribution costs. We find, however, that the trial court erred by refusing to enter a directed verdict against Buena Vista on the conversion claim. These errors will require reversal of the judgment and remand to the trial court for its redetermination of appropriate damages and for further proceedings consistent with this opinion.


Financing and Production of The Patriot

In 1993 Ilshin loaned funds to Last Patriot as seed money to obtain bank financing for the production of a film entitled The Patriot, starring Steven Seagal. Last Patriot obtained bank financing and completed the film, but did not repay its obligations to Ilshin and others.

1. The Distribution Agreement

When The Patriot failed to obtain theatrical distribution, Last Patriot entered into an agreement (the Agreement) for videocassette and DVD distribution of the film by Buena Vista. The Agreement granted exclusive U.S. home video distribution rights to Buena Vista for eight years, plus a six-month, non-exclusive, sell-off period.

a. Buena Vista's distribution fee

Under the Agreement, Buena Vista was entitled to a distribution fee, calculated as a percentage of "Defined Receipts." Defined Receipts consisted of gross billings after certain adjustments (primarily for refunds, rebates, and reserves, as discussed below in greater detail). Buena Vista's distribution fee was computed as 20 percent of the first $4.5 million of Defined Receipts, 22 percent of receipts from $4.5 million to 7 million, and 25 percent of receipts above $7 million.

b. Buena Vista's right to recoup distribution expenses

The Agreement provided that after payment of its distribution fee, Buena Vista could recoup "all actual distribution costs and expenses paid, accrued, or incurred" for the film's distribution. The Agreement broadly defines the distribution costs that are recoupable by Buena Vista, specifically including costs for rebates, sales incentives, and price protections, as well as for any "music [costs], talent clearances and residuals" that Buena Vista elected to pay.

"Rebates" are amounts typically paid by Buena Vista to subdistributors and retail sellers (or deducted from the payments due from them) as incentive to meet a particular sales volume. "Price protections" are amounts deducted by Buena Vista from amounts owed by sellers after Buena Vista has lowered the price of unsold videocassettes and DVDs, to obviate the expense of exchanging returned items for lower-priced replacements. The "music [costs], talent clearances and residuals" are royalty obligations, computed as a percentage of receipts, owed by Last Patriot to industry guild members (such as actors, directors, screen writers, musicians, etc.). Although they are undisputedly obligations of Last Patriot (the film's producer), not Buena Vista (the distributor), the Agreement expressly entitles Buena Vista to pay Last Patriot's residual obligations and recoup those amounts from Last Patriot's share of the proceeds, because Last Patriot's failure to pay residuals would jeopardize Buena Vista's ability to continue distributing the film.*fn5 The Agreement provides express indemnities by Last Patriot for any residual payments Buena Vista makes on its behalf.

c. Last Patriot's contingent compensation

The Agreement provided that after its fees and distribution expenses were deducted, Buena Vista would remit to Last Patriot 100 percent of the funds remaining--the "Contingent Compensation"--in installments. Under the Agreement, Buena Vista's periodic distribution statements "shall be deemed to be accounts stated and not subject to audit two (2) years after each statement is rendered" by Buena Vista.

d. The consent clause

During the negotiation of the Agreement, Last Patriot obtained Buena Vista's agreement to insert a "consent clause," providing that Buena Vista must obtain Last Patriot's consent before incurring more than $900,000 of "recoupable" distribution costs.*fn6 There was evidence that those negotiating the Agreement on Last Patriot's behalf intended the consent clause to protect it from the possibility that Buena Vista might incur excessive distribution expenses, thereby reducing Last Patriot's ultimate return under the Agreement. According to one of Last Patriot's negotiators, the consent clause also allocated risk between Buena Vista and Last Patriot as to how well sales would go under the Agreement. If sales were low (as Last Patriot's negotiator feared), Last Patriot would bear the risk that expenses might be a large proportion of revenue, while Buena Vista would bear the risk that the consent clause would cap recoupable expenses if sales were high.

The Agreement does not indicate the circumstances that would justify Last Patriot in either granting or withholding its consent to Buena Vista's incurring distribution expenses above the $900,000 threshold, nor the effect on the parties' rights and obligations if Last Patriot did not grant its consent. Nothing in the Agreement explicitly requires Buena Vista to devote any particular level of effort to the film's distribution, or to exert efforts or funds to maintain distribution during the Agreement's entire eight-year term.

2. Receipts and expenses during the film's distribution

When they negotiated the Agreement, the parties each anticipated that the film's U.S. home video distribution would generate receipts in the area of $4 million over the Agreement's eight-year term. But its distribution enjoyed far greater success. As early as September 1999, just a few months into the distribution enterprise, Buena Vista had obtained about $3.7 million in Defined Receipts, with costs of slightly over $1.2 million and fees to Buena Vista of $742,000.

Each quarterly participation statement reported to Last Patriot the amount of distribution costs incurred by Buena Vista, and showed that those costs had been reimbursed before distributing Last Patriot's share. But Buena Vista did not at any time seek Last Patriot's consent under the Agreement's consent clause.

By the time Buena Vista issued its participation statement for the period ending March 31, 2001, the cumulative Defined Receipts had reached $7.3 million, from which Buena Vista had received fees of almost $1.5 million and had recouped costs of just under $1.9 million, yielding over $4.3 million in Contingent Compensation to Last Patriot and its creditors.

Buena Vista's final participation statement, for the period ending June 23, 2005, reported cumulative distribution receipts of almost $13.5 million, fees to Buena Vista of over $3 million, costs recouped by Buena Vista of $5.66 million, and over $4.7 million paid to Last Patriot and its creditors.

3. Ilshin obtains a lien against Last Patriot and serves a levy on Buena Vista.

In February 2001, Ilshin obtained a stipulated $6.6 million judgment against Last Patriot (and others) arising from Last Patriot's failure to satisfy its loan obligations arising from production of The Patriot.

4. The parties assert conflicting positions with respect to the meaning of the Agreement's consent clause.

In a July 2001 letter to Buena Vista, Last Patriot noted that as of March 31, 2001, about two years into the film's distribution, Buena Vista had incurred distribution costs totaling over $1.9 million, and charged that Buena Vista's deduction of amounts exceeding the $900,000 threshold was improper because Buena Vista had neither requested nor received Last Patriot's consent.

Buena Vista's internal analysis following Last Patriot's letter concluded that if it were to apply a $900,000 cap to all its distribution expenses, by the end of the Agreement's eight-year term its net distribution fee--its only net return from the Agreement--would be wholly consumed. It estimated that distribution costs would entirely consume the almost $2 million it had so far earned, and another $1.9 million as well, leaving Buena Vista with an enormous loss for its highly successful distribution efforts. At the same time, Last Patriot's share of the proceeds, as of September 2001, would increase from $4.5 million to about $5.3 million, and would rise to more than $8.8 million during the Agreement's remaining term. In other words, the more videos Buena Vista sold, the more money it would lose.

Buena Vista soon afterward informed Last Patriot of its position that--notwithstanding the Agreement's literal definition of distribution costs--the parties had not intended that the consent clause's limit on "distribution" costs would incorporate the Agreement's broad definition of expenses that were recoupable by Buena Vista. While the listed items were recoupable by Buena Vista, the consent clause's reference to distribution costs was intended instead to refer only to advertising and marketing expenses, rather than adjustments to receipts such as to rebates and price protections, or to residual payments made by Buena Vista on Last Patriot's behalf.*fn7

Buena Vista contended it informed Last Patriot at that time that Buena Vista would have to end its distribution of the film if Last Patriot were to seek reimbursement of the distribution expenses over $900,000; Last Patriot did not recall any such communication, and Buena Vista in any event received no response from Last Patriot. According to Buena Vista, it assumed Last Patriot had accepted its analysis and had dropped the issue.*fn8

In January 2002, Comerica Bank, along with the Screen Actors Guild and the Directors Guild of America, threatened to sue Last Patriot, Ilshin, and others, for failing to make required payments for loans and residuals with respect to The Patriot and other projects.

In early May 2002, the issue of the Agreement's consent clause and $900,000 expense reimbursement cap was again raised, this time in a letter to Buena Vista on behalf of a creditor of Last Patriot. The letter demanded reimbursement of $1,645,350 on Last Patriot's behalf, noting that Buena Vista had deducted distribution costs totaling almost $2.2 million by June 30, 2001, and by September 30, 2001, the total was over $2.5 million. Buena Vista responded in June 2002, explaining its position that there had been a mistake in the Agreement's language, because a deal capping all distribution costs at $900,000 would make no economic sense, and no one would have made it intentionally.

Buena Vista agreed during the parties' discussions to toll any unexpired statutes of limitation until September 30, 2002.

5. Ilshin asserts liens.

In June 2003, Ilshin, as a judgment creditor of Last Patriot, served Buena Vista with a levy seeking funds due Last Patriot, accompanied by a letter indicating it sought proceeds payments as they became due. In response, Buena Vista directed payments owed Last Patriot under the Agreement to Last Patriot's creditors, including various guilds, Comerica Bank, and Ilshin.

In June 2004, Ilshin claimed that Buena Vista had recouped more than $3.6 million in distribution costs that were excessive under the Agreement. The parties then entered into a formal agreement tolling any statutes of limitations. (The parties' tolling agreements do not affect any issues in this appeal.)

In August 2005, Ilshin renewed its claim that Buena Vista had recouped excessive distribution expenses in violation of the Agreement. Buena Vista's October 2005 response again explained that the parties intended the consent clause to apply just to advertising costs, but not to all distribution costs, and especially not to residual payments made by Buena Vista on Last Patriot's behalf. As Buena Vista explained, otherwise Buena Vista would have no incentive to continue making sales once distribution costs had reached $900,000, and that it would not have paid residuals owed by Last Patriot unless it could deduct those payments from the proceeds it distributed on Last Patriot's behalf.

6. Buena Vista terminates The Patriot's distribution.

In October 2005, Buena Vista concluded that it could not reach agreement with Last Patriot and its successors with respect to the appropriate application of the consent clause, and that continuing to distribute The Patriot would cause it to incur expenses that it could not recoup, impairing its distribution fee. It therefore ended the film's distribution in October 2005.

As of September 30, 2006, Defined Proceeds had reached $13,467,850, Buena Vista had earned distribution fees of $3,066,929, it had recouped $5,658,432 for its distribution costs, and it had distributed $4,742,489 to Last Patriot and its creditors.*fn9

Ilshin filed suit against Buena Vista on February 23, 2006. As a creditor's suit pursuant to Code of Civil Procedure section 708.210, the suit alleged breaches of Buena Vista's obligations to Last Patriot under the Agreement, seeking damages for Buena Vista's unauthorized recoupment of costs in excess of the $900,000 expense limit, and for prematurely ending distribution of The Patriot before the June 2007 end of the Agreement's eight-year term. Ilshin's suit also included claims brought on its own behalf for conversion, punitive damages, and for equitable relief arising from the same facts.

Because it was undisputed that Ilshin's creditor's claim could not be heard by a jury, the trial court bifurcated "all aspects of this case except the conversion claim" for a bench trial upon the parties' stipulation, to be followed, if necessary, by a jury trial of the tort claim. By summary adjudication the trial court held that the contract language with respect to the Agreement's $900,000 limit on Buena Vista's recoupment of costs is unambiguous, and that Buena Vista's misunderstanding or mistake as to its meaning (if any) was unilateral. It limited Last Patriot's proof of contract damages for Buena Vista's recoupment of excessive costs to recoupments reported after June 2001. And it struck Last Patriot's claim for punitive damages.

At the conclusion of the phase one trial, the court rejected Buena Vista's key contention that the parties had understood and intended that the Agreement's consent clause, with its $900,000 cost reimbursement limit, would apply only to certain marketing expenses, rather than to all costs that the Agreement elsewhere listed as recoupable distribution costs. For Buena Vista's breach in reimbursing itself for costs above the $900,000 expense limit, the trial court found that Ilshin was entitled to damages of $3,775,197, representing the amount in excess of $900,000 for which Buena Vista had reimbursed itself after the June 2001 cutoff, plus prejudgment interest on that amount.

The court ruled also that Buena Vista had breached its implied covenant of good faith and fair dealing by prematurely ending its distribution of The Patriot in October 2005, more than 18 months before the natural end of the Agreement's eight-year term. For that breach it awarded Ilshin lost-profit damages of $800,000.

After the phase one trial, the court denied Ilshin's motion for entry of a directed verdict on the conversion cause of action, holding that before judgment could be entered Buena Vista would be entitled to a jury trial of at least some issues. Ilshin then filed a voluntary dismissal of its conversion claim. The court awarded Ilshin costs of $53,440.63, and attorney fees of $1,439,203.08 under Code of Civil Procedure section 701.020, subdivision (c).

Judgment was entered April 23, 2008, and notice of its entry was filed and served May 1, 2008. Buena Vista timely appealed from the judgment on June 20, 2008. Buena Vista's appeal seeks reversal of the judgment with directions, contending that the damage award is unsupported, or if not, that it is excessive. In the alternative, it seeks reversal of the lost profits award, contending that it is unsupported by substantial evidence, and reversal of the attorney fee award on the grounds that Code of Civil Procedure section 701.020, subdivision (c), is inapplicable to this action and the award is in any event not supported by sufficient evidence.

On July 9, 2008, Ilshin filed its own timely appeal from the judgment. Ilshin's appeal asks that we order the judgment amended to add the $983,235 of additional cost reimbursements reported by Buena Vista before the two-year cutoff imposed by the trial court, plus interest on that amount, and that we affirm the judgment for contract damages and attorney fees, as amended. Ilshin's appeal asks also that we reinstate its claims for conversion and punitive damages against Buena Vista.

Because we conclude that certain of Buena Vista's affirmative contentions are well taken, we reverse the judgment in part, but otherwise affirm.



Summary of Conclusions

Buena Vista has not established that Last Patriot was not damaged as a result of its failure to obtain Last Patriot's consent under the Agreement's consent clause.

Buena Vista's appeal does not directly challenge the ruling that the consent clause imposed a $900,000 limit on the distribution costs Buena Vista could recoup without Last Patriot's consent, and that Buena Vista breached that provision by recouping costs in excess of that limit. Instead it argues that as a matter of law its failure to obtain Last Patriot's consent under the consent cause resulted in no damages to ...

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