Schonfeld v. Hilliard

• Decision Date: 01 August 1999
• Docket Number: Docket No. 99-7852
• Parties: (2nd Cir. 2000) REESE SCHONFELD, individually and derivatively as shareholder of International News Network, Inc., Plaintiff-Counter-Defendant-Appellant, v. RUSS HILLIARD, LES HILLIARD and INTERNATIONAL NEWS NETWORK, INC., Defendants-Counter-Claimants-Appellees
• Court: U.S. Court of Appeals — Second Circuit

Page 164

218 F.3d 164 (2nd Cir. 2000)

REESE SCHONFELD, individually and derivatively as shareholder of International News Network, Inc., Plaintiff-Counter-Defendant-Appellant, v. RUSS HILLIARD, LES HILLIARD and INTERNATIONAL NEWS NETWORK, INC., Defendants-Counter-Claimants-Appellees.

Docket No. 99-7852

August Term, 1999

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: March 16, 2000

Decided: July 05, 2000

Plaintiff appeals from an order of the United States District Court for the Southern District of New York (Mukasey, J.), granting in part defendants' motion for summary judgment.

AFFIRMED IN PART, REVERSED IN PART, VACATED AND REMANDED.

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[Copyrighted Material Omitted]

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BRUCE E. FADER, Proskauer Rose LLP, New York, NY (David A. Picon and Amy S. Park, of counsel), for Plaintiff-Appellant.

WILLIAM G. DITTRICK, Baird, Holm, McEachen, Pedersen, Hamann and Strasheim, Omaha, Neb. (Jill Robb Ackerman and D. Nick Caporale, of counsel, Gary Greenberg, Orans, Elsen & Lupert, New York, NY, of counsel), for Defendants-Counter-Claimants-Appellees Russ Hilliard and International News Network, Inc.

JAMES P. MURPHY, Murphy, Kirkpatrick & Fain, PLLP, Billings, Mont. (Allen P. Rosiny, New York, NY, of counsel), for Defendant-Counter-Claimant-Appellee Les Hilliard.

Before: McLAUGHLIN, SACK AND KATZMANN, Circuit Judges.

McLAUGHLIN, Circuit Judge:

BACKGROUND

This case involves a closely-held cable television corporation that imploded just as it was about to launch its flagship channel. In 1988, brothers Russ and Les Hilliard formed International News Network, Inc. ("INN") to distribute a British news and information channel in the United States (the "Channel"). Prior to this ambitious venture, the Hilliard brothers owned small mid-western cable television companies with an aggregate of only 66,000 subscribers.

To secure large-scale expertise and prestige, INN brought in Reese Schonfeld, a founder and former President of Cable News Network ("CNN") - initially as a consultant, and later as a shareholder - to help INN negotiate with the British Broadcasting Corporation (the "BBC") for a programming license. INN also retained Daniels & Associates ("Daniels"), the nation's leading financial services company for the cable industry, to prepare a business plan and to drum up investors.

In February 1994, the Hilliards and Schonfeld executed a written Shareholders' Agreement whereby each became a one third shareholder in INN in return for a $10,000 capital contribution. In addition, the Hilliards, who had each already lent $300,000 to INN, agreed to lend up to another $350,000 to INN if necessary to meet its obligations to the BBC. In lieu of a further cash contribution, Schonfeld agreed to invest his time and effort.

The Shareholders' Agreement confirmed the parties' understanding that INN itself would not operate the Channel. Instead, INN would invest in a yet-to-be-formed operating entity. INN's shareholders, if they chose, could increase their personal stakes in the Channel by making additional cash investments in the separate operating entity. The agreement said nothing about the percentage of profits that INN, or any other equity investor, would receive from the Channel's operation.

Although the Shareholders' Agreement provided for a two-member board of directors (one chosen by Schonfeld, the other by the Hilliards), no board members were formally designated. It appears, however, that Schonfeld assumed the three roles of director, President and CEO of INN. Russ Hilliard acted as the other director. Les Hilliard apparently played no role in INN, other than investor.

The final piece of the puzzle fell into place on March 4, 1994, when the BBC granted INN a 20 year exclusive license to distribute its news and information programming in a 24-hour format, commencing not later than February 1995 (the "March Supply Agreement"). The agreement provided for INN's assignment of the benefits and privileges of the agreement to the yet-to-be-formed operating entity upon written consent of the BBC, whose consent would not be unreasonably withheld. The BBC retained its right, however, to withhold consent to any delegation of INN's duties under the contract.

As INN's first step to implement the March Supply Agreement, and based on assumptions and figures provided by the Hilliards and Schonfeld, Daniels prepared a revised business plan for INN (the "INN Business Plan"). Schonfeld and Russ Hilliard used this revised plan to attract investors.

Soon after the execution of the March Supply Agreement, Cox Cable Communications ("Cox"), one of the largest cable operators in the United States, entered the picture. Cox wanted to launch two BBC channels in the United States - one with news and the other with entertainment programming. However, because of INN's exclusive programming rights, Cox would be unable to operate the news channel. Accordingly, Cox offered to purchase INN's contract rights for $1.7 million cash ($700,000 at closing and $100,000/year for ten years thereafter), plus a 5% equity interest in both of Cox's proposed BBC channels.

Finding Cox's offer reasonable, INN entered into a letter agreement with Cox on June 2, 1994 accepting the proposed terms of sale (the "Cox Agreement"). Under the Cox Agreement, Cox retained the right to buy out INN's 5% interest in the BBC channels in their tenth year of operations. The price that Cox agreed to pay for that interest was 20% of the tenth-year gross revenues of both channels. The parties agreed to enter into certain "definitive" agreements (i.e., a Shareholders' Agreement, Buy-Out Agreement and consulting agreement for Schonfeld) once they received final approval from the BBC.

In light of the Cox negotiations, INN and the BBC agreed to temporarily suspend the March Supply Agreement. This, in turn, required a postponement in the Channel's launch date for several months.

Although the BBC had approved all financial aspects of the Cox deal, in August 1994, the BBC, on behalf of Cox, requested an extension of time to work out certain editorial issues concerning the proposed entertainment channel. Having decided to pursue the profits from the Channel themselves rather than selling out to Cox, the Hilliards denied this request. Schonfeld reluctantly agreed to abort the Cox deal.

In October 1994, the FCC promulgated a new rule allowing cable operators to charge an increased per-channel monthly rate for up to six new channels as of January 1, 1995. To take advantage of this window of opportunity, INN asked the BBC to accelerate the launch date of the Channel.

INN and the BBC signed an "Interim Agreement," effective December 14, 1994, in which the BBC agreed to provide provisional programming as early as possible, and to develop an "Americanized" programming format to become available to INN no later than December 31, 1995 under a revised 20 year supply agreement (the "December Supply Agreement"). In consideration for the interim programming feed, INN agreed to pay the BBC approximately $20 million in installments beginning January 3, 1995. The BBC retained the right to terminate the Interim Agreement if, by January 31, 1995, INN had failed to get letters indicating an intent to carry the Channel from cable systems with an aggregate of at least 500,000 subscribers. The December Supply Agreement also: (1) capped INN's initial capital contribution to the operating entity at 15%; and (2) gave the BBC a non-dilutable 20% equity interest in the operating entity.

According to three witnesses - Richard Blumenthal (INN's attorney), Schonfeld and Mark Young (a representative of the BBC) - Russ Hilliard repeatedly promised orally that he and his brother would personally fund the Interim Agreement. These promises were allegedly made to induce Schonfeld and the BBC to abandon the March Supply Agreement and enter into the Interim and December Supply Agreements despite the fact that INN did not yet have the cash available to make the necessary payments to the BBC. Schonfeld and Blumenthal testified in depositions that the Hilliards said they planned to invest up to $20 million in the operating entity as financing for the BBC payments. However, there is no oral or written agreement memorializing the precise amount promised, or defining the liabilities and remedies of the parties in the event of the Hilliards' failure to fund.

By mid-January 1995, the Hilliards had provided none of the promised funding and INN was in default under the Interim Agreement. In February 1995, the parties met in New York to discuss the situation. Russ Hilliard did not deny that he and his brother had promised to fund the Interim Agreement. He claimed, however, that funding had been withheld because INN was having difficulty obtaining cable operator support. Rather than suing the Hilliards and INN for breach of contract, the BBC offered a chivalrous solution: in exchange for the dissolution of both the Interim and December Supply Agreements, the BBC agreed to release the Hilliards and INN from any and all claims arising out of their breach of the oral agreement and Interim Supply Agreement.

Schonfeld alleges that the Hilliards never really intended to fund the Interim Agreement themselves. He claims that, all along, they had been unsuccessfully attempting to get the money from William Bresnan, the CEO of Bresnan Communications (which is 80% owned by TCI Cable). Russ Hilliard has admitted in deposition testimony that: (1) the funds he had promised were supposed to come from Bresnan or TCI, not from himself and his brother; and (2) he knew the BBC would never have signed the Interim Agreement had it known the truth (i.e., would never have agreed to make the Interim Agreement contingent on funding from Bresnan or TCI).

In April 1995, Schonfeld commenced this diversity action in the United States District Court for the Southern District of New York...