Ilshin Inv. Co. v. Buena Vista Home Ent. Inc.
| Decision Date | 13 May 2011 |
| Docket Number | B208839 |
| Parties | ILSHIN INVESTMENT CO., LTD., Plaintiff and Appellant, v. BUENA VISTA HOME ENTERTAINMENT, INC., Defendant and Appellant. |
| Court | California Court of Appeals Court of Appeals |
CERTIFIED FOR PARTIAL PUBLICATION*
(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.
White O'Conner Fink & Brenner, Andrew M. White, Tami Kameda; Horvitz & Levy, Frederico D. Cohen and Julie L. Woods for Defendant and Appellant.
Gibson, Dunn & Crutcher, Scott A. Edelman, Daniel M. Flores; Tantalo & Adler and Michael S. Adler for Plaintiff and Appellant.
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.1
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 $900,000.2
Buena Vista distributed The Patriot from mid-1999 until October 2005, with sales far exceeding the parties' expectations.3 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.
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.
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.
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.
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, andprice 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.4 The Agreement provides express indemnities by Last Patriot for any residual payments Buena Vista makes on its behalf.
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.
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.5 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.
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 hadobtained about $3.7 million in Defined Receipts,...
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