Schonfeld v. Hilliard

Decision Date01 February 1999
Docket NumberNo. 95 CIV. 3052 MBM.,95 CIV. 3052 MBM.
PartiesReese SCHONFELD, individually and derivatively as a shareholder of International News Network, Inc., Plaintiff, v. Russ HILLIARD, Les Hilliard and International News Network, Inc., Defendants.
CourtU.S. District Court — Southern District of New York

Louise M. Aponte, Bruce E. Fader, Proskauer Rose Goetz & Mendelsohn, New York City, for Plaintiff.

William G. Dittrick, Jill Robb Ackerman, Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha, NE, for Russ Hilliard and International News Network, Inc.

James P. Murphy, Murphy, Kirkpatrick & Fain, Billings, MN, for Les Hilliard.


MUKASEY, District Judge.

Plaintiff Reese Schonfeld, on behalf of himself and derivatively as a one-third shareholder of International News Network, Inc. ("INN"), sues Russ Hilliard and his brother, Les Hilliard, for various damages arising from the breach of an oral contract. Under the alleged contract, the Hilliards were obligated to finance a contemporaneously executed interim supply agreement between INN and the British Broadcasting Corporation World Service Television Limited ("BBC"). Plaintiff asserts, among other things, claims for breach of contract, breach of fiduciary duty and fraud.

The Hilliards now move for summary judgment pursuant to Fed.R.Civ.P. 56 dismissing all ten claims against them. In addition, the Hilliards submit two motions in limine to strike the proposed testimony of plaintiff's damages experts. Plaintiff cross-moves to strike all or part of the testimony of the four Hilliard experts. For the reasons stated below, the defendants' motions for summary judgment are granted in part and denied in part.


Many of the facts relating to the formation of the alleged oral contract are in dispute. The following relevant facts are presented in the light most favorable to plaintiff.

Russ Hilliard and Les Hilliard are brothers who separately own and operate small cable television companies in the mid-West. In 1988, they founded INN, a Delaware corporation, for the purpose of distributing an international news and information channel in the United States. (Russ Hilliard Decl. ¶ 2) Later that year, the Hilliards retained the financial services company Daniels & Associates ("Daniels") to prepare a business plan and solicit investors for the project. (Dickinson Dep. at 29)1

In 1990, the Hilliards hired plaintiff, a founder and former President and CEO of Cable News Network ("CNN"), as a consultant for INN. (Russ Hilliard Decl. ¶ 4) Later, in 1993, the Hilliards again approached plaintiff, who at that time was President of the Television Food Network, to discuss the possibility of bringing the BBC World News Channel, in a 24-hour format, to the United States. (Id. ¶ 5)

The Hilliards' negotiations with plaintiff culminated in a shareholder agreement, dated February 24, 1994, in which each signatory became a one-third shareholder in INN. (Russ Hilliard Decl. Ex. 1) Under that agreement, each shareholder was obligated to contribute $10,000 as equity in INN. (Id. ¶ 8(b)) In addition, Russ Hilliard and Les Hilliard each loaned INN $300,000 and agreed "to cause additional loans to be made to [INN] (in an amount not to exceed $350,000 in the aggregate) as may be necessary." (Id.) That agreement provided for a two-member Board of Directors. (Id. ¶ 3) Although no directors were officially designated, the record shows that Russ Hilliard and plaintiff effectively acted as directors. At this time, plaintiff also took on the roles of President and CEO of the new corporation. (Russ Hilliard Decl. ¶ 7)

With the reorganization of INN complete, the participants focused on acquiring BBC programming for a 24-hour news and information channel (the "Channel"). From the inception of the project, the parties understood that INN would be merely an investor in any entity ultimately established for the purpose of operating the Channel. INN's shareholders would be allowed to increase their equity in the proposed Channel by making additional cash investments in the operating entity rather than in INN, but no definitive decisions were made as to the percentage of profits INN, or any other equity investor, would receive.2 (Russ Hilliard Decl. Ex. 1)

In late 1993 and early 1994, INN, through its attorney Richard Blumenthal, and plaintiff, the acting President, negotiated an agreement with the BBC, executed on March 14, 1994 (the "March Supply Agreement"). Subject to limitations, the BBC granted INN a 20-year permit to distribute BBC programming on the proposed Channel, commencing not earlier than June 1995 and not later than January 1996. (Russ Hilliard Decl. Ex. 2) The March Supply Agreement gave INN the exclusive right to distribute and license the Channel "as a whole." (Id. ¶¶ 7.1.2-3) Arguably, INN had exclusive rights only to the provision of programming in 24-hour blocks, permitting the BBC to license blocks of less than 24 hours to other U.S. channels. (Id. ¶¶ 7-8) Upon the written consent of the BBC, INN was allowed to assign the benefits of the March Supply Agreement to the proposed operating entity. (Id. ¶ 21.1) This consent was not to be withheld unreasonably. (Id.) With respect to any other assignments, however, the March Supply Agreement was personal to INN and, apparently, the BBC could grant or withhold consent for assignment as it saw fit.3 (Id.) In addition, the BBC reserved the right to terminate all its obligations under the March Supply Agreement if INN failed to commence distribution of the Channel by March 1995. (Id. ¶ 18.1)

INN made several attempts to locate investors and secure carriage agreements from cable operators in an unsuccessful effort to meet the capital requirements prescribed by the March Supply Agreement. (Russ Hilliard Decl. ¶ 11) According to Blumenthal, the Hilliards promised that, in addition to their contributions under the shareholder agreement, "they would pay the initial cost of funding INN's efforts [in] seeking to implement the original [March] supply agreement." (Blumenthal Dep. at 54) Blumenthal testified that the Hilliards made an oral promise to pay ancillary costs — such as attorneys' and consulting fees. (Id.)

Soon after executing the March Supply Agreement, INN was approached by Cox Cable Communications ("Cox"), one of the largest cable operators in the United States (Dickinson Dep. at 39), with an offer effectively to buy out INN's supply rights. (Id. at 104-05) Cox wanted to launch two BBC channels, one with news and the other with entertainment programming. (Id. at 91) Cox was willing to pay INN a total of $1.7 million plus 20% of tenth-year gross revenues of both the proposed channels. (Id. at 91-92; Fader Decl. Vol. I, Ex. 4A) The deal eventually collapsed in August 1994, however, when INN denied a request by Cox for a 90-day extension to work out with the BBC certain non-financial terms of the arrangement. (Young Dep. at 52-54, 57, 143-44)

In October 1994, the FCC announced "going forward" rules, which allowed cable operators to charge subscribers an increased monthly rate for each new channel, up to six, added as of January 1, 1995. (Pl. Mem. in Opp'n at 25) This regulatory change provided a "window of opportunity" for the Channel to obtain distribution. (Young Dep. at 70-71) Eager to be in the market when the new rules took effect, INN and the BBC arranged a series of meetings to discuss the possibility of advancing the start date for launch of the Channel. (Russ Hilliard Decl. ¶¶ 14-16)

On November 17, 1994, and in the days following, Russ Hilliard, plaintiff and Blumenthal met in New York with Mark Young and Sarah Cooper — representatives of the BBC — to negotiate a deal whereby the BBC would provide programming on an interim basis within 60 to 90 days. In an "Interim Agreement," effective December 14, 1994, the BBC agreed to provide provisional programming as early as possible, and agreed to begin development of a revised programming format, specifically designed for the American audience, for launch no later than December 31, 1995, under a revised 20-year supply agreement (the "December Supply Agreement").4 (Russ Hilliard Decl. Ex. 3, at 1) In consideration for the interim programming feed, the Interim Agreement provided that INN would pay the BBC the following amounts: (i) £3.35 million (the "Basic Payment") in a series of installments beginning January 3, 1995, and ending August 15, 1995; (ii) an additional fee of between £250,000 and £1.5 million in order to pay the BBC's costs in altering or substituting programming; and (iii) all costs associated with the transponder transmission of the "Interim Channel." (Id. at 2-5) The Interim Agreement provided also that the BBC could terminate the Interim Agreement if, by January 31, 1995, INN did not have letters from cable systems with an aggregate of at least 500,000 subscribers indicating an intent to carry the Interim Channel and the Channel. (Id. at 5)

According to plaintiff, Russ Hilliard made repeated representations to plaintiff, Blumenthal, Cooper and Young that he would fund the Interim Agreement. (Young Dep. at 73; Schonfeld Dep. at 77-78; Blumenthal Dep. at 82) Two witnesses aver also that at the November 1994 meetings, Russ Hilliard assured all participants that he and his brother, Les Hilliard, would personally fund the Interim Agreement if necessary. (Schonfeld Dep. at 71, 73; Blumenthal Dep. at 65) There is no evidence, however, of the exact wording of the promise to fund. Moreover, it is undisputed that there was no oral or written agreement regarding the form of funding — whether a loan or an equity investment, the total sum of the promised funding, or the liabilities and remedies of the parties in the event of a failure to fund. Even so, plaintiff and the BBC representatives present consistent testimony that when they signed both the Interim Agreement and the December Supply Agreement, they relied upon the...

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