September 23, 2013 3:12pm PT by Eriq Gardner
Paramount to Sue JPMorgan Over Alleged Financial Conspiracy (Exclusive)
Paramount Pictures is primed to face off directly with JPMorgan with an allegation that the largest bank in the United States secretly conspired to interfere with the studio's rights on more than two dozen films.
The suggestion of "conspiracy" comes in the midst of a 3-year-old lawsuit between Paramount and Content Partners, a company that specializes in acquiring cash flows arising from intellectual property in film, television and music and whose investors included former Broadcast.com partners Mark Cuban and Todd Wagner. Paramount stands accused of cheating Content out of more than $100 million on 25 films including The Truman Show, Face/Off and Runaway Bride, but the studio is fighting back, saying that Content is a "scavenger" with "no interest whatsoever" in participation agreements and that its antagonist merely serves as a "plaintiff-for-hire."
In June, Paramount filed a cross-complaint against Content, blaming JPMorgan for much of what happened. At the time, the bank wasn't a direct party in the lawsuit. But that is about to change.
On Tuesday, a Los Angeles judge is scheduled to hold a hearing in the lawsuit and respond to arguments by Content's lawyers that Paramount's counterclaims came too late and insufficiently stated facts to support its allegations.
In advance of the hearing, the judge has tentatively ruled that the counterclaim is sufficient and not barred by the statute of limitations. But the judge does want more. He's allowing 20 days for Paramount to amend the complaint, recommending that JPMorgan be joined as a cross-defendant as an alleged co-conspirator. Sources tell THR that the studio is prepared to follow through on this. Viacom publicly states that no firm decision has been made.
The basis for Paramount's conspiracy charge dates back to the mid-1990s, when banks began lending to studios in exchange for a portion of a film's future proceeds. To hedge risk, banks also purchased insurance whereby insurers would repay any loan amounts that remained outstanding after a picture's release.
But the arrangement allegedly didn't work out as intended.
"Like many Wall Street schemes, JPMorgan's attempt to craft 'risk free' loans to finance motion picture production proved too good to be true," said Paramount in court papers filed in June. "Before the ink was dry on the Fifth [Revenue Participation Agreement], JPMorgan came to the realization that the insurers might not make good on their policies."
From 2000 to 2004, JPMorgan was involved in litigation in New York and the United Kingdom with insurers over insurance-backed loans. Around that time, the bank attempted to get Paramount to "buy out" the participation agreements, and in order to drive the price up, the bank allegedly conducted a financial audit that resulted in an attempt to show the studio was incorrectly calculating "crossing" amounts, which pertains to the amount of net receipts after Paramount had recouped its direct costs for the pictures.
JPMorgan and Paramount came to no deal. Instead, JPMorgan is said to have reached a secret arrangement with Content Partners.
"However, they were faced with a predicament," said the counterclaim. "JPMorgan and Content Partners knew that, under the express terms of the Revenue Participation Agreements, their transaction could not be consummated without Paramount's consent. But they also recognized that Paramount would never consent to an assignment of rights under the Revenue Participation Agreements to a 'scavenger' that was intent on pursuing baseless claims and bad faith litigation against Paramount."
JPMorgan and Content are alleged to have devised a way to work around this.
"JPMorgan purported to substitute itself as 'debtor' under the Loan Agreements … and transferred the position as purported 'lender' under those Loan Agreements to Content Partners."
Having gained financial position into Paramount's films, Content Partners filed a lawsuit in 2010 and it alleges that on 25 of its films, Paramount failed to comply with cross-collateralization provisions of agreements.
Three years into the lawsuit, Paramount struck back with its counterclaims.
Content's lawyer Marty Singer objected, asserting that the studio was making a move merely to frustrate his client's right to petition for its rights. Saying it was the "most absurd thing" he had ever seen, Singer filed a demurrer and motion to strike.
In a tentative ruling issued before Tuesday's ruling, the judge denies the statute of limitations defense, pointing to Paramount's argument that "it did not discover the facts giving rise to the concealment until months after this action was filed and it undertook discovery."
The tentative order gives Paramount 20 days to amend the counterclaim to include JPMorgan and says the motion to strike is moot. The judge notes, "The basis of the claim is concealment based upon a failure to disclose the alleged assignment of claims to Content when Content had an affirmative responsibility to notify Paramount, and, under the terms of the contracts, a responsibility to obtain permission prior to making assignments."
JPMorgan says it has no comment at this time.