11:30am PT by Eriq Gardner
Fox Seeks to Dismiss $240 Million Lawsuit by 'American Idol' Lenders
Looking to save itself in a lawsuit that demands $240 million in compensatory damages and more in punitive damages, 21st Century Fox has told a judge that American Idol lenders are seeking to blame others for their high-risk loans that didn't pan out.
The complaint was filed in December 2016 by the litigation trustee of former Idol producer Core Media Group, which declared bankruptcy and was then taken over by financial firms that had once extended $360 million in loans. Core filed for Chapter 11 after ratings for Idol tanked, causing Fox to cancel the singing competition show. Idol will soon reboot on ABC, but the real drama might now be taking place between Core's lenders: Fox, Endemol and Apollo Global Management, one of the world's biggest private equity firms.
Since the lawsuit was filed, the case has bounced around from one court to another, but it has finally landed in New York Supreme Court, where a judge is now hearing arguments over whether the high-stakes lawsuit should proceed. On Jan. 16, Fox, Endemol, and Apollo each filed motions to dismiss. The court papers became public this week.
According to the plaintiff, when Apollo acquired Core in 2011, it financed the purchase of the Idol producer with a short-term bridge loan. Allegedly, lenders would need to be immediately repaid on the $360 million loan if Core underwent a change of control. The lawsuit also asserts that Core could only engage in mergers or business combinations if the newly formed entity agreed to assume the obligations on loans.
With that background came the controversial 2014 deal between Apollo, Fox and Endemol. Apollo pledged Core's assets while Fox did the same with Endemol's to create a reality production powerhouse that included shows like So You Think You Can Dance, Big Brother, Deal or No Deal and The Biggest Loser. Fox and Apollo each had a 50 percent stake.
But Core's litigation trustee — really now operating to benefit the former lenders — alleges that loan payments were evaded and that the complex transaction really amounted to a scheme "to strip Core of its remaining cash, transfer Core's corporate opportunities to its competitors, and ultimately leave Core to default on its obligations to its lenders."
Now comes the first substantive response from Fox, accused of tortious interference.
"This case presents the paradigm for lenders seeking to blame others because they made high risk loans that did not pan out," write Fox's lawyers at Skadden Arps. "Companies that produce television shows are inherently high risk ventures because producing a show is expensive, anticipating consumer demand is challenging, and the television audience is fickle. Even if a producer correctly guesses what will be popular with viewers right now, a show that is a huge hit one year can be off the air the next."
In other words, lenders like TCP and Crestview placed a bad bet on American Idol.
"Fully aware of the volatile nature of the entertainment business, a group of lenders made high risk loans and negotiated a high return to compensate them for that risk," continues Fox's motion to dismiss. "When the borrower's business failed because its shows began to lose viewers, and the borrower defaulted on its loans, the lenders looked to blame others, and now accuse Fox of 'interfering' with the lenders' loans because it entered into an arms-length transaction affecting who held the equity interests in the borrower. Adding insult to injury, Plaintiff's Complaint is replete with allegations that the borrower was insolvent long before Fox ever became involved, yet Plaintiff attempts to hold Fox somehow liable for the purported breach of the same contract that Plaintiff admits the borrower never could have fully performed."
As to whether any contract was breached, Apollo's attorneys at O'Melveny & Myers tackle that subject.
The plaintiff's theory is that the loan agreement was breached when Apollo and Fox entered into a deal that effectively changed control of Core or when Core made a deal with Endemol to perform administrative and distribution services. At that point, the plaintiff asserts Core effectively operated as a subsidiary of Endemol. That's when loan repayments allegedly either needed to be made or obligations shifted.
Apollo responds that the deal didn't constitute a breach because Fox didn't acquire more than 50 percent of Core and there wasn't any merger since Core remained a separate entity at all times through the dealmaking. Apollo adds that the complaint fails to establish its domination and control of the joint entity, and even if not so, that such control was used to commit a fraud.
Fox argues that since there was not breach of contract, there can be no tortious interference. The Rupert Murdoch company also disputes any nefarious interference, too.
For instance, Fox points out that the plaintiff isn't alleging it took any intentional action to procure Core's breach nor took any action that prevented Core from complying with the loan agreement.
"Instead, Plaintiff essentially alleges that Fox is liable for failing to assume the obligations under the Agreements itself or to cause the [joint venture] to assume such obligations," continues Fox. "However, Fox had no obligation to assume the liabilities of CORE, or — assuming it even had the power to do so — cause the [joint venture] to assume the liabilities of CORE. A party cannot be liable for tortious interference merely because that party failed to perform the contractual obligations itself."
That's the setup for the plaintiff's opposition arguments, now scheduled to come next month.