Judge Allows Paramount to Sue Wall Street Investment Firms

Paramount Studios H 2015
AP Images/Invision

In Paramount Pictures' long-running battle with a group of Wall Street investors who put up $40 million for a slate of 25 films including Mean Girls, Team America: World Police and The Longest Yard, the studio is now on offense and advancing.

Last October, Allianz Risk Transfer, Marathon Structured Finance Fund, Newstar Financial and Munich Re Capital Markets suffered a big loss at trial after pursuing Paramount for six years with claims of having been defrauded. The financial firms claimed that Paramount had stepped away from risk-mitigation practices by abandoning international presale agreements in favor of self-distributing pictures in foreign markets. As a result, the movie investors said they hadn't seen a return on the so-called "Melrose 1" film slate that also included Elizabethtown, CollateralIThe Manchurian Candidate and other motion pictures released between April 2004 and March 2006.

In the midst of trial, U.S. District Judge Katherine Forrest suddenly stopped the proceedings to deliver her findings that Paramount hadn't changed its business strategy, that there was no misrepresentations to the investors and that a "waiver" in the investment subscription agreement barred the investors for suing over alleged federal securities fraud, common law fraud and unjust enrichment.

By early December, the Wall Street investors filed an appeal to the 2nd Circuit over what they perceived as the trial court's "clear misapprehension of the evidence" and "unsupported understanding of contract terms."

As this happened, possibly as retaliation or vice versa, Paramount filed its own lawsuit against these investment firms for allegedly breaching a covenant not to sue. Paramount now looks to be reimbursed for $8 million it has spent fighting Allianz Risk and others in court since 2008.

The investors reacted by bringing a motion to dismiss that argued that Paramount was forbidden from pursuing its claim by the legal doctrine of res judicata, a matter already decided. The theory was that the subscription agreement was the subject of the prior lawsuit. If Paramount wished to pursue this, it had a duty to either assert its contract claim either as an affirmative defense in the prior lawsuit or as a "compulsory counterclaim" under federal rules of procedure.

Paramount argued in opposition that Judge Forrest's ruling had been clarifying, that there was no rule it should have asserted a compulsory counterclaim, and that the investors' breach was "obvious" or in "bad faith."

At a hearing on Tuesday, New York Supreme Court justice Jeffrey Oing took Paramount's side and denied a motion to dismiss. He decided the so-called "American Rule," which doesn't allow the recovery of attorney's fees without an express fee shifting provision in the contract, to be inapplicable. As such, the almost never-ending battle over profits from Mean Girls and other films continues with potential discovery on whether Paramount could have made a better effort at mitigating its damages (or minimizing its legal fees) by asserting a contract breach much sooner.

The parties will also face off soon at an oral hearing at the federal appeals court.