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AGV PRODUCTIONS

September 15, 2000

AGV PRODUCTIONS, INC., PLAINTIFF,
V.
METRO-GOLDWYN-MAYER, INC. AND ORION PICTURES CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Schwartz, District Judge.

OPINION AND ORDER

In this action, plaintiff seeks a declaratory judgment that defendant Metro-Goldwyn-Mayer, Inc. is not the owner of certain sequel rights in the motion picture entitled "Terminator". Currently before the Court are plaintiff's motion for summary judgment and defendants' cross-motion for partial summary judgment and dismissal of the complaint. For the reasons stated below, plaintiff's motion is denied and defendants' motion is granted.

I. Factual Background

A. The Parties and the Property

Plaintiff AGV Productions, Inc. ("plaintiff") is a corporation organized and existing under the laws of California, with its principal place of business located in Santa Monica, California. (Amended Complaint ("Compl.") ¶ 1.) Defendant Orion Pictures Corporation ("Orion") is a corporation organized and existing under the laws of Delaware, with its principal place of business located in Santa Monica, California. (Id. ¶ 3.) Defendant Metro-Goldwyn-Mayer, Inc. ("MGM"), a corporation organized and existing under the laws of Delaware with its principal place of business located in Santa Monica, California, is the parent company of Orion, and its successor-in-interest. (Answer to Compl. ¶ 2; Declaration of Tim Campbell in Support of Defendants' Cross-Motion for Partial Summary Judgment and Dismissal of the Complaint and in Opposition to Plaintiff's Motion for Summary Judgment ("Campbell Decl.") ¶ 12.)

This case concerns certain rights to the motion picture called "Terminator", an action/thriller which enjoyed commercial success in the 1980s and 1990s. See Bernard Weintraub, "A Woman Making Movies for Men," N.Y. Times, May 3, 1994, available in LEXIS, News Library, Allnws File. The original "Terminator" was released by Orion in 1984 and its sequel, "Terminator 2: Judgment Day," was released by Carolco Pictures, Inc. ("Carolco Pictures") in 1991. See Weintraub, supra; (Campbell Decl. ¶ 6.) The property at issue in this proceeding relates to certain sequel, remake, television, and ancillary rights (hereinafter "sequel rights") to future motion pictures in the series.*fn1 Specifically, MGM claims that it has a "right of first negotiation" for sequel distribution rights, while plaintiff claims that such rights are invalid as a matter of federal and state law. The history of this dispute involves the operation of a series of distribution and licensing agreements involving Orion and negotiated in the mid-1980s, and the effect on those agreements of Orion's Chapter 11 bankruptcy proceedings in the early 1990s. These agreements and the specifics of the bankruptcy proceedings are outlined below.

B. The Hemdale-Orion Agreements

In 1982, Hemdale Leisure Corporation ("Hemdale")*fn2 acquired the rights in "Terminator" from Pacific Western Productions, Inc. ("PWP"), which retained a one-half interest in the sequel and remake rights. (Declarations of Andrew J. Vajna and Brian L. Davidoff dated Nov. 18, 1999, Ex. 1 ("AGV Ex. 1").)*fn3 In February 1983, Hemdale transferred the domestic and foreign distribution rights in "Terminator" to Orion via two agreements (collectively the "Hemdale-Orion Agreements"), one governing the United States and Canada (the "Domestic Distribution Agreement") and the other governing the rest of the world (the "Foreign Distribution Agreement").

Pursuant to the Domestic Distribution Agreement, entered into by the parties on February 3, 1983, Orion acquired, inter alia, the right to (i) rent, lease, distribute, reissue, and otherwise deal in and with respect to the Picture, (ii) project and exhibit the film, (iii) make foreign language versions, (iv) contract with sub-distributors, and to (v) publicize and advertise the picture. (Domestic Distribution Agreement ¶¶ 7.01, 7.05, 7.11.) Each party could assign its rights. (Id. ¶ 8.06) Further, Orion was required to pay to Hemdale a certain percentage of its profits and revenues, and to submit to Hemdale periodic reports showing collections for designated accounting periods. (Id. ¶¶ 5.01-5.02; Ex. A.) The Foreign Distribution Agreement, entered into by the parties on February 18, 1983, set forth the same rights and obligations as under the Domestic Distribution Agreement, except that these rights applied to territories outside of the United States and Canada and their respective territories and possessions. (Foreign Distribution Agreement ¶¶ 5.01-5.02, 7.01, 7.06, 7.12, 8.06, Ex. A.)

A "right of first negotiation" for sequel and remake rights was included as a separate clause in both agreements. That clause reads as follows:

With respect to the [sequel and remake] rights set forth in this [paragraph], Orion shall have and is hereby granted a right of first negotiation as follows. If Orion or [Hemdale] desires to exercise such rights, the parties agree to negotiate in good faith with respect thereto. If the parties cannot agree upon the terms relating to such exercise after thirty (30) days of such negotiation, [Hemdale] shall then be free to negotiate with other parties, provided that [Hemdale] shall not accept an offer which is equal or less favorable than that offered by Orion. (Domestic Distribution Agreement ¶ 7.03; Foreign Distribution Agreement ¶ 7.03.)*fn4

C. October 1984 Agreements

On October 24, 1984, Hemdale and Orion entered into a series of agreements with two entities purportedly closely linked to Hemdale and to each other: Cinema 84, a New York limited partnership, and Interlink Film Distribution Corporation ("Interlink"), a New York corporation. These agreements, which operated concurrently, apparently provided the parties with certain tax advantages. (Orion Inter-Office Memo dated Dec. 14, 1984, AGV Ex. 7; Defendants' Statement in Response to Plaintiff's Supplemental Statement Concerning Bankruptcy Issues ("Defs.' Mem. Bank.") at 4; Defs.' Resp. Q. at 2.) The Court discusses the agreements in the order considered by the parties in their respective submissions.

Pursuant to a "Purchase Agreement," Cinema 84 acquired all of Hemdale's rights in "Terminator", both domestic and foreign, including sequel rights, for $9.25 million. (Purchase Agreement ¶¶ 1, 3.) The scope of the conveyance was extremely broad, including production and distribution rights as well as the copyrights in the motion picture. (Id. ¶ 1). The distribution rights appear to mirror those granted to Orion via the Hemdale-Orion Agreements, and Hemdale conveyed its rights "subject to" PWP's existing rights in the sequels and remakes, as well as Orion's right of first negotiation "as set forth in Section 7.03 of the [Foreign Distribution Agreement]."*fn5 (Id. ¶ 1(i).) It was also made "subject . . . to the entering into" of three other agreements signed on the same day, through which Cinema 84's rights were reconveyed to Orion and Hemdale: (i) the Interlink Distribution Agreement, (ii) the Orion Sub-Distribution Agreement, and (iii) the "Hemdale Sub-Distribution Agreement." (Id. ¶ 2(a).)

Under the Interlink Distribution Agreement, Cinema 84 conveyed to Interlink its domestic and foreign distribution rights in "Terminator", but not its sequel rights. However, the agreement provided Interlink with a right of first negotiation for sequel rights under equivalent terms to those contained in the Hemdale-Orion Agreements, and further states that Cinema 84 agreed to be bound by any assignment of such right by Interlink to Orion.*fn6 (Interlink Distribution Agreement ¶ 19.)

That assignment was made in the Orion Sub-Distribution Agreement, to which Interlink, Orion, and Hemdale were parties. Through that agreement, Interlink "returned" to Orion domestic sub-distribution rights to the original "Terminator", originally provided to Orion in the Domestic Distribution Agreement,*fn7 in consideration for which certain "contingent sub-distribution license fees" would be owed to both Interlink and Hemdale.*fn8 (Orion Sub-Distribution Agreement ¶ 2.01.) The right of first negotiation for sequels was provided to Orion under terms similar to those contained in the Domestic Distribution Agreement: (i) the provision implicitly required Interlink's exercise of its right of first negotiation under the Interlink Distribution Agreement, which itself required ratification by Cinema 84; (ii) either Orion or Interlink could then choose to exercise its right under the Sub-Distribution Agreement; and (iii) if either did so, Orion, Interlink and Hemdale would negotiate thereto. (Id. ¶ 4.03.) Practically, this rights allocation meant that the production and distribution of sequels would be negotiated by Cinema 84, Interlink, Orion, and Hemdale. As such, this grant appears, at least partly, to return to Hemdale and Orion the sequel rights they had under the Domestic Distribution Agreement.*fn9 Further, it is clear from this agreement that Hemdale remained the producer of the original film, despite its transfer of rights to Cinema 84. (Id. (labeling Hemdale as "Producer").)

Hemdale and Orion re-acquired their foreign distribution rights in the Hemdale Sub-Distribution Agreement, pursuant to which Interlink conveyed its foreign distribution rights in "Terminator" to Hemdale. (Second Declaration of Francis J. Menton, Jr. in Further Support of Defendants' Cross-Motion for Partial Summary Judgment and to Dismiss the Complaint ("Second Menton Decl."), Ex. C, ¶ 1.) This agreement also allowed Hemdale to enter into sub-distribution agreements relating to those rights, (Id. ¶ 2), and Interlink "ratifie[d] and approve[d]" all sub-distribution agreements previously entered into by Hemdale, in particular the Foreign Distribution Agreement. (Id. ¶ 3.)

While the parties to the instant action disagree on the overall effect of the agreements discussed above on defendants' rights, they agree on their existence and validity. In contrast, plaintiff formally challenges the validity of a handwritten agreement between Cinema 84, Hemdale, and Interlink (the "Handwritten Agreement"), which transferred Cinema 84's sequel rights back to Hemdale explicitly subject to Orion's right of first negotiation.*fn10 (Second Menton Decl., Ex. A.) Plaintiff also urges the court to ignore a letter from Hemdale to Orion (the "Hemdale-Orion Letter"), pursuant to which Hemdale affirmed Orion's right of first negotiation on the basis of the Handwritten Agreement.*fn11 (Id., Ex. B.)

The Handwritten Agreement completed the cyclical transfer of rights on October 24, 1984, because as a result of its operation, Hemdale and Orion held essentially the same rights they had held at the "beginning of the day," with the exception of (i) certain ancillary sequel rights purportedly held by Cinema 84 and Interlink,*fn12 (ii) Cinema 84's and Interlink's right to payments arising out of the distribution of the original film, and (iii) Interlink's right to first negotiation for sequels.

Plaintiff claims that the Handwritten Agreement "should be ignored" because it (i) is "unauthenticated, handwritten, barely legible" and "heavily redacted," (ii) "does not appear to have been prepared by a lawyer," (iii) is invalidated by the integration clauses of the Purchase Agreement and Interlink Distribution Agreement, and (iv) "was most likely concealed by Hemdale and Cinema 84 from their counsel and the Internal Revenue Service." (Plaintiff's Reply Statement Concerning Bankruptcy Code Issues ("Pl.'s Rep. Bank.") at 3.) It adds that, for the same reason, the Hemdale-Orion Letter is invalid. (Id. at 4.) However, the fact that the Handwritten Agreement is unauthenticated or handwritten does not affect the validity of the assignment; the agreement, while hard to read, is not illegible, and redactions such as the one referred to here are commonly made by businesses for confidentiality purposes. Moreover, the integration clauses of the Purchase Agreement and Interlink Distribution Agreement expressly provide for written modification upon agreement by the parties. (Purchase Agreement ¶ 16; Interlink Distribution Agreement ¶ 28.) Finally, while this document, like the other agreements prepared on the same day, may have been generated for tax reasons, that does not invalidate the contract, and there is no indication in the record that the agreement was illegally concealed. In short, the document has the required mutuality and consideration necessary for a valid contract, and on the current record, may not be voided as a matter of law.

D. Subsequent Agreements

Furthermore, the Handwritten Agreement is acknowledged in subsequent agreements, which continued the transfer of rights in "Terminator". First, Cinema 84's assignment of rights to Hemdale forms the basis for Hemdale's subsequent assignment of rights to Carolco International N.V., an affiliate of Carolco Pictures (collectively "Carolco"). Pursuant to an agreement dated January 3, 1990 (the "Hemdale-Carolco Agreement"), Hemdale assigned to Carolco all of its rights in "Terminator", except the right to continue distribution of the original film and to receive monies derived therefrom. (AGV Ex. 11.) If the Handwritten Agreement were invalid, therefore, this transaction would essentially be a nullity, because the agreement would transfer no rights at all. Second, on May 10, 2000, Cinema 84 transferred "any rights [it] has or may have in and to [`Terminator']" to Carolco (the "Cinema 84-Carolco Agreement"), without sacrificing its claims against Hemdale arising out of the latter's distribution of the original film. (AGV Ex. 12.) The rights that Cinema 84 transferred included the ancillary rights associated with ...


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