Copthall Ltd v Scorched Earth Services Ltd and Another
| Jurisdiction | England & Wales |
| Judge | Mrs Justice May |
| Judgment Date | 16 June 2017 |
| Neutral Citation | [2017] EWHC 1341 (QB) |
| Docket Number | Case No: HQ14X05080 |
| Court | Queen's Bench Division |
| Date | 16 June 2017 |
[2017] EWHC 1341 (QB)
IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION
Royal Courts of Justice Strand, London, WC2A 2LL
Mrs Justice May DBE
Case No: HQ14X05080
and
Mr Philip Jones (instructed by Mackrell Turner Garrett) for the Claimant Ms Heather Rogers QC (instructed by Simons Muirhead and Burton LLP) for the Defendants
Hearing dates: 14, 16 – 17, 20 – 21 March 2017
Introduction
In July 2011, the Claimant ("Copthall") invested $4million in an independent film called Odd Thomas. The returns seemed very favourable. The film was in the process of being made in the US at the time, but filming had stalled for lack of funds.
Copthall alleges that the Defendants (respectively "Scorched" and "Mr Margolis") procured its investment in Odd Thomas by deceit, alternatively that the release of Copthall's funds from escrow by the film's guarantor was brought about by the Defendants' unlawful interference/procuring breach of contract between Copthall and the guarantor.
Parties to these proceedings
Copthall and its advisors
Copthall is a company incorporated in England and Wales, wholly owned by Bruce MacInnes and his wife. Mr MacInnes has for many years been involved in investment finance; he was and remains Copthall's sole director.
Copthall's legal advisors for the purposes of its investment in Odd Thomas were Sheppard Mullin Richter & Hampton LLP ("Sheppard Mullin"), US attorneys based in Los Angeles. The senior lawyer there was Robb Klein, assisted by Stacy Dollarhide. Mr MacInnes also received assistance from Perpetual Film Capital Advisors Limited ("Perpetual"), a company advising, as its name suggests, in relation to film investments.
Future, Scorched and Mr Margolis
Scorched was a special purpose vehicle ("SPV") incorporated by Future Films Ltd ("Future") for the purposes of Old Thomas. Future is a company which in 2011 was active in the fields of film finance and production. The Second Defendant, Mr Margolis, was the principal director of Future, also of Scorched. Other relevant staff employed by Future at the material time were senior executives Patricia Jackson and Thomas Gardiner, together with Future's in-house lawyer, Katrina Stagner.
Background — Independent film production and financing
I take the following background from the long third witness statement of Mr MacInnes prepared for trial.
Independent films are so-called because they are produced largely or wholly separately from the major film production houses. The funding of independent films is typically from a variety of different sources, in contrast to films produced by the major film studios, which generally have recourse to their own internally available resources. The production of an independent film is generally done by an SPV incorporated for the specific purpose of making that one film.
Sources of funds for an independent film include bank loans secured against advanced sales ("pre-sales") and tax credits, bridging or "gap" funding, distributor deposits and equity funding. To get funding for a $multi-million film a producer will need to have in place a script, cast, director, detailed budget and, importantly, a reputable sales agent. A good sales agent, with a strong track record of selecting commercially attractive film projects, will be able to obtain binding commitments from distributors around the world in advance of production. Under these pre-sales contracts, distributors commit to making a guaranteed minimum payment, of which part is paid as an up-front deposit, with the balance of the committed sum payable upon delivery of the completed film. The producer will then use these commitments as security for a bank loan facility to cover the costs of making the film. In this way, the bank takes credit and payment risk on the distributors; the distributors take the commercial risk on the success (or otherwise) of the film.
As well as pre-sales, there are invariably opportunities for a production company to acquire tax credits, wherever in the world the independent film is being made: almost all governments want to attract film investment to secure the wider benefits to the economy that are believed to accrue from a successful film production environment. These anticipated tax credits provide a further source of security for bank loan and other financing.
Film completion guarantee or "bond"
There are standard conditions which banks apply to loan facilities before an agreement to fund will become binding. An important condition is that there should be a completion guarantee in place, underwritten by a major insurance company. These "completion bonds" typically protect not only the bank but also all other investors in the film. All independent films made in the US or UK having a bank as a lender will be "bonded". There are companies whose business it is to arrange and provide such bonds.
Under the terms of the agreement for the bond the guarantor provides a guarantee to the beneficiaries that the film will be completed on budget in accordance with the agreed specifications (corresponding to specifications in the agreements with distributors). The guarantor is responsible for monitoring the production expenditure of the film and ensuring that the film is completed in accordance with the agreed budget and agreed specifications. If, for any reason, the film is abandoned and not completed then the guarantor is liable to pay the beneficiaries the cash amounts they have contributed to the production price. These amounts are agreed in advance and set out in the guarantee agreement. Likewise, if the funds put up for the film fall short, the guarantor is obliged to make good the shortfall so as to ensure that the film is made to specification.
As independent films frequently receive funding from a variety of different sources, it is usual for the funds which are provided to be held in escrow pending the date on which the final drafts of the agreements are all agreed. On that date, known as "financial closing" or simply "closing", the parties' signatures are released and the monies previously held in escrow are made available to the production account, to be paid in accordance with the budget and cashflow schedule. The guarantor's role is critical and to this end is it generally the guarantor that acts as escrow agent. In the words of Mr MacInnes (at paragraphs 20–21 of his third witness statement):
"Each financier relies on the completion guarantor to acknowledge and confirm that funds have been advanced by each of the other financiers in accordance with the amounts set out in the completion guarantee agreement. This procedure ensures that the film should be fully funded in accordance with the contractually agreed budget and production price, before any party releases their signatures to all the agreements at financial closing…
In addition, in many cases certain expenditures may have been incurred by the production which contribute towards the approved budget before financial closing. The completion guarantor is responsible for confirming and acknowledging the cash amount which each financier represents as having contributed to the production as a "prior production advance", and is expected to check the production accounts and wire transfer confirmations to confirm receipt of these funds, in the same way as the funds which it holds in escrow"
Amongst the many aspects of the production and financing included in the guarantee agreement is the final budgeted cost of production. This is known as the "strike price". There will be no bond issued and thus no financial closing until the guarantor is satisfied that funding for the film is sufficient to meet the strike price.
Future/Scorched involvement with Odd Thomas
In 2010 Mr Margolis was approached by a producer with whom he had previously had some contact, Howard Kaplan. Mr Kaplan had formerly worked at a well-known independent film production company, Morgan Creek, but in 2010 was working as a producer on his own account. Mr Kaplan had obtained the rights to a novel called "Odd Thomas" written by Dean Koontz, a popular US author. Mr Kaplan sought Future's involvement in the production; Mr Margolis was interested as the film had attracted interest from a leading Hollywood director and other well-known Hollywood figures.
Mr Kaplan's production company, Fusion Films Inc ("Fusion") had incorporated an SPV for the purposes of production, Two Out of Ten Productions Inc ("TOOT").
Mr Margolis' evidence was that Future's involvement was organised through a structured deal relating to the provision of production services, of a type which was commonly used at that time. Scorched (Future's SPV) contracted with Fusion to provide production services to the film. Scorched's obligation to provide the production services was sub-contracted through a layer of further agreements on to another Future company, Stripe Light Services Ltd ("Stripe Light"). Stripe Light contracted with TOOT via a set of further agreements. These connected agreements between the Future companies and Fusion/TOOT are considered in more detail later in this judgment.
Future/Scorched provided funds to the production of Odd Thomas through this structure in three tranches in February, March and April 2011, some months before full financing was in place for the film and before the completion bond had been issued. Future's investment monies were accordingly, as Mr Margolis pointed out, at greater risk than later investments made at the time of, and contingent upon, the issue of the completion bond.
Production of Odd Thomas started thereafter in May 2011 but by mid/end-June filming had stalled pending the conclusion of the full financing agreements for...
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