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Artisan Sues U.K. Insurer, Agents Over Failed Insurance-Backed Film Financing

31 May, 2001 By: Hive News

New York-based Artisan Entertainment has filed suit in Los Angeles Superior Court against U.K. insurance company Royal & Sun Alliance, financier/producer Peter Hoffman, Hoffman associate Graham Bradstreet, ICE Media and broker Heath Insurance Broking Limited, according to Inside.com.

The $100 million suit claims that Royal & Sun bailed out in the early stages of a three-year deal to guarantee as much as $500 million in bank loans, and, as a direct result, the independent film company couldn't start new productions or pay existing production loans.

The suit also claims that Artisan scrapped its highlypublicized IPO because it was forced to use its assets as loan collateral when the insurance deal crumbled.

Accoring to Inside.com's story on the lawsuit, a complex deal was patched together by Hoffman in which Royal & Sun was to insure repayment of a Chase Manhattan Bank loan to be used by Artisan to finance the production and marketing of an eight-film slate.

Inside.com says that Hoffman, a financial consultant and onetime president of Carolco Pictures, pioneered the use ofinsurance-backed financing, a funding avenue that gained popularity with both major studios and independent production companies in the mid-1990s when cash-flush insurance companiesguaranteed billions of dollars of production and distribution loans. Movie companies using this pipelinehave included Paramount, MGM, Universal, Sony, Village Roadshow, Phoenix Pictures andDestination Films.

By 1998, insurers began to back off after being hit by costly claims, the Web site said. A slew of lawsuits ensued, including one in October 1999 by French insurer AXA against Chase, Hollywood's biggest lender (Chase later countersued). In another, producer George Litto entered into arbitrationagainst AXA when the insurance giant revoked two insurance contracts.

However, until now Hoffman, an attorney who has reportedly earned several million dollars for hiswork advising insurance companies and brokers, had gone untouched by the suits, said Inside.com.

According to the Artisan suit, Hoffman approached former Artisan c.e.o. Mark Curcio in May 1998 to propose a deal in which an insurance company would provide "cash flow insurance" as security for a bank loan to cover production and prints and advertising costs for a slate of films.

Hoffman told Curcio and other Artisan executives that the key feature of such financing was it would be "non-recourse" -- meaning that once the entire slate of films was produced and ready for distribution, the bank would not look to the producer or its assets for repayment, but would use thecash flow insurance as its sole source of repayment, the lawsuit explains.

Hoffman, who had been instrumental in brokering such deals for major studios, told Artisan that through his affiliates -- including fellow defendants ICE Media, Bradstreet and Heath -- he wasauthorized to find and act on behalf of A-rated insurance carriers that would offer such cash flow insurance to Artisan.

Hoffman further explained, according the Inside.com and the lawsuit, that as long as Artisan could pay the hefty premium of 12 1/2%, and finished all the films in the slate within the three-year period, the insurer would make sure that the revenues from a film would equal or exceed the film's costs after a distribution period of 18 months to three years, "or the insurer would pay the shortfall to the lender."

During its negotiations with Hoffman and his associates, Artisan says it continually made clear that one of its primary goals was to avoid risking its other assets by using them as collateral, the lawsuit says. Artisan also stated that its main goal for the proposed financing was to add three or four more quality films a year to its theatrical release schedule.

In order to protect itself from exposure to liability, Artisan created the Artisan Film Investors Trust, which was funded and owned by outside investors. The trust became the borrower of a $163 million financing and put up about $10 million, mainly to pay the fees and costs associated with obtaining thefinancing, the lawsuit states.

Royal & Sun promised to insure the loan, the lawsuit says. Artisan says it relied on Royal & Sun because of obligations it would have to Chase without the insurance company's policy. So, if the eight films were not completed and ready for distribution by Oct. 13, 2002, for example, Artisan would have to pay back to Chase 100% of the money that the Trust borrowed and all the money invested bythird parties in the Trust, the lawsuit says.

Artisan made the deal on Oct. 13, 1999, and, at the same time, presented to the defendants all the required documentation for the first two films on the slate: Stir of Echoes and The Ninth Gate, whichwere complete and ready for distribution. Royal & Sun accepted and the financing went off fine, the suit adds.

But problems arose in June 2000 when Artisan completed and presented to Royal & Sun the documentation for its next three films: Way of the Gun, Blair Witch 2 and Soul Survivors. Theinsurance company refused to issue the cash flow insurance, the lawsuit states, and Chase would notrelease the financing for the three films which were complete and ready for distribution. Artisan says it had to use its own funds to complete the film Novocaine.

In addition, the suit claims, Royal & Sun made it clear "by its words and actions that it had no intention to provide...the promised cash flow insurance for the three final films on the eight-film slate." Artisan was then forced to stop production of the remaining films on the slate, and "was forced to take a series of urgent measures at extraordinary expense in order to mitigate its damages and avoid substantial additional monetary loss," the lawsuit adds.

Artisan's lawsuit claims that Royal & Sun and the defendants made intentional, false and fraudulentmisrepresentations about the cash flow insurance policy, causing it more than $100 million in damages.

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