Disney is sued by financial partner over movie profits

Walt Disney Co.’s main film financing partner, Kingdom Films, is suing the Burbank studio, accusing it of breaching a 2005 contract guaranteeing it a share of profits from the recent hit “High School Musical 3: Senior Year” and next year’s release of “Hannah Montana: The Movie.”

In the suit, filed in Delaware Chancery Court, Kingdom contends that Disney sought to deprive it of “bargained-for rights” in the two movies, excluding those films from the slate of 32 it agreed to help finance. In 2005, Disney and Kingdom formed Magic Films as a vehicle to finance the slate. Disney owns 60% of Magic and Kingdom owns 40%.

Kingdom says that in exchange for its commitment to provide $135 million in equity financing and a revolving credit line of as much as $370 million, it was to “receive certain rights” to movies in the slate and the “attendant benefits” of their success.

“The clear understanding was that, except for certain films and categories of films that specifically were carved out, Magic Films would benefit from the value of Disney’s properties,” the lawsuit says. Kingdom contends that the exclusion of the two films “is part of a concerted effort to eliminate from the slate those films that defendants believe may be profitable as a result of their association with the Disney Channel.”

Indeed, “High School Musical 3,” the first theatrical release of the movie series that originated on Disney Channel, stands out as one of the few home-run hits for Disney this year. The movie has generated $234.5 million in worldwide ticket sales since opening in theaters Oct. 24. “Hannah Montana,” also based on a Disney Channel show, is due in theaters April 10.

Kingdom disputes Disney’s claim that “High School Musical 3” is ineligible for inclusion in the slate because it is a sequel to the “High School Musical” and “High School Musical 2” television movies that aired on the Disney Channel and were not released in theaters. Under the terms of the deal between the media giant and Kingdom, sequels are excluded.

Disney declined to comment beyond a brief statement: “We believe we have acted in accordance with the terms of the contract and that this suit has no merit.”

It is not unusual for studios with co-financing slate deals to hold out films that they prefer to finance fully themselves in order to reap all the profits. For example, Disney carves out its “Pirates of the Caribbean” movies; Warner Bros., its “Harry Potter” franchise; and Sony Pictures, its “Spider-Man” series, from financial partners who help fund their pictures.

Being sued by a principal source of film financing isn’t good news for any studio at a time when third-party funding is increasingly difficult to obtain.

In July, Viacom Inc.’s Paramount Pictures saw a potential $450-million film financing pact with Deutsche Bank go up in smoke because the terms were too onerous for the studio.

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claudia.eller@latimes.com