Disney hit with suit by film financing partner

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Walt Disney Co.'s main film financing partner Kingdom Films LLC is suing the Burbank studio for allegedly 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 ‘Hannah Montana: The Movie.’

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


Kingdom claims that in exchange for its commitment to provide $135 million in equity financing and a revolving credit line of up to $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.’ 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 the 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 out in theaters on April 10.

Kingdom disputes Disney’s claim that ‘HSM3' is not eligible 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 terms of the deal between the studio and Kingdom, sequels are excluded from the fund.

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 the financial partners who help fund their pictures.

Being sued by your principal source of film financing isn’t exactly good news for the ‘happiest’ place on Earth (or any other studio for that matter) at a time when third-party financing is increasingly difficult to obtain. Just ask Viacom Inc.'s Paramount Pictures, which earlier this year saw a potential $450-million film financing pact with Deutsche Bank go up in smoke because the terms were too onerous for the studio.

The last thing studios want when profit margins are under pressure amid flat movie attendance and shrinking DVD sales is to assume 100% of the risk in financing their movies. After all, the favored Hollywood way is to rely heavily on OPM --other peoples’ money. But if you upset the other people, then you risk losing their money.

-- Claudia Eller