Phoenix funding suit could burn Chase, Heath

Insurers may not have to pay for pic policies

London’s High Court has handed down a preliminary judgment in Phoenix Pictures’ insurance-backed film financing lawsuit brought by HIH Casualty and General Insurance against Chase Manhattan Bank and its agent, Heath Insurance Broking, that could leave Chase and Heath holding the bag.

On Aug. 1, the Hon. Justice Aikens of the Queen’s Bench division of Commercial Court ruled that a group of insurance companies, led by HIH, will not be obliged to honor the Phoenix policies if they can prove Chase and/or Heath misrepresented or failed to disclose material facts to insurers before policies were issued.

The judgment allows the insurers to pursue claims of fraud, negligent misrepresentation and nondisclosure against Chase. The insurers, who additionally contend that Heath misrepresented or concealed facts regarding the loan, conflicts of interest and reasons that others declined to back the policies, may also now pursue the broker independently for damages.

The litigation began last November when the insurers, who essentially provided collateral for film loans from banks by insuring the performance of pics, filed suit in London alleging that Heath obtained insurance policies for Chase client Phoenix through fraud and/or negligent misrepresentations.

Field of dreams

The Phoenix deal, first inked in 1996 and one of the foremost in the then-relatively new field of insurance-backed film financing, was designed to insure Chase against any loan defaults as a result of box-office losses. Among the films were “The Mirror Has Two Faces” and “The People Vs. Larry Flynt,” each covered by individual policies, and “Apt Pupil,” “U-Turn” and “Swept From The Sea,” which were covered by an insurance-backed revolving credit facility.

On two of those films, “Mirror” and “Larry Flynt,” Chase has claimed total indemnities of $16.5 million.

Industry observers say that when HIH filed the London suit, few expected the case to have any real impact. While insurance-backed financing has been surrounded in controversy almost from its inception, it seemed impossible for a blue-chip bank like Chase to take a risk that would allow it to become embroiled in a serious lawsuit.

As one observer said, “Insurers got involved because Chase was doing the financing. But Chase would never have done these deals if the insurance companies weren’t backing the loans.”

Significant impact

The London ruling could have a significant impact on a number of pending cases, many of which directly involve French reinsurance giant AXA.

Last October, AXA filed a lawsuit filed against Chase in New York State Court, claiming that Chase knew AXA never intended to guarantee payment on any loan. In response, Chase filed a $2 million counterclaim against the Gotham-based AXA suit last December that pointed out AXA’s widespread involvement in the movie business included a $200 million involvement in Village Roadshow Ltd., a $100 million investment in Destination Film Distribution and the $100 million insured portfolio with Imperial Bank and U.K.-based Flashpoint, which Chase alleges has between $56 million and $90 million against it in claims.

Additionally, film producer George Litto has begun arbitration proceedings with the American Arbitration Association in Los Angeles against AXA for revoking two insurance contracts that backed financing for five motion pictures.

Industry watershed

The $100 million insurance-backed financing package put together by AXA and AIG for Destination is often cited as the industry’s watershed insurance deal. Lauded as groundbreaking at the time, the deal allowed Steve Stabler and his then-partner Brent Baum to set up their indie without any of their own money. The two were able to raise $100 million in five-year bonds backed only by the insurance policy.

Within three months of the Destination deal’s closing, however, both AXA and AIG had withdrawn from the film industry and AXA fired the exec writing its policies, citing deviation from AXA’s underwriting guidelines intended to limit the insurer’s risks. And last November, Stabler left his post as Destination’s CEO to take a producing deal at the indie.

Studios that have utilized insurance policies to back film financing in the past couple of years include Viacom’s Paramount Pictures, Seagram’s Universal Pictures, Metro-Goldwyn-Mayer and Sony Pictures Entertainment.