In Mizuho Corporate Bank Ltd. v. Reliance Insurance Co. In Liquidation, No. 1 REL 2005 (Pa. Cmwlth. Aug. 8, 2011), a Pennsylvania court determined that claims for losses stemming from a failed motion picture arose under an insurance policy, rather than under financial guaranties. A copy of the decision is available here.
The court decision arose out of a motion picture advertising efficacy policy (the “Policy”) issued by Reliance Insurance Company of Illinois (Reliance) to Woodbridge Flanders California (“Woodbridge”), a film production company. In 1997, Woodbridge and Warner Brothers Entertainment Inc. (“Warner Brothers”) agreed to purchase and distribute a film titled "The Dog of Flanders." Woodbridge obtained a loan from Banque Paribas for the costs of production, and Warner Bros. agreed to guaranty up to $3.5 million of the production financing. In addition, Mizuho Corporate Bank Ltd. agreed to loan $18 million for advertising expenses associated with the release and distribution of the film.
The Policy provided coverage to Woodbridge for losses incurred in the event that the film’s profits did not cover its costs. The Policy designated Mizuho as a loss payee to protect its interest in recovering payment for the production financing. Subsequent to issuing the Policy to Woodbridge, Reliance entered into liquidation proceedings.
Following the commercial failure of the film, Mizuho and Warner Brothers submitted claims for $20 million and $1.8 million, respectively, in the Reliance liquidation proceedings. In separate reports and recommendations, two referees concluded that the claims should be assigned priority level (b), as claims for losses under an insurance policy. On appeal, the liquidator asserted that the claims should be assigned priority level (e), as claims arising under financial guaranties. In part, the liquidator argued that Warner Brothers' losses arose as a result of its guaranty to Woodbridge, not as a result of insufficient film revenue.
The Court ultimately determined that the Policy more closely conformed to the standards of an insurance policy. In particular, the Court noted that the Policy guaranteed a minimum financial return from the production and marketing of the film and thus promised to pay in the event the film underperformed financially. Thus, Reliance's liability under the Policy remained subject to the contingency that the film underperformed. The Court noted that this type of guaranty differs significantly from a guaranty in the form of a promise to pay the debt of another.
The Court further noted that, pursuant to the Policy, the named insured, Woodbridge, transferred its right of indemnification in the event the film underperformed to the interested parties who had extended credit (Mizuho) or acted as a third-party guarantor (Warner Brothers). Therefore, the Policy essentially guaranteed payment to Mizuho and/or Warner Brothers, regardless of the fact that neither had paid the premium for the Policy. If, on the other hand, the film been a financial success and Woodbridge defaulted on the debt to Mizuho, or Warner Brothers defaulted on its obligation to Banque Paribas, Reliance would have incurred no liability, the Court explained.