After weathering criticism for buying Imperial Bancorp of Inglewood, Calif., Comerica Inc. is on the defensive again.
Imperial, which Detroit-based Comerica bought last month, is embroiled in a $75 million lawsuit with one of Hollywoods most talked-about new producers who also happens to be a long-standing client.
Intertainment Licensing GMBH of Munich alleges that Imperial conspired with the producer Elie Samaha and his company, Franchise Pictures of Los Angeles, to commit fraud against Intertainment, which receives the rights to films for overseas distribution in exchange for financing a portion of the films budget.
The case is a star-studded reminder of how risky certain business lines can be. Financing movie production and distribution is a gamble because of the possibility of producing a flop and the film industrys notoriously murky accounting procedures, said Campbell Chaney, a bank analyst in San Francisco with Sutro & Co.
The lawsuit and a counterclaim are also providing more fodder for analysts and investors who have expressed concern that Imperials checkered credit quality record could tarnish Comericas relatively unblemished reputation.
In 1999, Imperial provided $200 million of financing to Franchise Pictures, a company owned by Mr. Samaha, an entrepreneur-turned producer who has made headlines in recent years with projects such as The Whole Nine Yards, starring Bruce Willis. Though the practice of filming the pet projects of movie stars received a lot of hype a year ago, since then several of Mr. Samahas projects notably Battlefield Earth with John Travolta and Get Carter with Sylvester Stallone have been box-office failures.
Intertainment claims that Imperial and Franchise Pictures inflated the budgets for movies that Intertainment had agreed to distribute. It is seeking $75 million in damages.
You always hear stories about budgets being padded this goes beyond padding, said Scott Edelman, an attorney for Gibson, Dunn & Crutcher LLP, which is representing Intertainment.
In court papers filed last week, Intertainment charges that Imperial was a party to this scheme. Imperial would directly benefit from the larger security created by the fraudulently inflated guaranteed fees and excessively large financing fees, the suit says.
The banks attorney, Michael Wachtell of Buchalter, Nemer, Fields & Younger, declined to comment on the litigation.
Franchise Pictures, in turn, has sued Intertainment for breach of contract and promissory fraud.
Andrew Stevens, chief operating officer for Franchise, said Intertainment only brought the suit to delay paying $74 million in letters of credit that have come or were coming due shortly as payment for the rights to four films.
They are doing everything in their power to stall or get out of obligation of payments, Mr. Stevens said. Franchise continues to make films using Imperials financing.
Central to Intertainments argument of complicity by Imperial is that the bank was aware of the agreement with Franchise that limited Intertainments payment to 47% of the bonded budget, or the direct production costs of a movie, when Franchise signed licensing agreements for each film. These agreements, which Intertainment alleges were based on pumped-up budget numbers, were made to facilitate entering into a bank loan.
Intertainment says Imperial must have known the real size of the bonded budget when, as a lender, the bank contracted with a bond company to cover the risk that a movie was not completed.
And in a twist that speaks to the personality-driven nature of show business, Intertainment says that Franchises Mr. Stevens had originally agreed to prove that Imperial was a partner to the scheme in other words, to testify against his employer and the bank. Mr. Stevens told my client that he would assist my client in developing its case against Imperial, Mr. Edelman said.
Mr. Stevens called those allegations a lie, the severest form of defamation, and fraud.
Intertainments lawyers are attempting to get a protective order to seal documents connected with the case, including a release implicating Mr. Stevens.
Lawyers familiar with entertainment litigation said it is not unusual for plaintiffs to cast a wide net when pursuing civil damages and include any defendant that might have some connection with the case, including lenders. In this situation, they said, Imperials pockets appear all the more deep now that it is owned by $41 billion-asset Comerica.
Nor is it unusual for a lender to the film industry to end up in court but thats usually as the plaintiff against a borrower who has defaulted, said Greg Aldisert, an attorney Greenberg Glusker Fields Claman Machtinger & Kinsella LLP, who said he has appeared in court against Imperial often in the past.
Theyre a top-notch bank and would have no incentive to get into some messy angle with budgets, he said.
Nevertheless, the case casts a shadow over Imperials entertainment business, which is deeply tied to its relationship with Mr. Samaha.
Indeed, the bank had once proudly touted Mr. Samaha and his pictures to shareholders as an example of its bankers insider knowledge of the tight-knit entertainment industry.
In its 1999 annual report, Imperial included a full-page photo of Elie Samaha sitting in a directors chair and quotes him saying that Imperial has always come through for me when I needed them.
Now, Intertainment lawyers cite the report as evidence in their case against Imperial.
Before it closed the acquisition in January, Comerica had already completed a fair bit of scrubbing to Imperials loan portfolio, allocating $70 million in allowances for credit losses. Nonperforming assets which despite the large writedown remained high at $68 million included about $14 million of entertainment losses.
Risk in the $500 million portfolio, which by its nature is much higher than the rest of Comericas business, could get worse if the ongoing screenwriters strike throws production schedules off. But as 1.4% of the entire banks lending portfolio, its not big enough to sink the ship, said Rosalind Looby, an analyst for Credit Suisse First Boston.
Before making the Imperial acquisition, Comerica ran a $5 billion subsidiary based in San Jose, Calif., that focused on banking small- and middle-market businesses in the state. While it had already made some inroads in the burgeoning Los Angeles county market, its parents purchase of $6.5 billion-asset Imperial swiftly raised its standing in that market.
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