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Clause & Effect
If a TV network makes a non-recourse loan to a production company to produce a TV series, could the production company nevertheless be required to pay back the loan? Assume that the agreement with the network provides for a license fee to the production company as well as a loan for production costs that exceed the license fee, and that the loan will be repaid only from the series' net profits. What happens if the series is never syndicated and thus earns no net profits?
This was at issue in a suit by CBS Broadcasting against the Carsey-Werner Co. over the latter's failure to secure a syndication deal for the TV series 'Cybill' starring Cybill Sheperd. CBS had ordered a minimum of 13 episodes of 'Cybill' for the 1994/1995 TV season for a per-episode license fee of $550,000, plus a non-recourse loan equal to the difference between final production cost and the license fee. Carsey Werner produced 87 episodes of 'Cybill' and CBS loaned the production company $53,325,000. Carsey-Werner began to but abandoned efforts to syndicate the series. CBS filed suit in Los Angeles Superior Court for repayment of the loan alleging negligence, and breach of the implied covenant of good faith and fair dealing. Carsey-Werner argued that a good faith effort to syndicate the series couldn't be implied because the contract didn't obligate the production company to do so. The trial court dismissed the complaint.
Reversing in an unpublished opinion, the Court of Appeal of California, Second Appellate Division, ruled that the agreement between CBS and Carsey-Werner contained an implied covenant of good faith and fair dealing that required Carsey-Werner to make good faith, commercially reasonable efforts to syndicate 'Cybill.' CBS Broadcasting Inc. v. The Carsey-Werner Co., B151721 (Jan. 21). According to the appellate court, '[t]he agreement assumes the Production Company will attempt to syndicate the series under certain circumstances. The contingent circumstances occurred. The agreement does not provide the Production Company with express discretion to refrain from syndicating the series at its option. The fact that the loan was non-recourse does not negate the existence of an implied duty to attempt to generate cash flow from which to repay the loan.'
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