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Reversing in an unpublished opinion, the Court of Appeal of California, Second Appellate Division, ruled that the agreement between CBS and Carsey-Werner contained an implied covenant of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.'

The court noted that CBS had agreed to bear the risk of non-payment, which could occur if insufficient episodes had been produced, if Carsey-Werner had been unable to find a syndication deal for sufficient episodes or if the net proceeds hadn't been sufficient to pay off the loan. The court added: 'The provision that the Production Company was not required to repay more than it took in from the series was to protect the Production Company from taking a loss; it was not to provide the Production Company with the option to do nothing to generate additional cash flow. ' This is not a case in which the Production Company bargained and gave adequate consideration for the right to do nothing once they became obligated to repay the CBS loan.' The court also held that Carsey-Werner acted negligently in its handling of trying to secure a syndication deal for 'Cybill.'

The key agreement provision in dispute in the case read as follows:

'[The Production Company] shall repay such loan, plus accrued interest, in two installments [on specified dates]; provided, however, that in no event shall the amount of any loan payment plus accrued interest ' be in excess of [the Production Company's] cash flow from the net proceeds received by [the Production Company] from the Series prior to the date such payment becomes due (i.e., [the Production Company] shall only be obligated to make a loan (plus accrued interest) payment to the extent that [the Production Company's] cash flow from the net proceeds received by [the Production Company] up to the point that such payment falls due equals or exceeds the amount of the payment, plus the prior loan payment, if applicable). In the event that the cash flow is not equal to or greater than the amount of the loan (plus interest) payments that would otherwise be due in accordance with this provision, then CBS and [the Production Company] shall negotiate in good faith to extend the time by which the full amount of such payment or payments shall be made, but in no event shall [the Production Company] be required to make any loan and/or accrued interest payment(s) which would exceed the cash flow from the net proceeds theretofore received by [the Production Company] from the Series. For the purposes of this Paragraph ', in determining cash flow [to the Production Company] from net proceeds from the Series, the distribution fee and expenses attributable to the Series shall be the actual distribution fee and expenses charged by the Series distributor, except that if [the Distribution Company] is the distributor, then [the expenses and distribution fees are as set forth in the agreement].'

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.'

The court noted that CBS had agreed to bear the risk of non-payment, which could occur if insufficient episodes had been produced, if Carsey-Werner had been unable to find a syndication deal for sufficient episodes or if the net proceeds hadn't been sufficient to pay off the loan. The court added: 'The provision that the Production Company was not required to repay more than it took in from the series was to protect the Production Company from taking a loss; it was not to provide the Production Company with the option to do nothing to generate additional cash flow. ' This is not a case in which the Production Company bargained and gave adequate consideration for the right to do nothing once they became obligated to repay the CBS loan.' The court also held that Carsey-Werner acted negligently in its handling of trying to secure a syndication deal for 'Cybill.'

The key agreement provision in dispute in the case read as follows:

'[The Production Company] shall repay such loan, plus accrued interest, in two installments [on specified dates]; provided, however, that in no event shall the amount of any loan payment plus accrued interest ' be in excess of [the Production Company's] cash flow from the net proceeds received by [the Production Company] from the Series prior to the date such payment becomes due (i.e., [the Production Company] shall only be obligated to make a loan (plus accrued interest) payment to the extent that [the Production Company's] cash flow from the net proceeds received by [the Production Company] up to the point that such payment falls due equals or exceeds the amount of the payment, plus the prior loan payment, if applicable). In the event that the cash flow is not equal to or greater than the amount of the loan (plus interest) payments that would otherwise be due in accordance with this provision, then CBS and [the Production Company] shall negotiate in good faith to extend the time by which the full amount of such payment or payments shall be made, but in no event shall [the Production Company] be required to make any loan and/or accrued interest payment(s) which would exceed the cash flow from the net proceeds theretofore received by [the Production Company] from the Series. For the purposes of this Paragraph ', in determining cash flow [to the Production Company] from net proceeds from the Series, the distribution fee and expenses attributable to the Series shall be the actual distribution fee and expenses charged by the Series distributor, except that if [the Distribution Company] is the distributor, then [the expenses and distribution fees are as set forth in the agreement].'