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Madison Miracle Productions, LLC, and Paradise Film v. Mgm Distribution Company

September 28, 2012

MADISON MIRACLE PRODUCTIONS, LLC, AND PARADISE FILM PRODUCTION COMPANY, INC.,
PLAINTIFFS-APPELLEES,
v.
MGM DISTRIBUTION COMPANY, DEFENDANT-APPELLANT (METRO-GOLDWYN-MAYER STUDIOS, INC., )
DEFENDANT).



Appeal from the Circuit Court of Cook County. No. 05 L 7934 Honorable Sanjay T. Tailor, Judge Presiding.

The opinion of the court was delivered by: Justice Rochford

JUSTICE ROCHFORD delivered the judgment of the court, with opinion.

Presiding Justice Hoffman and Justice Karnezis concurred in the judgment and opinion.

OPINION

¶ 1 Plaintiffs, Madison Miracle Productions, LLC (Madison LLC), and Paradise Film Production Company, Inc. (Paradise), filed the instant suit seeking both damages for breach of contract and an accounting against defendant-appellant, MGM Distribution Company (MGM Distribution), and defendant, Metro-Goldwyn-Mayer Studios, Inc. (MGM Studios). Plaintiffs' suit generally alleged that defendants failed to properly distribute "Madison" (the movie), a motion picture produced by Madison LLC. MGM Distribution, a Delaware corporation with its principal place of business in California, filed a motion to dismiss for lack of personal jurisdiction. That motion was denied by the trial court following an evidentiary hearing, and this court subsequently granted MGM Distribution's petition for leave to appeal that decision pursuant to Illinois Supreme Court Rule 306(a)(3). Ill. S. Ct. R. 306(a)(3) (eff. Feb. 16, 2011). For the reasons that follow, we reverse.

¶ 2 I. BACKGROUND

¶ 3 Madison LLC and Paradise filed their initial complaint in July of 2009. With respect to the parties, the complaint alleged that: (1) Madison LLC was a California limited liability corporation, while all of Madison LLC's members were "citizens of and domiciled in Illinois;" (2) Paradise was a Delaware corporation with its principal place of business in California; and (3) both MGM Distribution and MGM Studios were Delaware corporations with their headquarters located in California.

¶ 4 As to the merits, the initial complaint generally alleged that "Madison" was a movie shot on location in Indiana, Illinois, Washington, and California in 1999. The movie was produced by Madison LLC at a total cost in excess of $15 million. After the movie was screened at a film festival in 2001, Paradise expressed interest in distributing the movie on behalf of Madison LLC.

¶ 5 Specifically, in exchange for a fee, Paradise would arrange for the movie to be distributed by MGM Distribution. That distribution would take place pursuant to a pre-existing "Distribution 'Put' Agreement" between Paradise and MGM Distribution. That agreement, executed in 1999, required MGM Distribution to accept up to six movies submitted by Paradise for distribution within the following five years. Such distribution could include arranging for an initial theatrical release, nationwide or internationally, and further distribution through other media outlets such as television, pay-per-view services, home video media (DVDs), and performances on airlines and cruise ships. Generally speaking, the agreement required MGM Distribution to "distribute each Picture in a commercially reasonable manner, consistent with the manner in which it distributes its own product of similar nature and quality."

¶ 6 The complaint alleged that Madison LLC agreed with Paradise's distribution proposal, and MGM Distribution in turn agreed to accept "Madison" as one of the six movies it was obligated to distribute pursuant to its distribution agreement with Paradise. These various agreements were memorialized in writing via: (1) the original 1999 distribution agreement between MGM Distribution and Paradise (the distribution agreement); (2) a 2004 agreement between Paradise and Madison LLC whereby Paradise agreed to submit "Madison" to MGM Distribution (the Paradise-Madison LLC agreement); and (3) a 2004 "PRODUCER/MGM P&A FUNDING AND DISTRIBUTION AGREEMENT" (the MGM-Madison LLC agreement) between MGM Distribution, Madison LLC, and Paradise, whereby MGM Distribution agreed to distribute "Madison" pursuant to its obligations under the original distribution agreement, and Madison LLC agreed to assume some of Paradise's obligations under that same agreement.

¶ 7 The complaint further alleged that while plaintiffs had fully performed their obligations under the contract, MGM*fn1 did not live up to its obligation to distribute "Madison" in a "commercially reasonable manner" either before or after the movie's theatrical release in April of 2005. Plaintiffs asserted that "the marketing, release and distribution of the film was horribly mismanaged and grossly substandard, the DVD release and distribution [were] disorganized and inept, [and] there was (and continues to be) utter confusion over who at MGM (or elsewhere) is handling international markets and media." Furthermore, plaintiffs contended that as a result of these failures, "a film which [Madison LLC] had invested $15 million to produce and market earned only $500,000 in box office sales--a small fraction of what Madison LLC reasonably would have been expected to earn had MGM met its obligations--and lost tens of millions of dollars in downstream royalties."

¶ 8 More specifically, the complaint alleged that--pursuant to the various agreements--Madison LLC had an obligation to both deliver the fully completed movie and other materials to MGM in a specific format and to forward at least $1 million dollars (marketing funds) to MGM to be used for "Print & Advertising ('P&A') expenses" (marketing expenses). These marketing funds were to be used to support the initial theatrical release of "Madison." Nevertheless, Madison LLC had the option to provide additional marketing funds to MGM in order to support the movie's chances for greater commercial success, and the complaint asserted that Madison LLC did in fact provide a total of $6.75 million in such funding. Additionally, and in conformity with its contractual obligations, Madison LLC also created a "Marketing, Promotion and Publicity Plan" (marketing plan) for the movie outlining how MGM should utilize the marketing funds provided. After completing its obligations, Madison LLC was entitled to the net proceeds that the movie generated from the exploitation of the movie through all of MGM's various distribution channels.

¶ 9 With respect to MGM, the complaint asserted that--in exchange for a percentage of the gross receipts generated by the movie--MGM was obligated to distribute "Madison" as it would one of its own films. The initial theatrical release would be in conformity with the marketing plan developed by Madison LLC, with that plan to be negotiated by the parties and ultimately approved by MGM. MGM was to exercise its approval power "in good faith." MGM was also to distribute the movie through all of its other distribution channels following the initial release to theaters.

¶ 10 The complaint went on to allege that MGM breached its contractual obligations in many respects. Specifically, plaintiffs asserted that MGM: (1) refused to fully implement Madison LLC's proposed marketing plan, instead insisting on a "bare-bones release of Madison;" (2) insisted that the "iconic MGM logo" be removed from promotional materials that had already been prepared; (3) failed to ensure that promotional material and "trailers" for the movie were exhibited in movie theaters prior to the initial release in April of 2005; and (4) failed to coordinate with and otherwise frustrated a "grass roots" marketing and advance ticket purchase strategy separately arranged by Madison LLC. Plaintiffs contended that due to these failures, "Madison" was initially released "in only 15 markets on only 93 screens," the theatrical release only lasted 21 days, and the movie only generated some $517,000 in ticket sales. Plaintiffs also alleged that "[t]he low box office numbers, caused by MGM's failure to perform, substantially compromised [the movie's] downstream distribution through DVD, international and pay television."

¶ 11 Additional contractual breaches were alleged regarding MGM's actions with respect to those "downstream" distribution channels. Specifically, plaintiffs alleged that--due in part to confusion and mismanagement caused by various transitions in the defendants' overall corporate structure and changes in their distribution partners--MGM also failed to competently handle the distribution of the movie via DVD, national and international television broadcasts, and pay-per-view channels. These failures further contributed to the movie's lack of commercial success. Finally, plaintiffs alleged that MGM had failed to comply with certain accounting and auditing obligations contained in the parties' agreements, thus stymying plaintiffs' efforts to determine both the scope of MGM's mismanagement and the amount of plaintiffs' actual losses.

¶ 12 Both defendants filed motions to dismiss plaintiffs' initial complaint, with MGM Studios bringing its motion pursuant to section 2-615 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615 (West 2010)). MGM Studios complained that plaintiffs' complaint improperly referred to defendants generally and nonspecifically as "MGM," and also failed to state a cause of action against MGM Studios because it was apparent from the agreements attached to the complaint that only MGM Distribution was a party to the operative agreements.

¶ 13 In turn, MGM Distribution filed a limited appearance and brought a motion to dismiss pursuant to section 2-301 of the Code (735 ILCS 5/2-301 (West 2010)). In that motion, MGM Distribution contended that subjecting it to suit in Illinois would violate its federal due process rights because it did not have sufficient "minimum contacts" with this state to support personal jurisdiction. MGM Distribution supported its motion by asserting that: (1) none of the parties involved in this suit, including plaintiffs, were Illinois corporations or residents; (2) the contracts involved were all negotiated and executed in California and MGM Distribution's obligations under those contracts were to be performed in California; and (3) while the exhibition of the movie would take place in Illinois (and elsewhere), all such activities were coordinated from California and carried out by independent third parties.

¶ 14 What followed was nearly two years of litigation with respect to defendants' motions to dismiss. During that time, the parties engaged in significant discovery on the jurisdictional issues, multiple affidavits and counteraffidavits were filed with the court, and plaintiffs twice filed amended complaints in an effort to better state a cause of action against MGM Studios upon various legal theories. These included allegations that MGM Studios directly participated in the contractual breaches alleged, MGM Studios should be held liable because it was the alter ego of MGM Distribution, and that Madison LLC was a third-party beneficiary of agreements between MGM Studios and MGM Distribution. In October of 2010, the trial court found that plaintiffs had made a prima facie case that Illinois courts had personal jurisdiction over MGM Distribution and scheduled an evidentiary hearing to resolve certain factual conflicts with respect to the jurisdictional issue.

¶ 15 That evidentiary hearing was ultimately held over the course of three days in July and August of 2011. During the hearing, the trial court heard testimony from the following individuals:

(1) Mr. John Hester, an attorney and long-time "senior advisor" and consultant for both defendants;

(2) Mr. Steve Stabler, the owner of Paradise; and (3) Mr. Carl Amari, the chairman of Madison LLC. The court was also presented with deposition testimony transcripts and other documentary evidence.

¶ 16 Mr. Hester testified that he had been a consultant for MGM Studios since 1997, and in that role he also provided services to MGM Studios' subsidiaries such as MGM Distribution. Mr. Hester was the person primarily responsible for negotiating both the distribution agreement and the MGM-Madison LLC agreement on behalf of MGM Distribution. The distribution agreement arose out of an employment agreement Mr. Stabler had with Orion Pictures, a company previously acquired by MGM Studios. That agreement allowed Mr. Stabler to "put" a certain number of movies to Orion Pictures for nearly mandatory distribution if he was ever terminated. When Mr. Stabler was subsequently terminated following MGM Studios' acquisition of Orion Pictures, the "put" agreement was triggered. Ultimately, this prior employment agreement was further negotiated by MGM Distribution and Mr. Stabler, and the result of that negotiation was the 1999 distribution agreement executed between MGM Distribution and Paradise, Mr. Stabler's company. Mr. Hester testified that the distribution agreement was completely negotiated and executed in California, with both parties being Delaware corporations operating out of California.

¶ 17 Mr. Hester further testified that it was in May of 2004 that he first became aware that Paradise was interested in submitting "Madison" to MGM Distribution pursuant to the distribution agreement. Mr. Hester understood that Paradise and Madison LLC had reached an agreement to do so, but that Madison LLC was also interested in depositing the marketing funds required by the distribution agreement directly with MGM Distribution instead of funneling that money through Paradise. Mr. Hester testified that such a transaction would be a "deviation from the original distribution agreement," and since Madison LLC would therefore be assuming Paradise's obligation to pay for the marketing expenses required in the distribution agreement, that modification "had to be in writing." It was this requirement that led to the MGM-Madison LLC agreement being executed in 2004. Mr. Hester's testimony was that the discussions and negotiations with respect to that agreement occurred in California and involved: (1) himself; (2) another MGM Distribution employee, Mr. Erik Lomis; (3) Mr. Stabler; and (4) Madison LLC's California-based attorney, Mr. Tom Taylor.

¶ 18 While Mr. Amari signed the MGM-Madison LLC agreement in Illinois on behalf of Madison LLC, the agreement drafts--including the final draft--were always forwarded to him through Mr. Taylor in California. The final signatory was Mr. Lomis, who signed the agreement in California on behalf of MGM Distribution. Mr. Hester acknowledged that the MGM-Madison LLC agreement contained a notice provision requiring Madison LLC's notices to be sent to Mr. Amari in Illinois, but denied that MGM Distribution knew if Madison LLC had its principal place of business there. Mr. Hester was aware that many of the investors in the movie were from Illinois and Mr. Amari had an office there.

¶ 19 After the MGM-Madison LLC agreement was executed, Mr. Hester and others at MGM Distribution did engage in discussions and negotiations with Mr. Amari and some of the other Illinois investors in the movie. These discussions and negotiations involved how and where the movie would be initially marketed and released to theaters. Mr. Hester acknowledged that these discussions and negotiations took place pursuant to the requirement for an approved marketing plan referenced in both the distribution agreement and the MGM-Madison LLC agreement, and he described the process as "collaborative." While all such in-person meetings occurred in California, and no MGM Distribution employee ever traveled to Illinois for any reason, Mr. Hester testified that MGM Distribution did participate in telephone calls with Mr. Amari in Illinois. MGM Distribution also exchanged faxes and e-mails with Mr. Amari in Illinois, with those communications containing general correspondence and draft agreements. Mr. Hester denied that any conversations or negotiations with respect to the specific distribution of "Madison" occurred prior to the execution of the MGM-Madison LLC agreement in the summer of 2004.

¶ 20 Mr. Stabler testified that he was the sole owner of Paradise. He also testified regarding the history surrounding the execution of the distribution agreement, and his testimony on that topic generally corresponded with Mr. Hester's recollections. Mr. Stabler further testified that the distribution agreement was "unique" and a "great opportunity" because it required MGM Distribution--one of the six major movie studios--to distribute the independently produced and financed movies submitted under the agreement "in no way different than they would distribute any of their own films." Mr. Stabler testified that this was important for many reasons, including the fact that "the studios control the bulk of distribution in the film business and they generally have output deals for both home entertainment and for domestic and international television that are far in excess of the output amounts that any independent sales organization could get from the films." The distribution agreement thus allowed Paradise to make use of MGM Distribution's "distribution system and to take advantage of the output deals they've negotiated."

¶ 21 Mr. Stabler first agreed to submit "Madison" to MGM Distribution under the distribution agreement in the late summer of 2003. In making that decision, he discussed the matter with Mr. Amari, who was based out of Illinois. Mr. Amari was the head of Madison LLC and the ultimate decision maker with respect to the distribution of the movie. He then reached out to Mr. Lomis, the president of distribution for MGM Distribution, who soon indicated that "Madison" would be accepted for distribution pursuant to the distribution agreement. Over the course of the next few months, Mr. Stabler, Mr. Lomis, and Mr. Hester engaged in "many" additional discussions in California regarding the exact way the movie would ultimately be distributed. Mr. Amari himself was only involved in some of Mr. Stabler's conversations with Mr. Hester, with Mr. Stabler establishing a conference call from California to Mr. Amari in Illinois.

¶ 22 During the course of those negotiations, MGM Distribution became aware that Mr. Amari operated out of Illinois and that Mr. Stabler--who described his role as that of a "middleman"--would often have to ask Mr. Amari for direction before relaying that information to MGM Distribution. MGM Distribution was also made aware of the fact that Chicago would be an important market for the initial theatrical release of "Madison," both because it was the third largest market in the country and because it was important to Mr. Amari that the other Illinois investors in Madison LLC would be able to view the movie in theaters there. These discussions ultimately led to the execution of the MGM-Madison LLC agreement in the summer of 2004.

¶ 23 Mr. Amari testified that he was the chairman of Madison LLC and the lead producer of the movie. In those roles, Mr. Amari testified that he "raised the majority of the money and cast everybody with the help of a casting director and hired the production team and hired the director, all--the cinematographer and everyone associated with producing the movie and then continued to be the decision-maker on the film and its distribution throughout until current." The vast majority of those decisions--and all of those decisions regarding distribution--were made by Mr. Amari, and the vast majority of those decisions were made at Madison LLC's principal offices in Illinois. That is also where Mr. Amari received telephone calls, general correspondence, and other notices from MGM Distribution regarding the movie. All of the investors in and members of Madison LLC, including Mr. Amari himself, were Illinois residents.

¶ 24 Mr. Amari ultimately decided to submit the movie for distribution through Paradise's distribution agreement with MGM Distribution. However, Mr. Amari specifically testified that Madison LLC never pressed for a direct contractual relationship with MGM Distribution and that he would have been content to pay MGM Distribution the required marketing funds directly without such a relationship. He also testified that he and the other Madison LLC investors traveled to California in December of 2004 in an effort to obtain as wide a theatrical release of the movie as possible. Mr. Amari and his investors had spent over $15 million on producing the film, and they felt that the only way to recoup that investment was to promote the movie to as wide an audience as possible. As such, they were prepared to spend far more than the $1 million in marketing expenses required by the MGM-Madison LLC agreement, and in the end actually spent over $5 million marketing the movie. It was also very important that the movie be distributed in Chicago, and Mr. Amari informed MGM Distribution of that fact. Despite this, MGM Distribution itself was unwilling to support a wider release and proposed a more limited initial theatrical distribution of the movie.

¶ 25 Mr. Amari did allow that Mr. Bill Bindley, the California-based director of the movie, had some authority to make decisions and hire some personnel with respect to the creative aspects of the film. He also testified that various pre- and postproduction offices were set up in California in order to expedite the completion of the movie, which was also partially filmed in California. Additionally, Mr. Amari admitted that Madison LLC was organized in California and certain organizing documents listed its principal place of business to be in that state. However, Mr. Amari testified that the movie was initially produced via another more generalized Illinois corporation and that Madison LLC was subsequently organized to provide an investment vehicle that was solely focused on the production of "Madison." That process was completed by Madison LLC's attorney, Mr. Taylor, and Mr. Amari was not certain exactly why California was chosen as the place of organization. Moreover, Mr. Amari reiterated that it was Illinois where he made all of the distribution decisions with respect to the movie on behalf of Madison LLC. He did acknowledge that Madison LLC's offices in Illinois were primarily located in an office he personally owned and that Madison LLC never had a lease for the space he used for its activities there.

¶ 26 As noted above, the trial court was also presented with a number of deposition transcripts, which included the deposition testimony of: (1) Mr. William Bindley, the California-based director of "Madison;" (2) Mr. Tom Taylor, Madison LLC's California-based attorney; (3) Mr. Stephan Manpearl, Madison LLC's California-based distribution and marketing consultant; and (4) Mr. Carrey, a California-based employee of Madison LLC who supervised various postproduction activities for the movie. These witnesses testified regarding their respective involvement in the production, postproduction, marketing, and distribution of the movie, and generally testified that their involvement in the project occurred in California. There were some exceptions to this, as Mr. Bindley was involved in the filming of the movie in Illinois and Indiana and Mr. Manpearl testified that he did attend some meetings with Madison LLC in Illinois. However, they all also generally testified that most--if not all--major decisions regarding Madison LLC and the movie were made by Mr. Amari and the other investors in Illinois, and that MGM Distribution was well aware of that fact.

¶ 27 Finally, the parties also presented documentary evidence to the trial court. These documents included the various contractual agreements at issue, correspondence, and documents related to the organization of Madison LLC and the production and marketing of "Madison." Of particular note, defendants introduced documents showing that Madison LLC was originally organized in California, California was originally identified as its principal place of business, and Mr. Bindle --a California resident--had at various times been identified as the president of the company as well as a member. MGM Distribution also produced evidence that Madison LLC was not registered to do business in Illinois. In turn, plaintiffs introduced documents showing that Illinois had been identified as Madison LLC's principal place of business on at least one of its agreements with MGM Distribution, MGM Distribution often communicated with Madison LLC in Illinois, and that--while "Madison" was initially released in 15 states-- 25% of the initial marketing expenses were spent in Illinois (more than in any other state) and Illinois was the location of over 10% of the screens upon which "Madison" was initially exhibited.

ΒΆ 28 At the concision of the hearing, the trial court concluded that it was proper to exercise personal jurisdiction over MGM Distribution in light of its contacts with Illinois. The trial court specifically noted that MGM Distribution entered into a contract with Madison LLC to distribute the movie and that the performance of that contract "was substantially connected with the State of Illinois." This conclusion was based on the following factual findings: (1) the movie was intended to be a "limited release movie," with a broader release contingent upon initial commercial success; (2) Illinois was disproportionally targeted as part of that initial limited release; (3) Illinois is where Madison LLC's investors and its chief executive lived, and MGM Distribution was aware of this fact; (4) the movie was partially filmed in Illinois; ...


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