Court Opinion

ID: 9480728
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:56:36.751701+00
Date Added: 2024-06-11T17:47:52.183254
License: Public Domain

WINTER, Circuit Judge,
dissenting:
I respectfully dissent. In my view, a remand is unnecessary because, on its face, the transaction in question was structured as a loan solely to achieve tax benefits, and the “loan” of $1.85 million was without economic significance. Moreover, even if significance is to be attributed to the “loan,” its real value was only a small fraction of that amount.
Simplifying only a little and rounding the numbers, the core of the arrangement concerning the illustrative film is that appellants agree to pay $375,000 in cash over two years for the right to 25 percent of the net profits from the film for ten years. If, within ten years, the film nets $2.5 million (actually slightly less, $1.85 million is 75 percent of $2,466,667), appellants then become entitled to 100 percent of the net profits forever, with Paramount retaining an option to the distribution rights. The transaction thus involves an investment, and risk, of only $375,000. The $1.85 million “loan” is irrelevant to this core aspect of the transaction because all the rights described above are vested whether or not the “loan” is paid. On this point, I take it that my views do not differ significantly from those of my colleagues.
My disagreement concerns the wrinkle to the arrangement that comes into play if the film does not net $2.5 million. In those circumstances, appellants have the right, and perhaps an incentive, at the end of the ten-year period to “pay off” the remaining amount due on the “loan” and thereby to become entitled to 100 percent of the film’s net proceeds in the future. My colleagues would remand for factual findings on the value of this right.
I am not persuaded that this is a relevant question. In reality, this provision is simply an option allowing appellants to purchase, at the end of the ten-year period, the right to 100 percent of future net profits, if they have not already acquired that right by virtue of the film having already netted $2.5 million. The exercise price of this option is $1.85 million less 75 percent of the net profits accrued over ten years. The “loan,” therefore, is merely a tax-motivated characterization of the method by which the exercise price of the option is to be determined.
Even if asking whether the value of this option approximates the size of the “loan” is the right question, the answer is too obvious to require further proceedings. As a matter of simple math this right cannot possibly be worth more than a small fraction of $1.85 million. If the film is a blockbuster success, appellants obtain the rights to 100 percent of the net profits forever well before the ten-year period expires. If the film is not a success, then the purchase price will be high, the value of the films low, and the option will never be exercised. The rare case in which the option might be exercised is one where the film earns less than, but close to, $2.5 million, and appellants conclude that $1.85 million less 75 *52percent of accrued net profits is an amount less than the future value of the film.
It is inconceivable that a person would stake $1.85 million for an option that will in reality have value only in extremely narrow circumstances ten years hence. After all, the parties themselves had priced the far more valuable right to 25 percent of the net profits over the first ten years, including the right to 100 percent forever if those profits exceeded $2.5 million, at only $375,-000. The fact to be determined on remand can be framed as the price at which appellants could have sold this option right at the time of the agreement. I submit that this price would be a pittance. Certainly, no one would stake an amount approaching $1.85 million for the right to the remaining net profits of a film that, by definition, had failed to earn $2.5 million during its first ten years of distribution.
In sum, the $1.85 million “loan” is merely one part of a formula that determines the exercise price of an option and is not a debt. I would therefore affirm.