UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) In re: ) Chapter 11 ) ION MEDIA NETWORKS, INC., et al., ) Case No. 09-13125 (JMP) ) Debtors. ) Jointly Administered ) ) ION MEDIA NETWORKS, INC. Plaintiff, ) ) ) ) Adv. Proc. No. v. ) RHI ENTERTAINMENT DISTRIBUTION, LLC Defendant. DEBTOR S ADVERSARY COMPLAINT FOR TURNOVER AND BREACH OF CONTRACT ) ) ) ) ) ION Media Networks, Inc. ( ION ), a debtor in the above-captioned chapter 11 cases, 1 as plaintiff in the above-captioned adversary proceeding, hereby alleges for its 1 The Debtors in these chapter 11 cases are: ION Media Networks, Inc.; America 51, L.P.; ION Media Akron License, Inc.; ION Media Albany License, Inc.; ION Media Atlanta License, Inc.; ION Media Battle Creek License, Inc.; ION Media Boston License, Inc.; ION Media Brunswick License, Inc.; ION Media Buffalo License, Inc.; ION Media Charleston License, Inc.; ION Media Chicago License, Inc.; ION Media Dallas License, Inc.; ION Media Denver License, Inc.; ION Media Des Moines License, Inc.; ION Media Entertainment, Inc.; ION Media Greensboro License, Inc.; ION Media Greenville License, Inc.; ION Media Hartford License, Inc.; ION Media Hawaii License, Inc.; ION Media Hits, Inc.; ION Media Holdings, Inc.; ION Media Houston License, Inc.; ION Media Indianapolis License, Inc.; ION Media Jacksonville License, Inc.; ION Media Kansas City License, Inc.; ION Media Knoxville License, Inc.; ION Media Lexington License, Inc.; ION Media License Company, LLC; ION Media Los Angeles License, Inc.; ION Media LPTV, Inc.; ION Media Management Company.; ION Media Martinsburg License, Inc.; ION Media Memphis License, Inc.; ION Media Milwaukee License, Inc.; ION Media Minneapolis License, Inc.; ION Media New Orleans License, Inc.; ION Media of Akron, Inc.; ION Media of Albany, Inc.; ION Media of Atlanta, Inc.; ION Media of Battle Creek, Inc.; ION Media of Birmingham, Inc.; ION Media of Boston, Inc.; ION Media of Brunswick, Inc.; ION Media of Buffalo, Inc.; ION Media of Cedar Rapids, Inc.; ION Media of Charleston, Inc.; ION Media of Chicago, Inc.; ION Media of Dallas, Inc.; ION Media of Denver, Inc.; ION Media of Des Moines, Inc.; ION Media of Detroit, Inc.; ION Media of Fayetteville, Inc.; ION Media of Greensboro, Inc.; ION Media of Greenville, Inc.; ION Media of Hartford, Inc.; ION Media of Honolulu, Inc.; ION Media of Houston, Inc.; ION Media of Indianapolis, Inc.; ION Media of Jacksonville, Inc.; ION Media of Kansas City, Inc.; ION Media of
Complaint, upon knowledge of its own acts and upon information and belief as to all other matters, as follows: SUMMARY OF CLAIMS 1. ION brings this adversary proceeding to recover a liquidated and undisputed debt that the defendant, RHI Entertainment Distribution, LLC ( RHI ), owes ION but has failed to pay. RHI s payment obligation arises out of a December 1, 2007 agreement under which RHI provided ION with programming content for ION to broadcast during certain time periods and sold the advertising time covering those broadcasts. The agreement requires RHI to pay ION an Annual Minimum Guarantee made up of four Quarterly Payments each year. But despite the agreement s express and unconditional terms, and despite ION s repeated requests for payment, including a demand letter dated February 11, 2009, RHI has refused to make the fourth Quarterly Payment, of $3,450,000, for the second year of the agreement. RHI has also failed to make the first Quarterly Payment, of $3,750,000, for the third year of the agreement despite the fact that it was RHI that chose to extend the term of the agreement to include a third year. Finally, RHI has breached the parties agreement by failing to spend contractually-required Knoxville, Inc.; ION Media of Lexington, Inc.; ION Media of Los Angeles, Inc.; ION Media of Louisville, Inc.; ION Media of Martinsburg, Inc.; ION Media of Memphis, Inc.; ION Media of Miami, Inc.; ION Media of Milwaukee, Inc.; ION Media of Minneapolis, Inc.; ION Media of Nashville, Inc.; ION Media of New Orleans, Inc.; ION Media of New York, Inc.; ION Media of Norfolk, Inc.; ION Media of Oklahoma City, Inc.; ION Media of Orlando, Inc.; ION Media of Philadelphia, Inc.; ION Media of Phoenix, Inc.; ION Media of Portland, Inc.; ION Media of Providence, Inc.; ION Media of Raleigh, Inc.; ION Media of Roanoke, Inc.; ION Media of Sacramento, Inc.; ION Media of Salt Lake City, Inc.; ION Media of San Antonio, Inc.; ION Media of San Jose, Inc.; ION Media of Scranton, Inc.; ION Media of Seattle, Inc.; ION Media of Spokane, Inc.; ION Media of Syracuse, Inc.; ION Media of Tampa, Inc.; ION Media of Tulsa, Inc.; ION Media of Washington, Inc.; ION Media of Wausau, Inc.; ION Media of West Palm Beach, Inc.; ION Media Oklahoma City License, Inc.; ION Media Orlando License, Inc.; ION Media Philadelphia License, Inc.; ION Media Portland License, Inc.; ION Media Publishing, Inc.; ION Media Raleigh License, Inc.; ION Media Sacramento License, Inc.; ION Media Salt Lake City License, Inc.; ION Media San Antonio License, Inc.; ION Media San Jose License, Inc.; ION Media Scranton License, Inc.; ION Media Songs, Inc.; ION Media Spokane License, Inc.; ION Media Syracuse License, Inc.; ION Media Television, Inc.; ION Media Tulsa License, Inc.; ION Media Washington License, Inc.; ION Media Wausau License, Inc.; ION Media West Palm Beach Holdings, Inc.; ION Media West Palm Beach License, Inc.; ION Television Net, Inc.; Ocean State Television, L.L.C.; and Open Mobile Ventures Corporation. 2
minimum amounts to advertise its programming and other products on ION s network of television stations. JURISDICTION 2. This Court has subject matter jurisdiction pursuant to 28 U.S.C. 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. 157(b)(2). 3. Venue of this proceeding is proper under 28 U.S.C. 1409 and because the parties agreement provides that New York is the exclusive venue of any dispute. PARTIES 4. Debtor ION Media Networks, Inc. is the plaintiff in this proceeding. ION owns and operates the largest broadcast television station group in the United States, providing network programming that consists of popular television series, movies, specials and sports. 5. Defendant RHI Entertainment Distribution, LLC is a limited liability company organized under the laws of Delaware with its principal place of business in New York. RHI distributes made-for-tv movies and mini-series, including both original and licensed content. STATEMENT OF FACTS 6. On December 1, 2007, ION and RHI entered into an agreement for the licensing of programming content, including movies and mini-series, that would be broadcast over ION s network of television stations (the Agreement ). 2 The Agreement was a restatement and amendment of a strategic programming relationship that RHI and ION had originally entered into in October 2006. 7. Under the Agreement, RHI agreed to provide both original programs and content from its library of titles that ION would broadcast on Friday, Saturday and Sunday nights 2 A true and correct copy of the Agreement is attached as Exhibit A to this Complaint. 3
between 7 p.m. and 11 p.m. (the RHI Programs ). With some limited exceptions, RHI also had the right to sell all of the advertising time during these programming periods. 8. The initial term of the Agreement, which is governed by New York law, was two years, running from June 19, 2007 through June 25, 2009. (See Ex. A at J.) The Agreement was renewable, at RHI s option, for up to two one-year terms. (Id. at 10.) By letter dated July 30, 2008, RHI notified ION that it was exercising its option to renew the Agreement for a third year, which extended the term of the Agreement through June 24, 2010. 9. As part of the Agreement, both RHI and ION represented and warranted that no representations or warranties have been made by or relied on by either [party] pertaining to the subject matter of this Agreement, other than those representations and warranties specifically set forth in this Agreement. (Id. at L.) 10. In exchange for broadcasting the RHI Programs and advertising, ION was paid (1) an Annual Minimum Guarantee and (2) a 50 percent split of the advertising revenue above certain thresholds and after certain adjustments for residuals and other costs. (Id. at B.2.) The Annual Minimum Guarantees were as follows: Year 1 -- $12,500,000; Year 2 -- $13,800,000; Year 3 (if any) -- $15,000,000; Year 4 (if any) -- $15,000,000. (Id.) 11. The Annual Minimum Guarantee was payable in four equal Quarterly Payments on a set schedule. (Id.) In Year 2, RHI was obligated to make the four Quarterly Payments of $3,450,000 on May 1, 2008, August 1, 2008, November 1, 2008 and February 1, 2009. (Id.) 12. Neither the Quarterly Payments nor the Annual Minimum Guarantee is subject to any right of setoff or other reduction in the amount due ION. 4
13. RHI failed to pay ION the $3,450,000 Quarterly Payment that was due on February 1, 2009. 3 On February 11, 2009, ION wrote RHI and demanded that RHI cure its breach within ten business days. RHI failed to do so. 14. RHI s election to extend the term of the Agreement also triggered its obligation to pay ION an Annual Minimum Guarantee of $15,000,000 for Year 3 of the Agreement, which was to be paid in Quarterly Payments of $3,750,000 on May 1, 2009, August 1, 2009, November 1, 2009 and February 1, 2010. (See Ex. A at B.2.1.) 15. RHI failed to make the required Quarterly Payment of $3,750,000 that was due on May 1, 2009. Accordingly, on June 4, 2009, ION wrote RHI and demanded that RHI cure its breach within ten business days. 4 16. The Agreement also obligates RHI to spend -- or to cause third parties to spend -- at least $2,000,000 per contract year to purchase advertising time on ION. (Id. at B.11.) Of that, at least $1,000,000 was to be spent on promoting and marketing the RHI Programs. (Id.) This required spending would benefit both parties by increasing interest in -- and therefore the ratings and advertising revenue of -- the RHI Programs. The other $1,000,000 was to be spent on marketing and promoting other RHI programs or products, like DVDs. (Id.) 17. To date, RHI has not purchased any advertising time on ION, much less the $4 million that it was obligated to spend for the first two years of the Agreement. Nor has RHI caused any third parties to purchase any advertising time on ION for the first two years of the Agreement. 3 A true and correct copy of the February 11, 2009 demand letter is attached as Exhibit B to this Complaint. 4 A true and correct copy of the June 4, 2009 demand letter is attached as Exhibit C to this Complaint. 5
COUNT I (Turnover under Section 542 of the Bankruptcy Code) 18. ION repeats and realleges paragraphs 1-17 as if fully set forth herein. 19. The Agreement required RHI to make a Quarterly Payment of $3,450,000 on February 1, 2009. RHI did not make the required payment. ION demanded that RHI cure its default, but RHI has not done so. 20. The Agreement also required RHI to make a Quarterly Payment of $3,750,000 on May 1, 2009. RHI failed to make the required payment. 21. ION has performed all of its obligations under the Agreement. 22. Because the Agreement does not provide for any right of setoff or any other reduction in the Quarterly Payments or Annual Minimum Guarantee, the Quarterly Payments of $3,450,000, due on February 1, 2009, and $3,750,000, due on May 1, 2009, are liquidated and there is no legitimate dispute over what is owed to ION. COUNT II (Breach of Contract) 23. ION repeats and realleges paragraphs 1-22 as if fully set forth herein. 24. The Agreement is a valid and binding contract between RHI and ION. 25. The Agreement required RHI to make a Quarterly Payment of $3,450,000 on February 1, 2009, and an additional Quarterly Payment of $3,750,000 on May 1, 2009. RHI did not make either required payment. 26. The Agreement required RHI to spend, or to cause third parties to spend, $4,000,000 to purchase advertising time on ION. To date, RHI has failed to purchase any advertising time on ION or to cause third parties to purchase any advertising time on ION. 27. ION has performed all of its obligations under the Agreement. 6
28. As a result of RHI s refusal to pay the Quarterly Payments in February and May 2009, together with RHI s failure to purchase, or cause third parties to purchase, the contractually required amount of advertising to promote the RHI Programs, ION has been damaged in an amount to be established but believed to exceed $11,200,000. PRAYER FOR RELIEF WHEREFORE, ION prays that the Court grant it relief as follows: (a) (b) (c) With respect to Count I, an order pursuant to Section 542 of the Bankruptcy Code directing RHI to turn over to ION the Quarterly Payments of $3,450,000 and $3,750,000 due under the Agreement on February 1, 2009 and May 1, 2009, respectively; or in the alternative, enter judgment against RHI on Count II for breach of contract in the amount of $7,200,000, together with applicable pre- and post-judgment interest and costs; With respect to Count II, to enter judgment against RHI in an amount to be established but believed to exceed $4,000,000, together with applicable pre- and post-judgment interest and costs; and All other relief as the Court deems just and proper. New York, New York Dated: June 8, 2009 /s/ Jonathan S. Henes James H.M. Sprayregen, P.C. Jonathan S. Henes Joshua A. Sussberg KIRKLAND & ELLIS LLP Citigroup Center 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 Proposed Attorneys for the Plaintiff, Debtors and Debtors in Possession 7
EXHIBIT A
EXHIBIT B
BFebruary i:. 2009 Bill AliDer Chief Financial Officer RHI Entertainment 1325 Avenue of the Americas. 21 s1 Fioor MEDIA NETWORKS M ew v ;:rk MY 1Q019 Dear 3iit. i wanted to follow-up on some outstanding items, including some of tne information requested in Hen^ Hoberman's January 29,r response to ION'S last proposal. As a maner of ordinary course, the quarterly payment for Contract Year 2 of S3.45MM was due- as of February 1. 2009. and we would appreciate that RHI make this payment within our ten (10) business day cure period i.e. by Friday, February 13 1 " Additionally. Sectior 2.2 of our Agreement requires that RHI provide ION with quarterly accounting statements regarding "Annual Net Ad Sales Revenues. I'm uncertain of the disconnect here, as the accounting is requiieri regardless of whether RHI determines that net revenues were insufficient to trigger lons 50 fr net participation. With regards to RHI's stated off network marketing spend 52.7MM. we would appreciate the "relevant >'!OCU-^L." ' su::p-m". as set forth m Section Hid) of our agreement Additionally Settlor- 11(b) orovides f o r a RHI on-char-ne: marketing spend of S2MM/contract yr.. ana as previously req jested, we woulc like to understand both how RHI intends to satisfy any undeiutilisation to date and your goforward plans. Towards that end. enclosed you will find lon's relevant pricing information on a "most favored nations" cost basis for purchase of general market spot buys on ION TV. F'naliy. following Henry's requests within our larger strategic plan dialogue. Steve Appei has provided for discussion a sales cost, reimbursement schedule, as well as a one time settlement free for successful safes to date. We stil believe we can collectively detail a plan that will take the- current deal to much higher profitatiiity if you allow us to help with some of the suggestions we have made. Our sales improvements since we started helping RHI are also enclosed for your review -lease give- ne a calf to discuss at your convenience. Since-e-ly. S~) \Jft~;y j^jnn Senior Vice President Finance anu Treasurer 954 816 8686 561-682-417 A : Rc-Otrit Hdlm:, Jr. R Brandon Burgess Henry S. Hubetman Marc Zand :<N M«aia N»m.-.i.. 601 Clearwater Park Road Wesi Palm Beach. FL 33601 Tel 561 45? 4522 Fax 56] 682 6357 www.ionmedia.con-.
EXHIBIT C