It looks like the cozy relationship between Hollywood and local banks is becoming strained.
At least three celebrities are being sued by local banks for falling behind on loan payments during the recession.
In the past month, Nicolas Cage, Toni Braxton and Janice Dickinson each have had papers filed against them in Los Angeles Superior Court as financial institutions, dealing with reduced earnings and under intense regulatory pressure, are tightening ship.
“The banks are playing a little bit more hardball these days,” said Lon Morton, chief executive of Morton Capital Management, a wealth management firm that has clients in the entertainment industry.
L.A. banks have long been sources of ready cash for Hollywood stars, whose large but sporadic paydays made them good customers. They sometimes borrowed money to maintain their life styles and repaid the banks when they got a huge paycheck.
However, in the new Hollywood, those checks are no longer so fat.
Banks are having their own problems, too. Over the past year, in particular, loan losses have spiked, leading regulators to shutter more than 100 banks nationwide. In an effort to keep institutions solvent, regulators have dramatically stepped up scrutiny of lending practices.
As a result, banks across the country have been forced to rein in lending and clamp down on truant borrowers. In Hollywood, that means that more than a few well-known entertainers are getting caught.
Big-name stars across the country have run into problems with loans of all types: Celebrity photographer Annie Leibovitz was pushed to the brink of bankruptcy in a much publicized matter after failing to repay a $24 million loan. Even director Steven Spielberg had to jump through hoops to secure financing for his new studio.
Indeed, some in the entertainment industry are finding it difficult to obtain loans because of their notoriously inconsistent pay, Morton said. In recent years, many high earners could easily secure mortgage loans, for instance, to build luxurious second homes.
“The fact that you had an entertainer that made X dollars last year doesn’t necessarily mean they are going to work this year and make the same kind of money,” he said. “It’s very tough for a lot of people in the entertainment business – because of the unpredictability of their income – to just go out and qualify for a loan (now).”
Stars’ bank
Long known as the “bank to the stars” for its reputedly lengthy list of entertainment industry clients, City National Bank, recently filed lawsuits against Braxton and Dickinson.
On Oct. 2, City National filed against Braxton, the R&B singer famous for hits such as “Un-Break My Heart,” for falling behind on a $900,000 loan. Braxton, who is reportedly facing foreclosure on a Century City condo after defaulting on a separate loan with Bank of America Corp., owes City National more than $650,000, the bank claims.
Meanwhile, City National also filed papers last month against Dickinson, a reality television star and former model, who failed to respond to an earlier lawsuit. The bank said she has fallen behind by $290,000 on a loan granted in 2008 for either “personal, family or household purposes or personal investment,” according to papers filed with the lawsuit. In total, the bank is seeking full repayment of the loan, plus interest and attorney fees, totaling more than $300,000.
Braxton and Dickinson could not be reached. City National, owned by downtown L.A.-based City National Corp., declined to comment.
The bank, the largest headquartered in Los Angeles, entered the recession with an enviably low-risk loan portfolio, and it has avoided many of the problems now plaguing other institutions. The bank has maintained a relatively clean balance sheet in part by aggressively addressing the few problem loans that have arisen, said Joseph Gladue, an analyst with West L.A.-based B. Riley & Co.
But will the lawsuits dent its standing with Hollywood?
Aaron James Deer, an analyst with New York-based Sandler O’Neill & Partners, said City National has a reputation for treating its customers well and he doubts the celebrity lawsuits will hurt it.
“City National is well regarded as one of the most client-oriented banks out there,” he said. “I don’t think this is going to turn away customers.”
Pay down
To many entertainment industry observers who have watched the pay for even the biggest stars drop dramatically in recent years, it is not surprising that some celebrities would fall behind on loan payments.
Jonathan Handel, an entertainment and technology attorney with TroyGould in Century City, said pay has come down across the board in the movie industry as Hollywood has been forced to grapple with the reality of the difficult economy.
“In the past, amongst actors, writers, directors and even the upper echelon of below-the-line folks, in all these cases, people had (what’s called) a quote or a going rate,” he said. “Today, quotes, in many contexts, have evaporated.”
That problem, he said, is affecting more than low-level workers: “Stars aren’t getting paid as much up front as they used to.”
In recent years, the biggest stars were earning upwards of $20 million per film through so-called first-dollar gross deals. Lately, however, studios have persuaded a number of stars, including Harrison Ford and Steve Carell, to accept back-end deals, which allow studios to recoup some costs before the actors get paid. Cage, too, has a deal in place for upcoming film “The Sorcerer’s Apprentice” that will pay the studios before he takes home a percentage of the gross.
One of the leading academic experts on the movie business, S. Abraham Ravid, a professor of finance and economics at the Rutgers Business School in Newark, N.J., said he is not surprised paydays have declined. He has published studies showing that the presence of major stars has little to no impact on box office performance, despite widely held beliefs to the contrary.
“Stars don’t seem to be correlated with success of movies,” he said. “Some movies with stars do well; other movies with stars don’t do well. There’s no predictability.”
Ravid’s conclusions, along with harsh economic realities, have contributed to seismic shifts in Hollywood as many stars find themselves with less influence – and smaller paydays – than they had just a few years ago.
“The entertainment business seems to be going through a reevaluation, retrenchment,” said Larry Turman, who produced such films as “The Graduate” and “American History X.”
‘Financial ruin’
As entertainers’ paychecks shrink, many are finding it more difficult to maintain their flashy life styles.
“As the economy goes down, the people who are on the riskier end in terms of spending, if they can’t get their next movie (made), they will be in trouble maintaining their life style,” Ravid said. “I’ve talked to quite a lot of people that provide financing in Hollywood and some stars are not considered good credit risks.”
Cage, one of Hollywood’s highest paid stars, is locked in a contentious legal battle over his deteriorated financial condition after investing in at least a half-dozen luxury homes, including castles in Europe.
The star of such films as “National Treasure” recently filed a lawsuit against his former business manager for leading him “down a path toward financial ruin.” In the lawsuit, filed last month in Los Angeles Superior Court, Cage claims he suffered “catastrophic losses” on investments, such as real estate deals, due to what he called his manager’s bad advice. The actor is seeking $20 million in damages.
Cage, who recently had a tax lien filed against him by the Internal Revenue Service for more than $6 million in unpaid taxes, has reportedly been trying to unload real estate holdings in Nevada, Louisiana, Rhode Island and the Bahamas. He recently sold a mansion in Bel-Air after several steep price cuts.
Meanwhile, East West Bank, a subsidiary of East West Bancorp Inc. in Pasadena, is going after the actor for allegedly failing to repay a $2 million loan taken out two years ago.
In August 2007, Cage opened an unsecured, revolving line of credit with East West that was set to mature a year later. As the loan was coming due, Cage asked for a three-month extension and then, in December, he renegotiated the terms to extend the maturity date until 2011, the bank claims in an Oct. 2 lawsuit filed in Los Angeles Superior Court.
Shortly thereafter, according to the filing, Cage stopped making payments on the loan. East West is seeking full repayment of the loan, which has an outstanding balance of more than $1.9 million.
Through a spokeswoman, Cage declined comment. Calls to his lawyer were not returned.
East West declined to comment.
Joel Klevens, a lawyer with Glaser Weil Fink Jacobs Howard & Shapiro LLP in Century City who is representing the bank in the lawsuit, said Cage did not receive special treatment because of his celebrity.
“It was just handled like a loan,” he said.
