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The Honolulu Advertiser
Posted on: Wednesday, October 23, 2002

Local law firm sued over movie deal

By John Duchemin
Advertiser Staff Writer

Los Angeles entertainment industry executive April Masini, who helped bring the production of the surf movie "Blue Crush" to Hawai'i in a controversial arrangement that made use of a high-technology tax credit, has sued the Honolulu law firm of Cades Schutte Fleming & Wright, claiming the firm conspired to limit her profits in the deal.

April Masini said she is entitled to more profits from the movie "Blue Crush."

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The seven-count malpractice and fraud complaint against Cades Schutte, one of Hawai'i's oldest and largest law firms, and Cades Schutte partner Vito Galati, could reveal details of the financial transaction that allowed the producers of "Blue Crush," to capitalize on $18 million in state tax credits.

Masini, who seeks unspecified damages in the suit filed Monday in Circuit Court, said she is entitled to more profits after she and Galati helped "Blue Crush" producers receive the credits allowed under Act 221, a state tax law that is intended to attract businesses and investors to Hawai'i.

Cades Schutte partner David Schulmeister said yesterday that the lawsuit is "completely without merit."

"We intend to vigorously defend ourselves, and we are confident that when all the facts are known, Masini's claims will be totally discredited," Schulmeister said. "We are proud of the role we have played in the generation of interest in movie production in Hawai'i and in the stimulation of investments that have benefited the state's economy. We hope this unfortunate lawsuit does not damage the state's efforts to attract investors to projects in Hawai'i."

Schulmeister would not comment further. Galati did not respond to phone calls requesting comment.

Masini, the former wife of "Lifestyles of the Rich and Famous" producer Al Masini, helped bring television shows including "Baywatch," "Pacific Blue" and "Destination Stardom" to Hawai'i.

Kate Bosworth, left, and Michelle Rodriguez starred in the locally filmed surf movie "Blue Crush."

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Since the passage of Act 221, she has been working to bring movie production to Hawai'i to take advantage of the law, which grants tax breaks not only to high-tech research companies, but also to performing-arts businesses.

"Blue Crush," a Universal Studios film, was the first movie to qualify for the state tax credits. But the deal has led critics to call for reform of Act 221, saying the film was a one-shot deal that did little to improve the state's economy.

Gov. Ben Cayetano wants the Legislature to tighten up the law, a move that industry observers fear would limit its usefulness as an incentive. Other critics want the Tax Department to issue clearer guidelines on who qualifies for the tax credits.

The lawsuit could create further debate over Act 221, said Joseph Blanco, the technology adviser to Cayetano and who helped Masini work with the Tax Department on the "Blue Crush" deal.

"I'm shocked that this was even filed," Blanco said. "This is a squabble more over sharing the proceeds of one deal, than over the law itself. If they had asked me, I would have said, 'Look, settle down and figure this out.' Don't take Act 221 down in the process and give it a bad rap."

In the lawsuit, Masini said she was approached in July 2001 by Blanco for help in introducing the Mainland film industry to Act 221, which had been recently passed the Legislature. Masini said Blanco referred her to Cades Schutte's Galati.

Galati was enthusiastic, though he admitted knowing nothing about the film industry, the lawsuit said.

With Galati's help and the support of Blanco, Masini attracted Universal Studios and "Blue Crush" producer Adam Fields to Hawai'i, the lawsuit said. Masini says her intent was to pair Universal with local investors who could take advantage of the Act 221 tax credits.

According to the lawsuit, while Masini worked with Universal, Galati filed for a "comfort ruling" from the Tax Department indicating the movie producers would get a tax break. Meanwhile, the lawsuit claims, Blanco sent e-mail to Tax Director Marie Okamura urging her to issue the ruling.

Blanco said he could not confirm that he sent the e-mails mentioned in the lawsuit because he has purged his computer system.

As the comfort ruling worked through the Tax Department, the lawsuit says, proposed deals between "Blue Crush" producers and two other potential investors, Bank of Hawaii and the Damon Estate, fell apart in late 2001.

Galati managed to attract a third set of local investors to finance the movie, which was completed by spring 2002, Masini says in the suit.

But the final deal drastically reduced Masini's role and significantly reduced her compensation, the lawsuit claims. Masini says the deal allows the sale of the tax credits to other investors. She says she was supposed to get 80 percent of the proceeds, but instead got 20 percent.

Masini also says in the suit that Galati ignored her wish to designate 20 percent of the profits of the deal to "socially responsible endeavors," and that he failed to adequately explain a fee charged by accounting firm KPMG Peat Marwick that she considered "unreasonable and excessive."

"In essence, Cades moved Masini out of the 'Blue Crush' deal, to gain an increased role (and compensation for itself and its other clients)," the lawsuit said.

The lawsuit says Galati and Cades committed malpractice because they were implicitly representing Masini, but simultaneously working against her interests.

Philip R. Brown, Masini's Honolulu-based lawyer, said Galati exploited Masini to set himself up as the prime tax-incentive lawyer for the film industry in Hawai'i.

"We know that now Mr. Galati is off on his own marketing transactions without April Masini," Brown said. "He has breached his fiduciary duty and usurped April's business opportunities."