Yea, the funding going belly up was definitely what killed it, but, I'm pretty sure I remember someone was written into the script who had passed away, and he said he wasn't emotionally able to use the script for a future project because of that passing
If I remember the sequence of events right (Jan will almost certainly correct me if I'm wrong) Franklin was in an early draft (if not the 1st?) and was written out/replaced when Biggs passed away. It wasn't until about a year or so later when Andreas also died that the script was scrapped.
The Memory of Shadows was canceled in February 2005. Katsulas died in February 2006.