In the 1930's, a lot of American horror films came to Britain and the British Board of Film Censors gave them an "H", which stood for "Horrific". This cartoon was the first one to be given the "H" certificate.
When RKO saw this, they threatened to sue. As a result, Universal pulled it out of theaters.
The reason Walter Lantz made this short was because he hated the movie which the cartoon was lampooning. He said the movie was stupid.