Steve Mnuchin Relativity Ryan Kavanaugh
PR Newswire/Rex

Steven Mnuchin came to Los Angeles with a certain New York sheen. The son of a prominent New York banker and arts patron, Mnuchin spent 17 years at Goldman Sachs building a fortune reportedly worth $46 million, before forming his own firm, Dune Capital, that would bring him even more luster. By the mid-2000s, Dune was providing financing for batches of winning movies, like the “X-Men” franchise and “Avatar,” Hollywood’s all-time box-office champion.

So when Mnuchin and Relativity Media announced last October that they had formed a new bond – the one-time Wall Street star investing in the Beverly Hills studio and joining founder Ryan Kavanaugh as co-chairman of the company’s board – it appeared to be a breakthrough moment for all concerned. Mnuchin deemed himself “thrilled” at the prospect of working with Kavanaugh and his team “as they continue to build a global media company that is redefining what it means to be a content creator in the 21st century.”

With Relativity’s Chapter 11 bankruptcy filing last week, those high hopes have been dashed, and Mnuchin has been left in a particularly uncomfortable position. The money-man and fellow investors in a Dune Capital fund are said to have lost as much as $80 million — equity that is almost certain to be lost for good, said two sources familiar with the situation. And disgruntled Relativity investors privately are questioning how a bank Mnuchin once headed –OneWest Bank of Pasadena – was allowed by Relativity to drain $50 million from the studio just weeks prior to the July 30 insolvency filing.

Mnuchin, who is partnered with Brett Ratner and James Packer in the film financing company Ratpac-Dune Entertainment, did not respond to repeated calls for comment.

But Variety has learned that the former Relativity co-chairman quietly resigned his board post at the film- and TV-maker on May 29, because of what a source close to the company said was the potential for a conflict of interest between his duties at OneWest (which just days ago was bought out by CIT Group of New York) and Relativity.

Mnuchin’s departure from the board two months ago is unlikely to appease creditors, who are owed hundreds of millions of dollars by the insolvent studio and who are fighting to recover at least some of what they’re owed for their loans or bills for services. The chances of getting much cash are dim, experts say, with Relativity’s liabilities standing at nearly $1.2 billion and its assets at just $560 million.

Bankruptcy courts are empowered to block unfair “preferences” — payments to individuals or companies shortly before a Chapter 11 filing that inappropriately give favored treatment. And two individuals who had studied the $50 million in payments to OneWest Bank argue that the lender was given a clear preference when it drained two of the few flush accounts Relativity controlled, as others went unpaid.

“This is an obvious case of a preference,” said an attorney for one creditor owed millions by Relativity. Mnuchin was “chairman of the company that is now bankrupt. And at the end of the day, the bank he is affiliated with sweeps up every dime from these two accounts. That is money the company could have used to preserve itself.”

The attorney, who accused Relativity of giving OneWest preferential treatment, said he was sure a soon-to-be-formed creditors committee will raise the issue and ask Judge Michael E. Wiles of the U.S. Bankruptcy Court in New York to return the $50 million from OneWest to the bankruptcy “estate,” established for the benefit of creditors. The office of the U.S. Trustee, a unit of the Department of Justice, can also make such a request, though that office has declined to comment.

The financial adviser put in place to oversee Relativity during the bankruptcy reported to the court on the “sweeping” of the funds to OneWest. Timothy Coleman of the Blackstone Group wrote that, over the course of two months, Relativity agreed to let OneWest take $32 million from accounts the studio received for use of its film library. Less than two weeks before the bankruptcy, on July 17, Mnuchin’s bank swept $17.9 million more from an account normally used to pay residuals and participation fees to performers, writers and others, Coleman’s declaration says.

Mnuchin had left Relativity just days before the company reached an agreement with OneWest to extend the loan deadline and allow the bank to claim that money.

“This provision effectively removed a cash flow source of the debtors and thus further strained the debtors’ already problematic liquidity situation,” Coleman said.

The bank had originally loaned money to Relativity under a September 2012 agreement, which was amended 17 times, most recently in April of this year, Coleman’s declaration says. Under the original 2012 agreement, other major lenders agreed that their repayments would be subordinated to repayment of the OneWest loan, according to a court declaration by Brian Kushner, recently named chief restructuring officer for Relativity during the bankruptcy. Kushner is helping to lead what senior lenders who are first in line for repayment hope will be a quick auction of Relativity.

The timing of the bankruptcy and suggestions of preferential treatment come at a particularly uncomfortable moment for Mnuchin, because another deal has thrust OneWest Bank into the headlines in recent days.

That was the sale, closed on Monday, of OneWest to CIT Group Inc. of New York for $3.4 billion.

Mnuchin and a group of investors bought the bank, previously IndyMac, after the sub-prime crisis of 2008 left it badly underwater. Depositors made a run on the old institution, which collapsed. That opened the way for a $1.5 billion purchase by the Mnuchin group. This week’s subsequent sale to CIT would mean that the Mnuchin group had effectively doubled its money in seven years.

Mnuchin is taking a position as vice chairman and a director of the newly merged CIT/OneWest. On the books of the new institution, Kushner’s bankruptcy declaration suggests, will be a $27.8 million debt. That is money that Relativity — the studio Mnuchin left so quietly two months ago — still owes to the bank that he now helps to lead.

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