Netflix headquarters
Courtesy of Netflix

UPDATED: Netflix has asked a U.S. Bankruptcy Court judge to allow it to end its contract with Relativity Media and to block confirmation of the entertainment company’s planned reorganization. The Thursday afternoon action by the streaming giant represents a significant blow to Relativity, less than two weeks before the company hopes to emerge from six months in bankruptcy.

Netflix said in its filing that Relativity failed to deliver the minimum number of films in 2015 required in their five-year-old contract and had little prospect of delivering enough movies this year, or in 2017. It also said that the studio founded and led by Ryan Kavanaugh has fallen short in securing financing and in building a new management structure to assure it will continue as a viable movie maker.

“Netflix has received nothing that could provide any level of assurance that the reorganized [Relativity] will be able to perform the extensive and complex obligations involved in the license agreements” with Netflix, the company said in its filing to Judge Michael Wiles.

The objection to the Relativity reorganization was one of many that flowed in before a Thursday deadline in Bankruptcy Court in New York, including one from CIT Bank, the holder of the “ultimates” loan on the studio’s films, which said the bank has not been adequately protected in the Relativity reorganization. “The failure to address this issue may prove disastrous for the [reorganization] plan as currently structured,” lawyers for the bank argued.

A spokesman for Relativity issued a statement questioning Netflix’s motivations. “In 2012, Relativity signed a distribution deal with Netflix whose terms were by far the most favorable of any studio,” the statement said. “This objection is nothing more than a blatant attempt by Netflix to use the Chapter 11 process to once again renegotiate the agreement, which does not expire until 2018.”  The company’s lawyers have expressed confidence that it would be able to meet all the requirements to have Wiles confirm a reorganization plan on Feb. 1.

The Netflix objection could be the most important of those filed Thursday, because the streaming service has provided hundreds of millions of dollars since Relativity began supplying it with films in 2010. The payments add tens of millions of dollars a year to Relativity’s balance sheet, Netflix has said.

The streaming company’s lawyers objected both to the information that Relativity has disclosed during the bankruptcy case and to the information that has not come out, particularly who will provide $100 million in new equity and an initial $62 million P & A loan. Relativity has said it needs that money to jump-start its stalled film business. “Unfortunately, many of the details remain unclear, and the proposed new capital is at this point simply hypothetical,” Netflix argues.

The Netflix filing, by attorney Shane Moses, also calls into question the “incredibly optimistic” financial projections Relativity has made. It notes that Relativity foresees revenues spiraling upward, to $909 million by 2018, and suggests the numbers are unrealistic, given that revenues stood at $501 million in 2014.

“It is worth noting that these dramatic increases in revenues are projected despite the sale of most of Relativity’s television business,” Netflix argues, adding, “Without a realistic and detailed business plan that demonstrates the viability of the projections, the projections are nothing more than meaningless numbers.”

Netflix also argues that Relativity has not provided enough information about who will be running the company going forward. The studio appeared to score a coup last month when it announced that actor Kevin Spacey and his producing partner, Dana Brunetti, would be the new leaders of Relativity Studios.

But Netflix doesn’t appear to be buying the change, at least not yet. Its objection complains that the hiring of the two Hollywood heavyweights and their production company, Trigger Street, has never been confirmed in the formal bankruptcy plan. “This leaves it unclear whether the transactions with Trigger Street, Mr. Spacey, and Mr. Brunetti have even been finalized, despite [Relativity] reporting them as a done deal,” Netflix said.

The streaming operator said confusion had also been created because Relativity’s legal filings had talked only about Kavanaugh and investor Joseph Nicholas as co-managers of the newly reformed studio. Relativity’s court filings have provided “no meaningful information on who will run the day-to-day operations or their qualifications, and no business plan or other information to support the Debtors’ incredibly optimistic financial projections,” the Netflix objection charges.

Netflix protests that it received only four films from Relativity in 2015, well under the number required, though it does not divulge how many were promised. (Relativity distributed “The Woman in Black 2: Angel of Death,” “Black or White,” “The Lazarus Effect” and “Desert Dancer.”) The streaming service claims that, even if Relativity meets its projections for seven releases in both 2016 and 2017, that also will not come close to the yearly minimum requirement.

The Netflix filing leaves unclear if there is any compromise it would accept, short of terminating its contract with Relativity.  Relativity’s failure to deliver enough films in 2015, alone, constitutes grounds for terminating the troubled deal, Netflix argues.

“The clock cannot be wound back,” its filing says. “Because Relativity is in default under the terms of the U.S. License Agreement, and that default is a non-monetary default that cannot be cured, the U.S. License Agreement cannot be assumed” by Relativity.

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