Ryah Kavanaugh Relativity Failure Lesson
Eric Charbonneau/Invision for Relativity Studios/AP Images

The judge overseeing Relativity Media’s bankruptcy ordered the payment of a first round of fees to the reorganization firm that guided the company in the initial phases of Chapter 11, resolving a nasty dispute between the two sides, for now.

An initial order Wednesday by U.S. Bankruptcy Court Judge Michael Wiles means that FTI Consulting is entitled to 80% of its fees and all of its expenses through Sept. 30. The consulting firm had submitted bills for $4,577,000 and $252,000 in expenses.

The ruling comes after a fierce dispute erupted last year, with principals for FTI Consulting saying that Relativity CEO Ryan Kavanaugh had obstructed their work and did not have a realistic view of the value of his company. Kavanaugh responding that the consulting firm had overstepped its authority, excluding him and his board from important decisions. He said the company’s future prospects were harmed by FTI’s actions.

The multi-media company attracted no bids when it went up for auction in October, except for its television unit, which was obtained by senior lenders for a non-cash bid of $125 million. Kavanaugh has been scrambling since then to secure $100 million in new equity investment to try to revive the rest of his company, led by its film unit, Relativity Studios. It last week announced that former Google CEO Eric Schmidt would invest in the company, though the size of the infusion was not disclosed.

Judge Wiles on Wednesday decried “petty bickering” from both sides in the Relativity/FTI dispute, but said he was authorizing payment of the first round of fees for the consulting company because no formal objection had been made within the required 20-day time frame. “Why on earth are they not entitled to payment of the 80% of fees and 100% of expenses in accordance with the order I already entered; because there is no objection on file?” Wiles asked.

(Twenty percent of fees are routinely held back in bankruptcy cases, but typically paid once the cases are fully resolved.)

FTI’s lawyer opened the hearing by saying the firm did not “pander to the Hollywood press” in the dispute, in contrast to Relativity. Wiles said that it appeared to him that the “petty bickering” had gone in “both directions,” adding that “I expect the parties to rise above any bickering and will have little patience for it in the context of these discussions.” He later admonished the two sides to avoid “pointing fingers or trying to embarrass each other.”

Wiles’ ruling in favor of FTI does not apply to a later fee application — totaling $508,000 and $55,000 in expenses — for work in October. That requests will be subject to consideration on another day.

The judge also heard lengthy arguments from the lawyers in the case on a proposal that would settle claims made by Elliott Associates and its subsidiaries. The giant hedge fund declared in July it was out more than $130 million invested in Relativity, as of the time of the bankruptcy filing. A proposal to settle its claims came before the court Wednesday, but Wiles said he thought the proposed order was overly broad and asked the lawyers to rework it and return to him next week.

One of the parties to the case suggested that — with financing for the reorganized Relativity not yet spelled out — it would be difficult for the remaking of the company to be complete by a Feb. 1 court confirmation hearing. Wiles said he would not move back the date for the crucial hearing, however, without the agreement of Relativity and the other major parties to the bankruptcy.

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