Ryan Kavanaugh Relativity
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Netflix suffered a setback in its efforts to void its contract with Relativity Media over the bankrupt studio’s failure to deliver a promised number of films.

During a hearing on Tuesday, Scott McNutt, an attorney for Netflix, said that Relativity was in breach of its contract, because its reorganization plan doesn’t pave the way for the company to deliver enough films to satisfy its agreement. He questioned the company’s financial viability as it hopes to emerge from Chapter 11 protection.

“This plan of reorganization is built almost entirely on the back of the Netflix contract,” said McNutt, adding, “They’re essentially saying we don’t have the capacity.”

However, U.S. Bankruptcy Court Judge Michael Wiles shot down Netflix’s objections and said that Relativity had made a “good faith” effort to deliver movies to the streaming platform.

“I don’t see how that wipes anything out of the contract,” said Wiles.

Bankruptcy filings reveal that Netflix paid Relativity $283 million in licensing fees since its contract began in 2010, but the number of films the studio has produced tapered off as it began to struggle financially last year. Relativity has not debuted a film in theaters since “Desert Dancer” in April 2015. The number of films the studio is obligated to license to Netflix has not been publicly disclosed.

The judge said that Netflix had certain protections — namely that it did not have to pay for films that Relativity failed to deliver.

“Surely nobody thinks that this bankruptcy was something that [Relativity founder Ryan Kavanaugh] was looking forward to, or tried to engineer, or that anybody at Relativity is anything more than enormously upset that their business has been disrupted,” he added.

Kavanaugh, who was in court watching the proceedings, gave a half-nod as the judge spoke.

On Monday, McNutt told the court that he was disturbed by the lack of detail about the financing and management behind the new Relativity. He asked for at least two more days to digest recent financial disclosures filed by Relativity. He went on to question what role newly named studio chairman Kevin Spacey and president Dana Brunetti would play at the company.

But Judge Wiles faulted McNutt for a lack of “preparedness” and told the Netflix attorney that he should have sought out the financial details through earlier discovery; requests the judge noted Netflix had not made.

After volleying with the judge on Tuesday, McNutt said he would remove at least part of the company’s objections and noted that he hoped that the companies would be able to reach a compromise.

An attorney for Relativity rose to challenge at least part of McNutt’s objections before Wiles wryly told him, “Sit down when you’ve won.”

Despite seeing Netflix pushed back on its heels, Relativity had its own frustrations on Tuesday. Judge Wiles said that there were still too many questions swirling about its post-emergence financing to allow the company to begin the process of exiting Chapter 11.

“I don’t fault you for wanting to emerge out of bankruptcy, but you’re not there,” said Wiles.

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