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

More than seven months after it slid into bankruptcy, Relativity Media will emerge from court protection and resume normal operations, following a ruling Friday by a U.S. Bankruptcy Court judge in New York.

Judge Michael Wiles ruled that the Beverly Hills-based entertainment company had provided enough evidence to show that it can operate successfully as a reorganized company, with co-CEO’s Ryan Kavanaugh and Joseph Nicholas overseeing the operation, including a film studio to be run by producer Dana Brunetti.

The approval came after a flurry of last-minute changes and with many complex payment agreements and legal settlements still required to make Judge Wiles’ ruling final. It also came despite the fact that early promises — the presence of Academy Award winning actor Kevin Spacey on the management team and as much as $100 million in new equity investment — did not materialize.

Relativity’s final plan for exiting Chapter 11 called for a $35 million loan from investor and co-CEO Nicholas, of Chicago, and another $40 million loan from Midcap Financial Trust. The company’s financial consultant, Marni Wieshofer of Houlihan Lokey, told Wiles on Friday that those loans would be enough to tide the company over.

In a crowded courtroom where a mood of quiet anticipation reigned, Judge Wiles ruled after an hour-long hearing that the company had proven it could be viable, though he acknowledged challenges to come. “I think everybody realizes that the emerged company will be highly leveraged and that forecasting the results of films is an inherently iffy proposition,” Wiles said, adding, “And that there is still some more work to be done on putting some more financing into place in terms of equity and the ultimates facility.

“But on the record I have in front of me, I am prepared to make the confirmatory finding,” Wiles concluded. He then congratulated the lawyers in the case on the “unbelievable amount of hard work that has gone into getting the plan confirmed.”

Nicholas assured the judge that many investors will be willing to throw in with Relativity, with the bankruptcy finally concluded. The judge had noted that the company had talked about a group interested in making a $50 million equity investment, but only at the conclusion of bankruptcy.

“They are still out there looking, they are waiting for emergence” from bankruptcy, Nicholas told the judge Friday.  He said Relativity had also been approached by “another group, a much larger sized investment” that also wanted to continue talks at the conclusion of the Chapter 11 case. “The interest feels strong. I think as soon as we are out, we start the conversation,” Nicholas said. “And the calls are coming in. The interest is coming in.”

The hearing came at the end of a tumultuous bankruptcy that started last July and stumbled into a new year, as Relativity struggled to find new financial partners. Starting Chapter 11 with $1.2 billion  in liabilities against a reported $560 million in assets, the Beverly Hills-based company pledged to bring in new equity investors.

When Wiles conditionally approved Relativity’s emergence from bankruptcy in February, the company said it would later show proof that it had locked in $80 million in new equity investment.  It also said it would show proof of a final deal bringing in Spacey to run the new company. He had first appeared before Judge Wiles in a razzle dazzle video, in which the actor talked about his excitement about running the studio.

More than a month later, Spacey quietly conceded in a declaration attached to other court documents that he did not have the time to act as Chairman of Relativity Studios. His producing partner, Brunetti, had reached an agreement that would have him sign on as the chief executive of the company.

Even just hours before Friday’s hearing (which began half an hour late, following a last-minute adjournment while attorneys conferred), lawyers for Relativity were filing new documents in court, revising the terms of their agreement with Midcap Financial. The document also included language about a settlement with VII Peaks Capital of San Francisco. Relativity had reported last April that a $250 million investment from VII Peaks would re-energize Kavanaugh’s company and pave the way for an initial public stock offering. Months later, court filings made it clear that VII Peaks’ investment was much smaller — a reported $12 million. And the investment firm and Relativity became embroiled in a legal battle over the terms of their deal.

In asking the company to pin down a workable arrangement this time around, Wiles had last month cautioned: “The margin for error is very small.”

Dozens of other objections had been cleared away prior to the hearing, with the major lenders in the case and a committee representing unsecured creditors (owed some $89 million) agreeing not to stand in the way of the plan. Most had calculated that potential paltry returns they would receive in a reorganization were more than they would get if the plan failed and Relativity had to be liquidated.

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