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Relativity Bankruptcy: Justice Department Official Argues Against Bonus Pay

Employee salary bonuses proposed as part of the Relativity Media bankruptcy should be denied because they are designed to retain executives and other workers and not to encourage a more optimal sales price when the company is auctioned Oct. 1, the U.S. Trustee’s office argued in a legal filing Friday.

Serene K. Nakano, who represents the U.S. Trustee, contended that Relativity employees should not receive bonus pay for completing their normal duties or to merely keep them working for the company during bankruptcy. The U.S. Trustee is a branch of the Justice Department that is empowered to protect the integrity of the bankruptcy process.

Relativity Media, founded by entrepreneur Ryan Kavanaugh, filed for Chapter 11 protection July 30, citing nearly $1.2 billion in liabilities and about $560 million in assets. The mini-studio had proposed post-auction pay to five executives totaling nearly $315,000 to make up for previous pay cuts of $795,000. Another proposal would pay $589,000 to 80 Relativity employees, some of whom took pay cuts that totaled double that amount. That money is supposed to be paid a day after the finalization of a sale of Relativity in a bankruptcy auction.

But the U.S. Bankruptcy code requires that, during a Chapter 11 proceeding, such pay should be designed to promote an increase in the value of the bankrupt company. Nakano’s filing Friday in U.S. Bankruptcy Court in New York argued that the goal in the pay proposals was not set high enough above an existing stalking horse bid of $250 million to inspire employees to drive a more lucrative sale.

The plan “is not calculated to achieve the executives’ desired performance because the benchmarks are set too low,” Nakano’s motion contends. “In addition, [Relativity] has not shown that the [incentive] plan is consistent with industry standards.” She also argues that the Relativity board of directors has sole discretion over granting the bonuses, with no criteria for the awards spelled out.

Nakano noted in her filing that Congress had determined to “eradicate the notion that executives were entitled to bonuses simply for staying with the company through the bankruptcy process.” She also contended that bonuses in bankruptcy can’t be based solely on the debtor’s business judgment.

In addition, Nakano argued that the benchmark for the bonuses essentially may have already been met by the $250 million stalking horse bid. That is the amount offered for the bankrupt company by senior lenders Luxor Capital, Anchorage Capital and Falcon Investment Advisors. “Using these metrics, the bonuses are essentially guaranteed,” Nakano wrote, adding later in her argument that “insiders should not be paid bonuses to incentivize them to satisfy the very fiduciary duties that they are already requited to fulfill under the Bankruptcy Code.”

Companies interested in bidding for Relativity are directed to express their interest by Sept. 17, with bids due Sept. 25 and an auction to be held Oct. 1.

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