Relativity Sports Joins Dispute Over Contracts at Bankrupt Parent Company

In a business built on relationships, Relativity Media has strained a lot of them — both before and after its July 30 Chapter 11 bankruptcy filing.

With just a week to go before bids are due on the bankrupt company, sales agents would like to be whipping up enthusiasm among potential buyers of the film and TV concern. Instead, the sale faces additional clouds. That’s because multiple producers, vendors and others have come forward to tell a U.S. bankruptcy judge that they object to a continuation of their fraught relationships with Relativity and to having their contracts with the insolvent company sold off to an unknown successor.

Many of the objections filed in U.S. Bankruptcy Court in New York this week were formalities. Individuals and companies registered their concerns merely to reserve their rights, in case they do not believe in the financial strength or business acumen of any  buyer that emerges from the October 1 Relativity auction.

Even Relativity’s own subsidiary, Relativity Sports, put down a marker in the bankruptcy court, saying in papers Thursday that it objected to the parent company (which owns about one quarter of the sports agency) continuing to hold a contract to provide support services to Relativity Sports. It also objected to the contract being passed on to a new buyer.

The sports unit, which represents dozens of pro athletes across all major sports, was excluded from Relativity Media’s July 30 bankruptcy filing. It continues on as an independent entity, which has been building its reputation in the sports world. In its filing in bankruptcy court, the agency said that Relativity Media was supposed to provide unnamed management “services” at cost, plus a markup of as much as 20%. Relativity failed to provide those services and “the defaults are material, have been ongoing, and remain unresolved,” the sports agency’s papers contend.

Lawyers for Relativity Sports implied in their filing that they expect senior lenders who have made a $250 million stalking horse bid for Relativity to become the new owners of the company. The agency said it has received no evidence that the new owner will be able to resolve “the multitude of issues and defaults” in the contract it has held with its parent company. An individual close to the agency said it needed to make the filing, to make sure any future management agreement is sustainable.

While such disputes are not welcome, they are not entirely unexpected and lawyers for Relativity and the credit bidder (comprised of the firms of Luxor Capital, Anchorage Capital and Falcon Investment Advisors) have managed to resolve many other disputes since the start of the bankruptcy. They have a committee of unsecured creditors going along, for instance, with a quick auction of the company. They also got early objectors to sign off on bonus pay for employees, deemed necessary to help increase the value of the company prior to the Oct. 1 auction.

It is possible that disputes with Relativity Sports and others filing objections will be resolved, either before or after the commencement of bidding on Sept. 25.

Other disputes aren’t likely to dissolve so readily.

That includes the fights with filmmakers who say that Relativity and its unknown successor can’t possibly help finish and distribute films. The most stinging of those rebukes came Thursday from heavyweight film producer Neal Moritz, who said he and partners had been misled into believing Relativity was a solvent and fully functioning outfit when they agreed to have the company help produce and distribute “Hunter Killer,” a submarine thriller now stalled in pre-production. Moritz and writers on the project said Ryan Kavanaugh’s company painted a rosy financial picture, while knowing it was actually withering on the vine, according to a filing in U.S. Bankruptcy Court in New York. The papers depicted what’s left of Relativity Studios as a shell, without the cash or personnel to get movies out to the public.

A Relativity spokesman called Moritz’s allegations “baseless and patently false” and said the deal with the producer had been made in good faith. Still, it remains difficult to see how the very public smack down will reach an amicable resolution.

Another less fractious dispute, but still a significant one, loomed in this week’s court filings. The disagreement is between Relativity Television and the production company that makes “Catfish: The TV Show.”  The reality-based program, shown on MTV, explores the relationships of couples who met via the Internet. It has been one of Relativity TV’s strongest offerings — and may continue so. But the producers said their contract should not be passed on to a new owner without a financial dispute with Relativity being cleared up first.

The Catfish Picture Company said in its motion to the bankruptcy court that it had not received required quarterly reports from Relativity on the show’s finances. The company also claimed to be owed an untold amount of money in guarantees, producer fees and other payments. Sources close to Relativity insisted that the producers have been paid millions in fees over the years and that about $160,000 currently owed stems only from the time since the bankruptcy filing. They said they expected the debt to be paid once a sale of the company is approved, as soon as next month.

It’s important that the “Catfish” fight be cleared up, because Relativity TV has been cited as the strongest remaining asset for the insolvent company. Its chief executive, Tom Forman, is viewed as a savvy operator. Hedge fund managers and others who have looked at the business said the reality-heavy TV operation could fetch up to $100 million, and possibly more. But that value could be clouded if the company appears to be estranged from key producers, said analysts following the deal.

Disputes have also arisen with producers of several films, in various stages of development and completion. They  include:

–“Shot Caller,” a project centering on prison gangs, researched by producer Ric Roman Waugh from inside the lockup gates. Producer Bold Films objected that it had a relationship with current Relativity execs, but had no assurance of a new company’s ability to “finalize and distribute a major motion picture.”

–“Collide,” once called “Autobahn,” is a thriller about a blood-thirsty mob boss, played by Anthony Hopkins, who puts a hero, portrayed by Nicholas Hoult, on the run. Producer IM Global says it wants to be released from a distribution agreement with Relativity, because the studio is in no position to make the agreed upon $24.5 million marketing investment prior to a promised Oct. 30 release.

Lawyers for both Relativity and the investment firms that could replace it as owner objected to IM Global’s position. They said that the call to end the contract to distribute the film is premature, because it comes before the Oct. 1 auction, which will provide more clarity about how “Collide” and other films will be handled. The Relativity lawyers also noted that IM Global had not previously objected, when the date of the auction was set.

The fight over “Collide” might provide a microcosm of many of those emerging the week before the bankruptcy bidding. The company, and the senior lenders who now control its future, contend the auction stands to reap a healthy sales price and resolve many of the concerns expressed by producers and other partners. Some of those third parties are far less sanguine about an angel arriving to revive a devilish balance sheet.  Those partners were registering their objections, early and often.

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