Relativity Bankruptcy: Can One Film Lender Pry Away the Rights to ‘Masterminds’?

Ryan Kavanaugh
Everett Collection/REX

Relativity Media’s bankruptcy has left scores of creditors desperately hoping that a sale of the failed entertainment company will allow them to collect on millions of dollars in unpaid bills.

In this chaotic environment, one creditor has proven to be unusually aggressive, a film distribution lender with the utilitarian moniker of RKA Film Financing. It is currently attempting to seize control of four of Relativity’s unreleased films, including the Kristen Wiig comedy “Masterminds” and the Halle Barry thriller “Kidnap,” arguing that it has liens on the productions and that the studio’s management fraudulently used money that had been set aside to promote and advertise the pictures to help cover overhead costs.

Even before Relativity’s July 30 bankruptcy filing, RKA’s lawsuit in New York state court raised eyebrows in Hollywood — it labels Relativity Media founder Ryan Kavanaugh a “conman” and demands $90 million in damages. But it’s not clear how successful RKA — formed specifically to finance the studio’s films — will be in its attempt to seize the four films.

“These kind of tensions within a bankruptcy are not unusual,” said Brian Davidoff, a bankruptcy attorney with Greenberg Glusker. “There’s not enough money as it currently stands to pay all of the creditors, so they’re looking for leverage that puts them at the top of the heap to get paid.”

There’s a long line of people hoping to get their money back. Relativity lists liabilities of almost $1.2 billion and assets with a book value of just under $560 million in filings. For RKA Film Financing’s backers, it’s not just a question of getting paid first, experts say; gumming up the bankruptcy process with lawsuits can enable a creditor to have more influence over the sales process. “It can get them a seat at the bargaining table,” notes Jude Gorman, general counsel at Reorg Research.

Another bankruptcy expert, who asked not to be named, said that RKA’s lawyers may be pursuing financial documents in the bankruptcy proceeding in order to obtain information to advance their other lawsuits. “They can use this evidence to further their fraud claims in state court,” said the expert. “They could also use the information to request a Chapter 11 trustee to oversee the company.”

None of the creditors in the case has yet demanded a trustee. The appointment of a trustee or an examiner to study a bankrupt company’s books can come in cases where there are allegations of fraud or irreconcilable disagreements. But parties sometimes worry that the appointment of such an intermediary can slow up a bankruptcy, and it is viewed by judges as a last resort.

“The Chapter 11 process is built around a company being able to reorganize its own affairs,” said Gorman. “The bar is pretty high for telling a company ‘Nope, you don’t get to reorganize.’ It has to be pretty close to malfeasance before a trustee gets appointed.”

The motion last week by Benjamin Naftalis, one of the Latham & Watkins lawyers representing RKA, indicates the film financier feels an urgency in trying to release the films while they are at the height of their value. The filing asked Judge Michael Wiles of the U.S. Bankruptcy Court in Manhattan to lift a stay that would prohibit RKA from exercising its liens on the four movies.

Besides “Masterminds” and “Kidnap,” the financier paid to release and publicize the horror pic “Before I Wake” (previously “Somnia”) and the Kate Beckinsale thriller “The Disappointments Room.” RKA claims that its lien on the films is “senior to the rights of other lenders,” including the hedge funds that are now driving the bankruptcy and attempting a quick liquidation sale of the failed studio.

Other lien holders — including guilds whose members are due to receive participation fees and eventual residuals on the films — could support a quick release of the films because of concern about their diminishing value over time. If that happens, potential buyers of Relativity Studios would have to downsize any bids on the overall operation, realizing that some or all of the proceeds from the current slate are already claimed by various creditors, experts said.

The eventual value of the films is hard to predict until the public gets a look at them. But they could be among Relativity’s most valuable film assets, given the participation of several prominent stars. The company has a limited library of titles and a handful of films in pre-production such as “The Crow,” but making a profit on those assets could take more time and patience.

Theoretically the four pictures claimed by RKA could be released within months of being obtained, provided the company buying them has the capacity to market and distribute the films.

The bankruptcy case returns to court on August 25.