Relativity Reorganization Moves Ahead Despite Objections Over Film Releases

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

A U.S. Bankrupcty Court judge postponed the proposed date for ruling on Relativity Media’s plan for emerging from Chapter 11 bankruptcy for two weeks on Wednesday. Though Relativity’s lawyers argued for the hearing to go forth Jan. 15, Judge Michael Wiles said schedule was “not realistic” given the amount of work remaining.

“I am concerned that… trying to compress everything to fit that date is just too much, it leaves too little time particularly since everything people would need to do would have to be done over the holidays,” said Wiles, before pushing the critical confirmation hearing to Feb. 1.

Wiles did approve, subject to later modification, Relativity’s disclosure statement, a requirement before any reorganization can be approved. CEO Ryan Kavanaugh is attempting to raise $100 million in new funding to jump-start the company that he founded in 2004 and that filed for Chapter 11 protection on July 30.

“The case has basically been one triage project after the next,” said a lawyer representing unsecured creditors in the case, which now moves forward with high hopes expressed by Relativity and some creditors, while others noted the many hurdles that still remain.

A lawyer for Manchester Securities Corp., a subsidiary of giant hedge fund Elliott Associates, noted that the interim financing it has provided Relativity continues as the case drags on. While it remains hopeful a reorganization will work, the financier’s lawyer said: “Manchester has been very patient while we work with debtor and Mr. Kavanaugh, but our patience is not endless….We are not on board with this plan yet.”

Elliott also gave notice that it does not acknowledge Relativity’s right to a sequel to the 2011 action fantasy “Immortals,” saying Manchester could claim its rights over the film, which it said is held in its library. A lawyer for Kavanaugh disputed that, saying the title belongs to Relativity, as long as it pays a fee.

Also raising concerns about the progress of the case was an attorney for VII Peaks Capital, the San Francisco Bay Area investment house that dumped $12.5 million into Relativity not long before it filed for bankruptcy. Attorney Joel Stein said Relativity had not done enough to report to the court and creditors its finances during Chapter 11.

Stein also demanded more transparency from the entertainment company about what ownership interest Kavanaugh have once the company emerges from bankruptcy. Stein called Kavanaugh an “insider” who is “to a very real extent working for himself.”

Lawyers for Relativity said it made no sense for VII Peaks to be claiming it had inadequate financial information, since one of its principals sits on Relativity’s board and has had access to inside information over dozens of board meetings. Judge Wiles also said he believed Kavanaugh’s exact financial position with the remade firm could be made clear through supplemental disclosures and was dependent on what other equity partners the company might bring on board. The judge said he expected that information would become clear prior to approval of a reorganization plan.

Manchester is not the only Relativity business partner suggesting that the company may not control the destiny of film projects that it hopes to release in 2016 and beyond. CIT Bank, the successor to OneWest Bank of Pasadena, has loaned money to Relativity for both film production and in exchange for proceeds from movie “ultimates.” A lawyer for the bank said that it could at some point claim possession of two films it fronted money to produce — the comedy “Masterminds” and “The Disappointments Room” — because Relativity did not release them by the dates promised.

Relativity’s representatives in the New York court said they believed that CIT actually had “the most protected position” of many creditors and would be adequately protected through the reorganization plan. Wiles invited the bank to come to him and request immediate relief if it deems that is necessary, though he said the damage from delayed releases appeared to have already been done. The bank gave no hint if, or when, it might press its claim. And Wiles did not say how he would rule.

Thought they did not speak out in court Wednesday, another Relativity lender also has an outstanding dispute over upcoming films. RKA Film Financing of New York previously filed suit in state court in New York accusing Kavanaugh of misdirecting funds it loaned his company for the release of five films.

Relativity earlier this month announced it would release five films in 2016. But a mediation over the RKA dispute did not lead to a resolution, according to sources familiar with the dispute, and the financial firm’s lawsuit is still pending, keeping open the possibility it could seize and the movies and try to release them through another distributor. Relativity contests those claims and has said RKA tried to take advantage of the studio’s weakened financial position.