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Relativity Bankruptcy: RKA Film Financing Drops Objections

Some of the objections to the fast-track auction of bankrupt Relativity Media were abandoned or cast aside by a U.S. Bankruptcy Court judge in New York, though the final decision on whether the mini-studio will go on the block Oct. 1 remained to be decided when a hearing resumed Tuesday afternoon in front of   Judge Michael Wiles.

One of the most obstinate opponents of Relativity’s quick bid to sell itself, RKA Film Financing of New York, dropped its objections to loans that will keep the bankruptcy and sale on track. The film financier has said it is owed more than $75 million that it loaned for promotion of films, which it claims was diverted to Relativity’s general operating expenses.

RKA’s concession that an auction could go ahead came following a compromise last week by the other side. Senior lenders Anchorage Capital Group, Luxor Capital Group and Falcon Investment Advisors said that loans from RKA and another financier tied to film promotion “must be paid in full in cash” before Relativity can sells the films in question as part of its proposed auction.

RKA’s lawyer made clear it would lift its objection to the auction. “We think that we need to get on with business here,” said David Heller, an attorney for the financier.

Heller’s statement came during a lengthy hearing Tuesday on whether or not Relativity would receive another payment from the $45 million it had lined up of debtor-in-possession (or DIP) financing. That money is intended to be used to fund ongoing operations until the proposed October auction. No resolution had been reached by the time the court broke for lunch and the ponderous progress of the proceedings left one attorney joking that “we’ll be here until next Thursday.”

Relativity, the studio behind films such as “The Pursuit of Happyness” and TV shows like “Catfish,” filed for bankruptcy protection in July, citing assets of $560 million but liabilities of $1.18 billion. Founder and CEO has called the bankruptcy a mere reorganization, but the company’s controlling lenders have made clear they intend to sell Relativity, or its pieces, to the highest bigger. Lenders led by Anchorage, Luxor and Falcon made a $250 million “stalking horse” bid, in hopes of generating higher offers from outside interests.

Though Relativity did resolve an objection with another lender over residuals and payments to production and acting guilds, the hearing was not without its friction. The proceedings grew testy Tuesday after a key lender tried to inject certain stipulations on a possible sale of the troubled studio’s assets.

Evan Jones, representing a group of affiliates associated with hedge fund Elliot Investments, said the interests maintained rights over the sale of Relativity as part of its operating agreement. The attorney had argued that an operating agreement mandated that if Relativity sold its assets for less than $50 million, it would be required to obtain a fairness agreement from J.P. Morgan.

But Judge Wiles dismissed that objection as “sophistry.”  The judge said that any agreements that Relativity had entered into prior to Chapter 11 did not supersede his power to approve a sale of the studio’s assets.

Attorneys for Relativity and for other lenders also hit back at Jones’ contention, arguing that the attorney was trying to ensure that his clients, a constellation of entities called Manchester and Heatherton, got paid before other creditors.

Mark Shinderman, an attorney for various creditors, decried “the schizophrenia with which the objection is written,” maintaining that it did not adequately delineate the relationship that Manchester and Heatherton had with Relativity.

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