Relativity Media Funds Misspent on Ryan Kavanaugh’s Legal Bills, Lender Suggests

A film financing company that has already sued Ryan Kavanaugh for fraud in the Relativity Media financial meltdown has now suggested the entertainment company may be continuing to squander its assets by paying Kavanaugh’s personal legal expenses.

The accusation was included in a filing in U.S. Bankruptcy Court in New York in which the lender, RKA Film Financing, asks the court to allow discovery so that it can ferret out possible misappropriation of funds. The motion by RKA’s lawyers says that initial inquiries have revealed that 94% of the $73.6 million loaned by the firm to promote the release of four Relativity films was misdirected to other purposes.

RKA previously had filed a lawsuit, prior to Relativity’s July 30 bankruptcy declaration, accusing the film- and TV-maker of fraud for failing to spend P&A funds for the release of designated films — including “Masterminds,” “Somina,” “Disappointments Room” and “Kidnap.” RKA moved in a separate motion Wednesday to be allowed to seize those films, potentially to release them with a new distributor in order to collect a total of $85 million in loans Relativity has not repaid.

RKA’s lawyers, at the firm of Latham & Watkins, added the new demands for discovery later Wednesday. It was in the later filing that they declared that Relativity’s failure to use loan proceeds for the unreleased films “raised obvious questions as to what Relativity Media and Ryan Kavanaugh have done with these funds.”

The court filing suggests that some of the money might have been used to pay for lawyers at the firm of K & L Gates to represent Kavanaugh. The law firm defended Kavanaugh in the earlier fraud lawsuit by RKA, the new filing suggests. The firm now representing Relativity in the bankruptcy, Jones Day, previously filed a countersuit on behalf of Kavanaugh against RKA, charging that its allegations against Kavanaugh were a bogus attempt to extract funds at a time Relativity was fighting to refinance its operations.

A spokesman for Relativity and Kavanaugh could not immediately be reached for comment. The company and its embattled CEO have declined to comment through much of the bankruptcy.

RKA has been among the most aggressive of hundreds of creditors pursuing Relativity, which declared bankruptcy while acknowledging nearly $1.2 billion in liabilities and $560 million in assets. The new filing says that Relativity lied or made negligent misrepresentations to RKA “to further their scheme and artificially prop up Debtors balance sheets to obtain additional investments for the dying company.”

The filing also raises — for the first time publicly — the possible liability of officers and directors of Relativity for the company’s liabilities. The motion tells the court that RKA “has a good faith belief that the officers and directors of [Relativity] have acted improperly prior to and during this bankruptcy to the detriment of RKA (and potentially other creditors.)” It requests that Relativity turn over information about insurance it holds for officers and directors, suggesting that creditors may be able to collect from the insurance on Relativity’s leaders.

Latham & Watkins also asked the judge to let it examine records of payments released from Relativity’s bank accounts to OneWest Bank. The Pasadena-based bank “swept” nearly $50 million from Relativity’s accounts in the weeks just prior to the bankruptcy. That money was set aside for film promotion and to pay residuals to talent, but OneWest believed it had precedence to take the funds because it, too, was owed tens of millions of dollars in unpaid loans.

The RKA motion will be before the bankruptcy court in Manhattan at a hearing scheduled for Friday morning. The principal issue before Judge Michael Simes will be whether to allow the lead lenders to Relativity to push ahead with a fast-tracked September 16 auction of the company.

The news was first reported by Deadline.

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