Judge Skeptical of Netflix Bid to Stream Relativity’s ‘Masterminds’ Before It Hits Theaters

UPDATED: A federal bankruptcy judge said he is leaning against giving Netflix permission to stream two Relativity Studios films — “The Disappointments Room” and “Masterminds” — before they are released in theaters.

Judge Michael Wiles did not make a final decision in the dispute, setting a hearing for May 19, but said that — despite confusion about a series of agreements governing the relationship between the studio and streaming service — it seemed clear that the films were meant to be seen in theaters before Netflix puts them online.

“I am hard pressed to think I would ever authorize you to release these movies on Netflix before a theatrical release . . . that just seems so contrary to the language of the agreement itself,” said Wiles near the end of a 90-minute hearing.

The judge agreed with lawyers for both Relativity and Netflix that the mini-studio’s contract with the streaming service is a crucial component of its plan to return to solvency, after a string of losing films drove it into Chapter 11 last year. Wiles in March approved a reorganization plan for Relativity, which officially took effect in mid April.

Netflix has long been one of the most outspoken critics of the company founded by entrepreneur Ryan Kavanaugh. It said that the company’s failure to deliver films by promised dates should clear the way for the streaming service to release the films online.

Netflix’s attorney, Scott McNutt, argued that the company has been held hostage by the long delay in releasing the films. “So you end up having a stale movie,”  said McNutt, “but a movie that must be delivered and that we must pay for and that [payment] occurs before it is theatrically released.”

Attorney Richard Wynne, representing Relativity, said that Netflix would not be forced to pay for films it could not deliver to its audience.

While neither of the two upcoming films is considered a likely blockbuster, Relativity has hopes that both will help it get back on its feet and show financiers, producers and talent that the studio is back in business.

Relativity plans a September 30 release for “Masterminds” — a bank heist comedy starring Kristen Wiig, Jason Sudeikis and Zach Galifianakis. It has set December 16 for the debut of “The Disappointments Room,” a horror film starring Kate Beckinsale.

McNutt argued that with the bankruptcy plan approved and now in effect, the dispute over the timing of the film releases should go to a federal arbitrator and not be decided by Judge Wiles. “It’s time to kick these little birds out into the open air and see if they can fly,” McNutt told the judge. “And, if they have a dispute, they are obliged to resort to the binding arbitration provision.”

Wynne said the contest over Netflix’s release rights amounted to a core issue in the reorganization, one that the bankruptcy court can rightfully decide. He worried aloud that the ongoing dispute would make it difficult for Kavanaugh’s studio to raise money for its operations and for the release of additional films.

“I don’t think we could have something that is more integral to the plan,” Wynne said. “And to throw it off into a black hole of arbitration puts us off into a morass. What do we tell the equity people we are talking to? What do we tell the P&A people?”

Though Wiles agreed to hear more arguments, and witnesses on the subject, he seemed to be leaning heavily against allowing Netflix to release any films before they go into theaters. “The agreement with Relativity is quite clear that you are not allowed to exhibit any movie unless it is a ‘title,'” the judge said, adding that the agreement made clear that a film does not become an official “title” “unless it has been theatrically released already.”

Wiles also said upsetting the normal release pattern would doom the box office prospects of the two films, injuring not only Relativity but other parties to the bankruptcy — including CIT Bank and RKA Film Financing — that stand to get proceeds from the movies.

As it struggled through bankruptcy, Relativity saw theatrical release dates come and go. Arguing that it should be able to get out of its contract with Relativity because of the failure to deliver the films, Netflix was one of the studio’s most aggressive opponents during the bankruptcy process.

Lawyers for the streaming service also argued that the Relativity reorganization plan should not be approved. But Wiles said that Netflix’s remedy for Relativity’s failure to deliver films was for the company to simply reduce its payments to the studio, not to hold up the entire reorganization or to explode the contract between the two.

Netflix has lost several attempts to stop or slow Relativity’s reorganization and to be freed from its contract with Kavanaugh’s company. The streaming company has continued to fight in Wiles’ courtroom, though one bankruptcy expert said the company also has the option of trying to remove the matter from bankruptcy court. Via a gambit known as a “withdrawal of reference,” Netflix could attempt to move the case out of the bankruptcy court and into a U.S. District Court. The company thus far has given no indication it would make such a move.

Relativity presented evidence in the bankruptcy case that it would release six movies in 2016 — “Kidnap” on Aug. 16, “Solace” on Sept. 16; “Masterminds” on Sept. 30; “Before I Wake” on October 16 and “The Disappointments Room” on Dec. 16. The company also listed another Oct. 16 release — of a film yet to be acquired.

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