Relativity founder Ryan Kavanaugh paid himself $2.6 million after the company emerged from bankruptcy in 2016, even as the company failed to pay bankruptcy fees or file tax returns, according to the U.S. trustee’s office.
The trustee has raised objections to Relativity’s latest bankruptcy filing, which came last month. In court papers, the trustee’s office expressed concern that the bankruptcy is designed to benefit Kavanaugh and lender UltraV Holdings at the expense of other creditors.
“This is a case that cries out for a robust investigation of potential avoidance actions,” wrote Greg Zipes, an attorney for the trustee’s office in New York, arguing that some creditors may wish to nullify transfers to preferred parties.
UltraV is set to acquire the company through a bankruptcy sale, and has agreed to retain Kavanaugh as a consultant on a $10,000-a-month contract, which includes an equity incentive in the reorganized company. The bankruptcy process would wipe out other creditors’ claims on the company.
Relativity first went bankrupt in 2015, and was reorganized the following year with a plan to raise more than $100 million in fresh equity. However, the new investment never materialized and the company was forced to declare bankruptcy for a second time last month.
In the bankruptcy filing, the company’s chief restructuring officer, Colin Adams, acknowledged that Relativity had not prepared audited financial reports since 2014. In addition, the trustee’s office said it was informed by Relativity’s representatives that “given the poor state of the Debtors’ records, it would be difficult for the Debtors to provide the United States Trustee with specifics about what sums were paid to whom” since the company emerged from its initial bankruptcy. In addition, the trustee was informed that “the Debtors had not filed certain tax returns, and that no extensions of time were sought or granted.”
“As it turns out, the Debtors have apparently been unable to pay even the administrative claims owed under the confirmed (bankruptcy) plan” of 2016, Zipes wrote in a filing on May 9. “In summary, while the Debtors appear to have raised some capital and paid down some debt, their finances are largely a mystery, apparently even to themselves.”
In a filing on Tuesday, Zipes wrote that the trustee had recently learned that Kavanaugh paid himself a salary of $2.6 million between April and November of 2016. Kavanaugh stepped down as CEO at the end of 2016, but continued to hold the majority of the company’s equity.
The trustee also raised concerns about whether the UltraV sale agreement is in fact an arm’s length transaction. In its bankruptcy filing, Relativity stated Kavanaugh had left the company by the time the sale agreement was negotiated. But the trustee stated that subsequent investigation shows that Kavanaugh had access to Relativity’s computer systems, even after the bankruptcy was filed on May 3. He had access to Relativity’s email, bank accounts, and servers until May 8, and was not fully cut off from access to the bank accounts until May 12, according to the trustee.
The trustee’s office has objected to UltraV’s plan to provide interim bankruptcy financing, saying the terms could improperly advantage UltraV and make it difficult to investigate potential claims. Relativity has said that it is “hemorrhaging” cash, and has already drawn on emergency funds from UltraV to support its operations.