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Bankruptcy Judge Cancels Kodak's Agreement With Sony Pictures

Over Sony's strong objection, a judge agrees that Kodak used its business judgment to reject a supplier agreement over $18 million in owed rebates. The future relationship between the companies now is cloudy.

Kodak logo - H 2012

Sony Pictures Entertainment and Eastman Kodak are having major difficulties with each other.

On Wednesday, a bankruptcy judge canceled the current film-supply contract between the two companies -- throwing $18 million that Sony is owed into question.

Kodak is the storied film company that has enjoyed 132 years of a solid relationship with Hollywood. But the company has experienced hard times, and it filed for Chapter 11 bankruptcy in January 2012.

In the filing, Kodak revealed that it owed the major studios lots of money -- at least $51 million. The debt came from tax credits, rebates, discounts and other incentives offered to studios when buying Kodak film for motion pictures.

In August, Kodak asked a judge to approve new supplier agreements with Disney, Warners, NBCU and Paramount. Conspicuously absent was Sony, which was the studio that was owed the most money -- about $18 million in rebates.

Recently, Kodak asked the judge to reject an executory contract with Sony.

That raised Sony's ire.

Sony said in court papers that after Kodak's bankruptcy filing, it had "continued to negotiate in good faith to reach a mutually agreeable purchasing arrangement going forward."

The studio also pointed out that since Kodak's bankruptcy, it had purchased about 450 million feet of motion picture film from Kodak.

Nevertheless, despite what it says were points when a deal was being neared, Kodak suddenly broke off negotiations on a new supplier agreement. After seeing Kodak's motion to reject the supplier agreement, Sony stated that "the timing of the motion belies Kodak's true purpose -- it is clearly trying to deny SPE an allowed administrative expense claim for the post-petition rebates that have accrued and are now due and payable."

The administrative expense was $9.4 million.

In response, Kodak said it had negotiated but that the talks were unsuccessful and that while it wasn't "surprised that Sony would prefer to continue under the current terms, the Bankruptcy Code permits Kodak, consistent with its business judgment, to reject the Film Agreement."

Kodak also questioned Sony's motives.

According to the company's lawyers, "Kodak learned during negotiations of a new agreement in 2012 including Kodak's standard exclusivity language that Sony may have purchased substantial quantity of film from Kodak's competitors. These actions call into question Sony's basic good faith during the pendency of the protracted negotiations."

Kodak also said that based on the $18 million and its own internal projections, "There is no commercially reasonable justification to pay that amount to assume and continue to do business under the Film Agreement. Kodak's risk is compounded by Sony's right to unilaterally terminate the Film Agreement at any time on five business days' notice."

The arguments were presented to U.S. Bankruptcy Judge Allan Gropper, who eventually took Kodak's side and threw out the current contractual arrangement that the two companies enjoy with each other.

That doesn't mean Sony necessarily will lose out on all the money that is owed. That will be under consideration at a later hearing date that will consider Sony's administrative claim.

And even though the old deal is out the window, the companies still can negotiate with each other on new terms.

But without the $18 million incentive, Sony might no longer have reason to give Kodak all its business. Indeed, because the judge threw out the old contract, it means that the studio no longer has to honor any exclusivity provisions it previously agreed to. Sony has purchased film stock from Kodak's competitors but hasn't used it yet. The ruling frees up the company to do so.

Sony had no comment about the development.

A major studio possibly moving away from Kodak film would be quite a shakeup. According to Kodak's papers, 80 best picture Oscar winners have been shot on Kodak film, plus current contenders Argo, Beasts of the Southern Wild, Django Unchained, Les Miserables, Lincoln and Silver Linings Playbook.

E-mail: eriq.gardner@thr.com; Twitter: @eriqgardner