Fox Responds to Liquidation Suggestion in Rhythm & Hues Bankruptcy

Twentieth Century Fox has responded to the explosive suggestion last week that bankrupt VFX house Rhythm & Hues be liquidated.

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Read Fox's Response Here

The proposition was offered by a newly formed Committee of Unsecured Creditors, who questioned R&H's leadership and the benefit of a loan and sale of the company, saying, "If the Debtor cannot continue operating its business and must close its doors, so be it" and the "entire case appears to have been designed primarily as a mechanism to benefit Fox and Universal."

That has brought an angry reply from Fox, which is counting on R&H to continue its operations and complete work on Percy Jackson: Sea of Monsters, scheduled for release on Aug. 16.

Fox says last week's objection was designed as "baseless and gratuitous attacks" upon it and Universal, and says that the "blunderbuss attack on the DIP Lenders for having done everything possible to preserve the Debtor as a going concern is puzzling and troubling."

Read Rhythm & Hues Response Here

The studio adds that when it and Universal agreed to put up $17 million in loans, it was an extraordinary gesture.

"The DIP Lenders did not make an ordinary commercial loan," says Fox in papers filed Monday. "In fact, no other lender offered to make this loan on such generous terms or on any other terms."

Fox goes into detail on why its loan was "atypically generous," including that it has a 6 percent interest rate instead of double digits, is not payable until 2015 and other considerations. For example, Fox says it didn't receive a "lien on other projects for other studios."

The studio also details the liquidation scenario: Projects wouldn't be completed, and there would be no receivables. There would be no assurances that the estate would receive any money from the sale of its building. And then there are the liabilities.

For example, Fox tells the Committee not to ignore the damage claims that would be made.

"The DIP Lenders understand that Warner Brothers, whose projects were not as far along in production as the DIP Lenders, has asserted a $4.9 million damage claim for the Debtors' failure to complete its projects."

Fox calls the liquidation preference "all the more puzzling when considering its membership, all of whom should understand the dramatic negative consequences of a shut-down and liquidation. While the Creditors' Committee has a duty to represent all unsecured creditors, it has only three members: Warner Brothers, the terminated employees WARN act claimants, and Focal Point, the Debtor's former investment banker."

In a separate filing, attorneys at Greenberg & Glusker representing the debtor, also respond, saying that without the loan, it wouldn't have made payments to vendors, wouldn't have met payroll, wouldn't be able to explore a sale of the company.

"Shutting down operations would have been premature and irresponsible," they say, which would have led to breach of contract claims asserted by Fox and Universal, additional labor claims asserted by additional workers who would have been terminated, and potentially $45 million in claims under the new federal health care law, which mandates 60 days' advance notice of any modification of a medical plan.

"Indeed, a shutdown of the Company would have resulted in less revenue and larger claims," they say.

Email: eriq.gardner@thr.com; Twitter: @eriqgardner