Judge Halts Netflix's Plan to Stream Zach Galifianakis Comedy in June

Relativity Media wins the latest round in a bitter battle with its successful reorganization at stake.
'Masterminds'

Relativity Media can breathe a sigh of relief. On Friday, a bankruptcy judge stopped Netflix from streaming next month the films Masterminds, a comedy starring Zach Galifianakis, and The Disappointments Room, a horror film that features Kate Beckinsale.

Relativity and Netflix have been feuding in court over the streaming giant’s controversial plan to put the two films on its service in June ahead of theatrical releases later this year. Relativity has argued that Netflix is precluded from doing so because it is at odds with the judicially approved reorganization of the Ryan Kavanaugh studio. In turn, Netflix argued that after paying a $7.4 million minimum guarantee to Relativity (with money back if the films never were theatrically released), it had every right to begin streaming in accordance to specified start dates. The dispute, which triggered three days' worth of testimony that concluded on Monday, has revealed quite a bit about Netflix’s licensing relationship with distributors and expectations on content.

Netflix argued that a contractual interpretation was a matter for arbitration, not for a bankruptcy court, but in agreeing to hear testimony from both sides, U.S. Bankruptcy Judge Michael Wiles said he wanted to know whether Netflix’s streaming plan was being done in “bad faith.” Previously, back in February, Netflix looked to escape a deal that paid Relativity hundreds of millions of dollars by objecting to the assumption of the contract and disputing Relativity’s ability to deliver films. Wiles rejected Netflix then, and the company would later drop an appeal. The latest dispute amounted to an investigation into whether the streaming plan was pretext in Netflix’s ongoing efforts to get out of payment obligations. Relativity said Netflix's streaming plan threatened its reorganization.

Today, the judge gathered the parties in a downtown Manhattan courtroom to deliver the news that he would not let Netflix sidetrack Relativity's Chapter 11 exit and all the deals it had made with lenders, which were premised on expectations of a theatrical release for the two films as well as money from downstream license agreements.

The ruling could bring either an appeal (the judge has already refused a Netflix bid for a stay) or some other bold move by Netflix that cuts against Wiles' decision. Before the ruling was announced, Netflix filed additional papers that asserted that the bankruptcy court lacked constitutional authority to compel Netflix into amendments to its agreements. The streaming giant objected that this matter involves no "public right" and Wiles simply can't make any factual or legal determination on the contracts. The argument was unavailing to the judge, so it will be worth watching what Netflix decides to do next.

"The debtors' [Relativity] ability and right to exploit films was key to its financial ability under reorganization. This could have not been clearer at confirmation hearing," said Wiles. 

He continued that Netflix was an "active participant" at the confirmation, objecting back in February, and that Netflix had an "obligation" to resolve any issues with its rights then. The judge added that Netflix's new arguments are "irreconcilable" from its past position that films had to be theatrically released under its license agreement and that Netflix's ambitions would "destroy" Relativity's commercial prospects. Wiles believes Netflix is counting on this to exert leverage and he won't stand for what he considers to be a "collateral attack" on Relativity's reorganization. The judge rejects Netflix's attempt to litigate this in arbitration. He rules that Netflix is estopped from making such arguments.

Stopping just short of ordering specific dates that Netflix can stream the two films, but issuing injunctions that will have the effect of ensuring Netflix's cooperation, Wiles told the parties, "To allow Netflix to pursue [its plan] would threaten the integrity of bankruptcy process ... with devastating consequences."

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