Relativity Bankruptcy: Financier Wants Cap on Residuals, Profit Participation Payments

Manchester Securities argues debtors haven't demonstrated necessity.
Bradley Cooper and Robert DeNiro in Relativity's "Limitless"

Relativity Media's Chapter 11 bankruptcy could soon explore debt to big-name actors and other creatives.

On Wednesday, an objection was filed by Manchester Securities, a subsidiary of Paul Singer's hedgefund powerhouse Elliot Management, which was one of Relativity's earliest financial backers and is still owed $131 million from the bankrupt studio.

Manchester tells a bankruptcy judge that payment of residuals and profit participation from Relativity's films and television shows "might improperly elevate one group of prepetition creditors above other similarly situated prepetition creditors" and that Relativity's lawyers "have not sufficiently demonstrated that the proposed payees qualify under the critical vendor or doctrine of necessity exceptions to the general rule that prepetition creditors are not paid before confirmation."

According to Relativity's court papers late last month, $28 million worth of profit participations and residuals were due at the time of the Chapter 11 filing and $8.245 million more was expected to come due through September. The debtors argued it was important to pay these obligations so as to preserve the ability to maintain new production and not "negatively impact" relationships with talent and other stakeholders like unions. Hollywood guilds have been closely watching this situation.

In today's objection, Manchester argues "approval with limitations reflecting the nascency of these cases and the uncertainty of their future trajectory is reasonable."

Specifically, the financial firm wants to impose a specific dollar cap on payments and limit payments from being made after October 31 or the sale of Relativity's assets. Additionally, Manchester wants reasonable advance notice before specific payments are made.

In doing so, Manchester also says Relativity has failed to offer proof that talent would stop working with the studio "if unpaid altogether," failed to investigate the secured status of residual and participation obligations, and that the debtor is under obligation in bankruptcy to "negotiate favorable terms with payment recipients."

Relativity hasn't spelled out who is owed what, but the company has worked with some of the biggest names in Hollywood (Bradley Cooper, Will Smith, Tom Hanks, Angelina Jolie, etc.) who presumably have leverage to demand profit participation as part of their compensation package.

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