Relativity Bankruptcy: Judge Not Ready to Approve Sale

Tucker Tooley stepping down as Relativity president.
Ryan Kavanaugh

At Monday's hearing in U.S. Bankruptcy Court, Judge Michael Wiles held back full approval of the Relativity sale, saying everyone needed more time to review the details. As a result, everyone will be back in court Tuesday morning.

But while the judge withheld final approval of the sale of Relativity's TV assets, he complimented the parties and sounded as if he was predisposed to giving his nod."The record shows the sale was conducted in good faith," he said. "The sale of TV assets was made in sound business judgment. But parties are entitled to the details."

In a separate development, Relativity also announced that Tucker Tooley is stepping down as Relativity president, following a 30-day transition period. Relativity general manager Ramon Wilson,  who has been with Relativity since 2006, will serve as president on an interim basis.  Tooley, who joined Relativity in 2007, has had a hand in such Relativity movies as The Fighter, Limitless, Immortals and Act of Valor.

On Friday, Anchorage Capital Group, Luxor Capital Group and Falcon Investment Advisors (also known as the "Cortland Lenders") made a revised stalking horse bid of $125 million in canceled debt for Relativity's television assets. With approval from the judge, they will now take over a cash flow positive division that produces such shows including MTV's Catfish.

At today's hearing, a lawyer for Relativity called a motion to approve the sale of TV assets "uncontested," though he did note an objection from RKA, the P&A lender that previously sued Relativity CEO Ryan Kavanaugh for fraud.

RKA said it needed more time to review the sale. In court papers, they suggested Kavanaugh's group is essentially becoming the new debtor-in-possession under an intricate agreement that would leave all but the TV assets to Relativity.  A group headed by Kavanaugh — who is now being backed by VII Peaks Capital, Joseph Nicholas and OA3 — is putting up $60 million in cash and assuming $30 million in debt for assets such as distribution rights for unreleased films including MastermindsThe Disappointments Room and Kidnap as well as projects-in-development like Fighter 2 and Fletch Won.

Bennett Spiegel, the lawyer for the debtors, called RKA's objection "emotional."

Wiles, though, agreed that the stalking horse's winning bid was only presented this morning and that everyone (himself included) needed more time to review. "We have a little bit of a due process problem," he said.

The judge was asked to at least give preliminary approval, which led the judge to see if the many producers and distributors raising objections over the assumption of contracts had anything to say. This prompted a soft response from a packed crowd at the courthouse and others listening in via teleconference. IATM, licensor of the surprise hit Act of Valor, spoke up with some broad concerns. And although there's an additional hearing on Oct. 14 to consider more objections on the assumption of contracts, others, including producer Brett Ratner's attorney, raised concern about "splitting assets" before their objections were addressed.

Others were quite positive at the move to sell TV assets for $125 million.

Manchester, a subsidiary of Elliott Management and formerly one of the biggest critics of Relativity's Chapter 11, spoke in support of the sale. Under the deal, if everything goes according to plan, Manchester will put up $35 million in exchange for the remaining DIP loan and be put in first lien position.

If everything goes according to plan, the deal to sell Relativity's TV division will close on Oct. 20.

Even beyond that date, though, there will be a lot left to do. Before Relativity emerges from bankruptcy, Kavanaugh will have to present a plan for reorganization.

But what's occurred during the past week got one strong endorsement.

"At the beginning, this looked like a busted company," said a lawyer for the committee for unsecured creditors. "Nobody was happy how this case was set up. We had impatient creditors and negative press about Mr. Kavanaugh. It looked like doomsday for sure. What we have today is dramatically different. This is a classic restructuring. The committee is extremely supportive this is the right thing for the company and Kavanaugh (should be) back in charge."

Soon after today's hearing ended, Relativity announced that Tooley would be stepping down.

In a statement, Tooley said, "Now that the company has a clear path to emerge from Chapter 11, I have decided to re-focus my efforts on filmmaking and the creative side of the business. I expect to work closely with Relativity in my new capacity and will announce my plans shortly."

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