Relativity Bankruptcy Judge Rejects Biggest Objection to Studio Sale

U.S. Bankruptcy Court Judge Michael Wiles rejected Manchester Securities' arguments of its rights under Relativity's operating agreement, clearing a major hurdle in the sale of the studio.
AP Images
Ryan Kavanaugh

Unless something quite unforeseen happens, an auction for Relativity Media will be held on Oct. 1.

On Tuesday, U.S. Bankruptcy Court Judge Michael Wiles presided over the latest hearing in one of Hollywood's biggest-ever Chapter 11 filings. This one related to financing put up by three lenders who will become the "stalking horse" bidders at the auction. It also concerned the overall legitimacy of the sale.

Manchester Securities, a subsidiary of early Relativity backer Elliott Management and one of its largest creditors, attempted to throw a wrench into the sales process by arguing that its rights under Relativity's operating agreement were being trampled. Evan Jones, an attorney for the huge hedge fund, told the judge that he had slept on a couch several days while putting together that agreement in 2012 and urged the judge to accept his client's argument that disposal of Relativity's assets — which includes 27 films in development including The Fighter 2 — couldn't happen without his client's consent.

Judge Wiles rejected the arguments, clearing the most significant objection to a quick sale of Relativity.

At issue was the relationship between a company's charter, enforced under state law, and the powers invoked by the Supremacy Clause of the U.S. Constitution, giving federal judges the ability to adjudicate what happens to a company in the bankruptcy process. The judge wasn't pleased to hear his authority was potentially usurped. "You are replacing bankruptcy code," he told Jones. "Everything else you say is sophistry."

Wiles cited the "very clear language of bankruptcy code," referring to the part that allows a debtor-in-possession to largely exercise business judgment in the disposal of assets to pay creditors, and shrugged off the objections.

Jones tried to argue that if a company charter required a company to only be in the film business, a debtor couldn't use the bankruptcy process to sell rocket fuel. "I think I'm getting traction with the court here," said the Manchester attorney optimistically.

"You're misperceiving," responded Judge Wiles to the boisterous laughter of those in the courtroom.

The failing of Manchester — after a lunch break, the hedge fund announced it had settled its remaining issues related to liens, administrative expense claims and consultation rights — plus a retreat by RKA Film Financing -- the P&A lender that has filed lawsuits against Kavanaugh for allegedly failing to pay millions of dollars owed and fraudulently mismanaging $75 million in funds — means that the biggest hurdles for the sale are now gone. At the hearing, an attorney for RKA said he would be withdrawing its objections to the sale and DIP financing after unspecified accommodations were made.

"I applaud the parties for working things out,” said the judge.

This follows two weeks where Relativity's lawyers scrambled to resolve other objections including those from the Committee of Unsecured Creditors. The court hearing was packed with high-powered lawyers representing a number of companies and constituencies, but many didn't speak. The issues of timeliness and inadequate information have been dealt with along with issues related to fees and costs. To take care of the objectors, the stalking horse bidders dropped the breakup fee, put conditions on their exit fee, waived matching rights on equal bids, increased the wind-down budget 20 percent and more.

The hearing also addressed whether Relativity's board properly delegated powers to chief restructuring officer Brian Kushner. Again, it was Manchester who brought this issue to the table after doing discovery and even urging a delay of today's hearings to conduct more investigation. But Relativity agreed that it would take consummation of any sale to its board, which took care of that issue.

Manchester could bring claims once the sale has completed. Today, the judge assured the hedge fund that if there were any inappropriateness or conflicts of interest in the way Relativity was brought to bankruptcy, It would have its day in court on that matter. Other parties from Netflix to Viacom have reserved rights to their potential claims.

In the early part of the hearing, the judge approved motions to pay critical vendors, residuals and participations and reality TV prize money as well as the studio’s so-called cash management and utilities.

That ruling on residuals is significant given previous objections to paying $8.3 million over the next few weeks. A freeze on residual payments would have affected thousands of actors and actresses who have worked on Relativity films and TV projects over the years, including some of the biggest names in Hollywood. Relativity's lawyers warned that it would disrupt relationships and make it tough to pursue new productions, but by the time the issue came to hearing, it had been resolved. The motion was approved without any controversy.

The amount of paperwork created by Relativity’s Chapter 11 filing has been staggering. There are now nearly 40,000 pages of documents available to parties who have signed nondisclosure agreements. To date, 74 nondisclosure agreements have been sent out, of which 26 were signed, and 20 potential bidders have accessed the data.

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