Relativity Bankruptcy: Who's Getting Paid and Who's Getting Screwed

The company owes money to employees, vendors, Bradley Cooper, Brett Ratner and even a game show winner. What's the pecking order?
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Ryan Kavanaugh
Now that Relativity Media has filed for bankruptcy — one of the biggest in Hollywood history — who will be getting screwed?
 
Not the winner of Food Network's Great Food Truck Race, a show produced by RelativityREAL. Brian Kushner, the turnaround specialist who is charged with the mini-major's restructuring, believes the $2.5 million in reality television prize money is pretty important for saving the company from financial ruin. Not paying out, bankruptcy documents say, would mean harm to "innocent third parties," "negative publicity," diminished "value and appeal" of the company's TV competition shows, and distributors and other partners who might no longer trust Relativity and would "avoid working" with them.
 
But how about Hollywood A-list director Brett Ratner? The bankruptcy papers reveal that he's claiming owed fees for MTV's Catfish. Or how about about Procter & Gamble? Apparently, based on a review of the filings, the corporate giant is threatening to sue Relativity for the unauthorized use of "Tampax" in the Peter Farrelly-produced sketch-comedy anthology film Movie 43. All those who are in court, or just about to get there, are in a worse position than the winner of Great Food Truck Race.
 
 
The bankruptcy provides a rare look at the priorities for a large-scale studio that had its hands in film, television, music, fashion, sports and more. On Thursday, Relativity filed a petition for bankruptcy in New York. CEO Ryan Kavanaugh declared that the company "explored a variety of options to refinance Relativity’s debt" before settling on the decision. 
 
As of Dec. 31, the company had $560 million in assets, including $92 million in cash on hand, against $1.18 billion in liabilities. The crushing debt led the lenders to take over the company from Kavanaugh. Now, Anchorage Capital and Luxor Capital have put up $45 million in new financing for the distressed company. Relativity can pay its bills, and the lenders-turned-new-owners will facilitate a sale of the studio that is expected to close by October.
 
The first order of business, though, is ensuring that payments are made to those most necessary to continue operations. And thus, we get to see Hollywood's pecking order.
 
Of course, wages to Relativity's employees have to be paid. After layoffs this week, there are now 89 full- and part-time employees. Weekly payroll for these employees is estimated at $1.75 million, with $275,000 currently owed. Unless something unexpected happened, they'll be getting paid, though the top executives (surely Kavanaugh too) who are said to be owed will have to live with a $12,475 cap per the bankruptcy code. The bankruptcy papers say that making unpaid compensation to the large workforce is "critical to maintaining employee morale, retention and performance," but those running the show now "do not intend to seek to pay any Unpaid Prepetition Executive Compensation in excess of the Priority Cap."
 
Then, there's 760 temporary production personnel and a few dozen independent contractors. Relativity spends $5.55 million per month on these creatives, with just over $3 million owed. Possibly bad news for them: The restructuring chief and his colleagues "seek the authority, but not the direction, to pay" these obligations based on business judgment.
 
And how about residuals and profit participation? Up to $28 million is currently owed by Relativity. Again, business judgment comes into play, though Kushner writes that preserving the value of the library of film assets is "directly tied" to the ability to maintain new production and that failure to pay those obligations would "negatively impact" relationships with talent and other stakeholders like unions. Excellent news for Bradley Cooper, who starred in Relativity's 2011 hit Limitless.
 
If there's a particular group of creditors that looks primed to raise some hell over the bankruptcy, it's Relativity's vendors. Who are they? Corporate technology providers, equipment providers, film element providers, production staffing agencies, television production service providers and production location vendors.
 
These are deemed the "critical" ones, perhaps raising concern for those advertising agencies such as Carat USA and Palisades Mediagroup who are listed as Relativity's biggest unsecured creditors but apparently don't fit the definition of being critical.
 
It's reported in bankruptcy papers that "some of these film production and distribution suppliers have already stopped providing goods or services to the Debtors unless the Debtors comply with their restricted terms or pay all past due amounts in full."
 
Time for some hard bargaining.
 
Kushner is seeking authority to pay them only if they agree to freeze the old terms of their deals.
 
And even then, some hard choices are coming. Relativity's new stewards want to set aside no more than $6.4 million for these vendors. It's an amount that Kushner writes "represents less than ten percent of the total projected unsecured claims that may be asserted."
 
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