Relativity’s Emergence From Chapter 11 May Come Down to a Single Objection

The bank that extended a production loan on the forthcoming film 'Masterminds' is suddenly one of the most important players in whether the studio can put its plan for reorganization in motion.

The votes are in, and Ryan Kavanaugh's plan for the reorganization of Relativity Media has commanded a huge amount of "accept" votes from creditors. But don't count on the studio behind such films as Immortals, Limitless and The Fighter emerging from Chapter 11 bankruptcy just yet.

Sure, some of Kavanaugh's recent antagonists including Cortland Capital and Manchester Securities have voted to accept the plan, as has the Directors Guild of America and the Screen Actors Guild, along with more than 85 percent of unsecured creditors. There are certainly notable objectors, too, including Nicholas Sparks Productions (which co-produced Relativity’s Safe Haven) and Google, which is a bit odd considering the fact that TomorrowVentures, the venture fund of Google chief Eric Schmidt, is now pledging money for a restructured Relativity.

But the most important opponent of the reorganization plan appears to be CIT Bank, which extended tens of millions of dollars for Masterminds, an action-comedy starring Zach Galifiankis and Kristen Wiig, and The Disappointments Room, a horror film toplined by Kate Beckinsale. As part of its plan, Relativity plans to release both films in the coming year.

CIT Bank's vote to reject the plan is important because it literally belongs to a class of its own.

Under bankruptcy law, when creditors vote, claims are separated by classes. CIT Bank belongs to a class called "production loan secured claims," which is distinct from the other classes including "pre-release P&A secured claims," the "post-release P&A secured claims," the "secured guilds claims" and the "general unsecured claims."

What matters here is a general rule in bankruptcy law: In order to confirm a reorganization plan, the proponents need to cross certain voting thresholds for approval in each class. Here, CIT Bank has thrown its 100 percent "Class E" claims against the plan. 

But, that's not the end of the matter, because there's also something called a "cram down" whereby a plan can get approved over the objection of an non-consenting class. Bankruptcy experts consider this to be one of the most complicated areas of what they do, but it generally means a creditor can be compelled to accept the plan if a judge deems the plan to be fair and equitable. Often, in these circumstances, a creditor is allowed to retain contractual rights and take deferred payments or the  “indubitable equivalent” of its claims.

On Tuesday, though, as the votes were being tabulated, CIT Bank filed an objection that argued that the plan proponents cannot take advantage of the "cram down" provision of bankruptcy law.

"The Proposed Plan is not fair and equitable to the Lenders as it neither provides for them to retain their liens nor for their realization of the indubitable equivalent of their claims," stated CIT Bank's attorney.

The objection notes that Relativity intends to extend the maturity date of loans by as much as three-and-a-half years — in the case of Masterminds, that would be March 1, 2019 — but says those loans have been structured in a way that the loan is repaid when a film is completed, before the theatrical release. "In other words, before the risk of the Film's box office performance success might become a factor," says CIT Bank, noting that Masterminds is set to be released on Sept. 30.

The timing of film releases and the push-off on debt due is just part of the objection.

CIT Bank also raises the issue that it may be losing enforcement rights under replacement debt notes, and further issues concern about Netflix's objections related to the possibility that Relativity might not meet its commitment on the delivery of films. If Netflix is able to cancel its deal, and Relativity loses a principal source of revenue —  hundreds of millions in licensing fees — CIT Bank wonders if this "could affect the Lenders' ability to realize upon their Collateral and further add to and increase the risks that rightly belong to the Debtors, but that the Lenders would be required to assume."

Then, there's the new financing coming in, which in most respects represents a positive for Relativity, but not necessarily for an old lender potentially forced to take a subordinate position to the new investors. Kavanaugh has announced that Kevin Spacey and Dana Brunetti will be taking prominent roles at Relativity and that there's more than $100 million in exit financing. However, there have been no filings about this from Team Kavanaugh at the bankruptcy court. After noting that "events reported in the press may never actually come to fruition," CIT Bank addresses the impact of the in-flowing money.

More than $40 million will be used to do P&A on Masterminds, and whoever is putting up the money will be replacing funds from RKA Film Financing (which is still in active litigation with Kavanaugh), which CIT Bank frames as ensuring the bank will be losing its first lien position.

"As set forth above, the Proposed Plan strips the Lenders of nearly every right customary in the production loan market," says CIT Bank, which is also pushing to delay the confirmation hearing at least a week. "The Proposed Plan does not even attempt to compensate the Lenders for the loss of those rights."

Relativity wouldn't comment about what's happening, but a source familiar with discussions says the two sides are talking about how to resolve the sticky situation ahead of an all-important court hearing on Monday. The source adds there's a difference of opinion at the moment on whether Relativity can effectuate a cram down.


The debtor is moving ahead with seeking confirmation of the reorganization plan. In a new court filing, Relativity says its plan embodies "comprehensive settlements" with most of its lenders including Cortland, RKA, Manchester, Macquarie and others, though it's also noted there's "a carve- out for willful misconduct and gross negligence." Relativity also addresses the appointment of Spacey and Brunetti, saying it anticipates "significantly enhanced earning potential for their future films produced under the stewardship of these industry veterans."

What's more, Relativity tells the bankruptcy judge, "Here, there can be no dispute that the Debtors will emerge with a vastly improved capital structure, as the Plan delivers the company’s balance sheet by approximately $500 million and calls for the Debtors to obtain new credit facilities and equity contributions."

Relativity also addresses most of the objections, including the one from Netflix. The debtor admits that it won't make its obligation to deliver a set minimum on films, but also points to another part of the contract that states the penalty for failure to do so is monetary ($5 million per film) and that the penalty is excused where Relativity makes "good faith efforts" to release the minimum targets. Relativity says it made such efforts and deflects blame for its inability to deliver enough films in 2015.

Other objections from Google and Comcast (over advertising debt), QNO (over the assumption of a contract for the film Somnia), Viacom (over Relativity's commitment to place advertising for the Brick Mansions), The Weinstein Company (over The Crow) Nicholas Sparks (over profit participation from Safe Haven) and Brett Ratner (over a lingering dispute over participation on Catfish) have been tabled to Feb. 17, which is of course, after next week's confirmation hearing.

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