Hollywood Guilds Fight to Save Residuals in Relativity Bankruptcy (Analysis)

Will residuals be paid? It’s complicated.
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Relativity's Ryan Kavanaugh

As a blizzard of legal papers arrived Thursday at a Manhattan federal court, signaling the start of Relativity’s bankruptcy, Hollywood guilds moved decisively to protect their members’ residuals from vanishing in the storm, a review of documents by The Hollywood Reporter shows – but whether those efforts will be successful is not yet clear and will play out in the coming weeks as proceedings continue and as the mini-studio accesses a lifeline loan approved by the court on Friday to keep its operations going.

Contrary to a published report, there is no “promise” that $8 million of Relativity funds will go to pay residuals. The reality is more complex, and in fact the initial loan approved by the court – $9.5 million to cover operating expenses over the next two weeks – has no allocation for residuals at all.

Later loan installments do include a budget item of $8.245 million for profit participations and residuals, but that is simply a forecast, subject to change, not an ironclad promise. Over the next 9 weeks, the aggregate lifeline loans – more formally, debtor in possession (DIP) financing – total $45 million (including the initial $9 million), but later installments are subject to complex conditions in the hundreds of pages of loan documents and court orders. A hearing is scheduled for Aug. 14.

And even that $8.245 million only represents obligations that are forecast to come due in the next nine weeks. Obligations that have recently come due but are as yet unpaid may amount to an additional $28 million, according to a Relativity filing. Those obligations are currently unfunded: they’re not addressed at all in the budget forecast and instead would likely have to compete to be paid out of existing assets.

“SAG-AFTRA, DGA and WGAW are closely monitoring the financial situation at Relativity and its related entities, including yesterday’s bankruptcy filing,” the guilds said in a joint statement to THR. “Our legal teams are working with the company, and will continue working with post-bankruptcy personnel, to ensure that all our compensation, residuals and related health, pension and retirement claims are properly identified and resolved through the bankruptcy process.”

One source of assets to pay talent and guild claims might be about $18 million that was held in a residuals and profit participations account at One West Bank. That will require a fight, because according to a filing, the bank swept that money out of the  account on July 17 to pay down a Relativity line of credit called the “Ultimates Facility” (ultimates are forecasts of motion picture revenue).

That sweep might not have happened had the revenues been processed through a separate, so-called CAM account at a different institution, as is common in independent film finance today. So the guilds or Relativity will likely need to try to claw back some of the swept funds. This may be possible, as the law provides that many transfers made in the ninety-day period prior to a bankruptcy filing can be reversed or “avoided,” in the sometimes arcane terminology of the statute.

Even if that money is recovered, it would leave approximately $10 million unpaid of the $28 million in residuals and participations obligations that have accrued. That would likely raise the question of how funds will be allocated for residuals as opposed to profit participations. It’s a sensitive issue, because it seemingly pits rank and file members against stars who have the bargaining power to demand and receive participations.

Yet another question is whether future residuals will be paid after Relativity exits bankruptcy, either as an intact entity or sold piecemeal. Here, the answer is usually yes, as the guilds have usually been able to obtain agreement that the buyer will pay residuals.

All of this is complex because, although residuals are a form of wages, they are not protected in bankruptcy law the way ordinary wages are. Nor are they covered by a statutory provision that applies to intellectual property licensing fees.

For those reasons, the guilds have had to actively participate in the drafting of motions and proposed court orders. They achieved several safeguards in the Relativity papers, most notably garnering approval of a motion to allow – but not require – Relativity to pay residuals and participations.

Other protections are buried more deeply in separate documents, such as a set of acknowledgements that the guilds in many cases have security interests in produced movies and TV shows and that those security interests may be the senior liens. Such liens generally give the guilds priority over other claimants to revenue from the projects, and those acknowledgements help insulate the liens.

But when DIP financing is made available to a debtor, it can take priority even over senior security interests, in effect jumping to the head of the “pay-me-first” line in a process called priming. To guard against that, one of the court orders includes language that the guild liens will not be primed.

All of these subtleties might seem far from the guilds' usual meat and potatoes – wages, residual formulas, working conditions and labor law. But in fact they’re the result of a 25-year campaign coordinated by the DGA, SAG/SAG-AFTRA and the WGA, in concert with outside counsel, to enhance the unions’ ability to get their members paid even when companies fail. Language in the guild agreements, coupled with provisions in movie and TV financing documents and an active participation in bankruptcy proceedings, have strengthened the unions’ positions.

As the remainder of Relativity’s summer of discontent unfolds, writers, directors, actors and others will no doubt be watching closely. Said the guilds, “As always, it is a top priority to ensure that our members are treated fairly and compensated properly for their work, even when a producer is in a distressed financial situation.”

Bookmark The Hollywood Reporter’s Labor Page for the most in-depth coverage of entertainment unions and guilds.

Email: jh@jhandel.com

Update 8/2/15 1:40 a.m.: Added paragraph re payment of residuals after the company exits bankruoptcy