Relativity Bankruptcy: Hedge Fund Files Appeal Over Planned Auction

Manchester Securities argued that Relativity's Chapter 11 was improper under an operating agreement.
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Heatherden Securities is looking to appeal a judge's order ahead of an auction over the assets of bankrupt Relativity Media.

The appellant is an affiliate of Manchester Securities, a subsidiary of Paul Singer's hedge fund firm Elliot Management, one of Relativity's earliest financial backers and a big creditor who has been investigating the circumstances that threw the Ryan Kavanaugh studio into Chapter 11.

Manchester made an objection over the bidding procedure over an alleged lack of authorization to dispose of assets.

According to papers filed last month, Manchester was a member of Relativity Holdings and has argued the bankruptcy is "ultra vires," or beyond the powers of the corporation's operating agreement. The firm, represented by attorney Evan Jones, also has alleged that chief restructuring officer Brian Kushner "is impermissibly conflicted," having been "handpicked" by senior lenders leading the process now and an example of an "extreme case of self-dealing.”

The other big financiers called Manchester's objection an "over-the-top gambit of a disgruntled debtholder bent upon utilizing the insider status of its affiliate to compel payment of its deeply subordinated debt claims."

At the hearing to discuss the issue, U.S. Bankruptcy Court Judge Michael Wiles rejected the objection because federal law had to come before an operating agreement on just one of the many Relativity companies. "You are replacing bankruptcy code," he told Jones. "Everything else you say is sophistry."

Bids are scheduled to come soon, with an auction taking place Oct. 1.

At this late hour, other motions and objections have been made, including from the U.S. Trustee over a bonus plan intended to incentivize top executives to stay on at the company through the sales process. There's also been a bid by IM Global to allow it to find a new distributor for Collide, a film that has garnered interest and is one of the assets listed for sale. These issues should be settled before the auction while Manchester's appeal remains uncertain.