Relativity Bankruptcy: Ryan Kavanaugh Feuds With Studio's Chief Restructuring Officer

Ryan Kavanaugh Cover Splash Without Text - H 2015

As the calendar year closes and Hollywood looks ahead to what's upcoming, one of the bigger mysteries involves whether Relativity Media emerges from bankruptcy to become a powerful competitor to the five major film studios.

For that to happen, Ryan Kavanaugh's plan for reorganization has to be accepted. His company slipped into bankruptcy upon the maturity of substantial debt, and amid jockeying with financiers, Relativity took an important step by coming to an agreement to sell off its cash flow-positive unscripted television division for $125 million. Challenges remain, and creditors with liens on assets are still agitated.

On Wednesday, a bankruptcy court was scheduled to hear Relativity's motion to approve a disclosure statement in connection with the plan for reorganization, but as throngs gathered at the courthouse for a separate matter involving Bernie Madoff, the Relativity case exploded with a new development.

Brian Kushner, chief restructuring officer at Relativity, submitted a declaration that exposes some of the backroom drama between his company FTI Consulting and Kavanaugh.

According to Kushner, Kavanugh never wanted to hire an outside firm to oversee Relativity, but the creditors insisted upon it. 

"Because of my views on the financial strength of the Debtors differing from Mr. Kavanaugh, there was almost instantaneous animosity between Mr. Kavanaugh and FTI generally and me specifically," states Kushner. "As a result, as my team and I became more integrated into the Debtors’ businesses, Mr. Kavanaugh became increasingly unavailable, focusing even more on his attempt to woo new investors, ignoring the immediate liquidity concerns of the Debtors."

After Relativity filed Chapter 11, the relationship hardly got better. 

Kushner says that Kavanaugh was upset with how Relativity's sale was primed to generate only $250 million when Kavanaugh's financial advisors were valuing the company at $2 billion.

By late September, Kavanaugh is said to have drafted a memorandum spelling out grievances with FTI. On Dec. 8, Relativity's lawyers also sent a letter (see here) to the judge outlining its concerns with FTI's handling of its bankruptcy and alleged failures to go to the board on key decisions. Among the grievances: failure to pursue a $2 million offer for Relativity's fashion division, a directive not to release the film Masterminds in foreign markets before a domestic release, the termination of employees at the digital studios division, how pay cuts for senior managers were effectuated and the retention of senior executives like then-CFO Andrew Matthews. Kavanaugh was also upset by the termination of Danny Stepper and Happy Walters.

"Mr. Kavanaugh alleges that the terminations spearheaded by me led to limitations on available staff able to articulate the value proposition of key divisions to potential investors," says Kushner. "The one such example articulated by Mr. Kavanaugh was the availability of an executive to respond to an inquiry made by the Carl Icahn team in connection with the Debtors’ Chinese joint venture assets. Additionally, Mr. Kavanaugh complained that he had been excluded from the sale process altogether and was unable to add his input with respect to presentations to potential purchasers and meet with potential investors to explain his vision for the business."

Even small stuff like the screening of a film, Kidnap, became fodder for fighting.

"According to Mr. Kavanaugh, I became inappropriately irate when the producers refused to deliver a print of the film to be screened and the costs in the thousands of dollars was an unneeded expense on the estate," says Kushner, defending himself by pointing out that the producers would not release the film for screening, that there was litigation brewing over the film and more.

Here's Kushner's full filing, which argues in one section, "Mr. Kavanaugh's complaints about the sale process are no more than complaints about his not being permitted to control it and use it as a platform for restating his vision to turn buyers into investors for his benefit."

In a statement in reaction to Kushner's filing, a spokesperson says, "No one has more passion for Relativity than Ryan Kavanaugh, and he has worked tirelessly to strengthen Relativity’s balance sheet and capital structure. FTI made numerous missteps that cost Relativity and its lenders millions of dollars, and this filing represents little more than sour grapes following the firm’s termination by Relativity earlier this year. Kavanaugh continues to work with the Board and all advisors to guide the company toward emergence from Chapter 11 bankruptcy with a robust slate of content and positioned for long-term success.”

Kushner is bringing the controversy public just as many of the studio's creditors are reasserting themselves over the reorganization plan by objecting to the debtor's disclosure statement.

Relativity envisions releasing seven films in the next 18 months including action-comedy Masterminds, starring Zach Galifianakis and Kristen Wiig, and action-thriller Kidnap, starring Halle Berry. Relativity believes it will eventually get into the black with its film distribution strategy, targeting a $105.6 million profit by 2017 on the back of such pics as The Crow (expected to generate $107.7 million in revenue), Hunter Killer ($124.3 million), Immortals 2 ($146.1 million) as well as Masterminds ($125.4 million) and Kidnap ($85.6 million). The films are subject to distribution costs.

But some objectors like lender CIT Bank have told the judge that Relativity hasn't adequately recognized the implication that movies like Masterminds are impaired and how lenders could take collateral by seizing the films. And the financial institution also has concerns about how Relativity is going to raise new money to execute advertising needs.

"Without material new capital, it is not realistic for Debtors to plan to emerge from Chapter 11 as a major studio," stated CIT Bank in an objection on Monday.

Lenders are also questioning what's really different now — how a studio that wasn't profitable before bankruptcy suddenly is going to make a miraculous turnaround.

VII Peaks Capital, which once was primed to put up $30 million for Kavanaugh's group, raises other objections. Among them, according to its own court filing, "There appears to be no explanation as to how Mr. Kavanaugh's proposed capital contribution entitles him to such a large percentage of the reorganized Debtor or Debtors."

What's more, some of Relativity's legal problems that preceded the bankruptcy haven't gone away. Take RKA Film Financing, which in July sued Kavanaugh and alleged he had misappropriated P&A funds

On Tuesday, RKA noted it is "particularly impacted by this lack of clarity in the Plan and Disclosure Statement regarding the continued viability of such claims following Confirmation of the Plan."

With such drama swirling, U.S. Bankruptcy Judge Michael Wiles told the parties today he needed additional time to review the disclosure statement. A spokesperson for Relativity characterizes this as "common in complex [Chapter] 11 cases."