Relativity Bankruptcy: Sale Objections Pour In From Creditors, Netflix, Viacom, Labor Guilds

One large P&A lender argues a September auction is designed to enrich some of the other financial firms.

In advance of a court hearing on Friday, the Relativity bankruptcy continues to get close attention. Many are responding with objections and concerns to a proposal that would put the indie studio's assets up for auction in September. The biggest creditors express the strongest reservations while others doing business with Relativity — including Netflix and Viacom — believe the process is moving too fast.

Macquarie Investments, which has been identified as a secured creditor with a $32.4 million claim, potentially represents the most serious objection to date since Relativity filed Chapter 11.

The financial firm, represented by lawyers at Gibson, Dunn & Crutcher, says it "does not consent to the sale of these assets free and clear of its liens." What's more, Macquarie is attacking the prepetition lenders (Anchorage Capital Group, Luxor Capital Group and Falcon Investment Advisors) who have moved in front of the line as a result of providing $45 million in DIP financing. These firms, operating now as RM Bidder LLC, are primed to make the "stalking horse" bid at the auction next month, but Macquarie complains that the proposed "break-up fee and expense reimbursement are excessive" and that those other financial firms are "double dipping" at the expense of the Relativity estate.

And it goes further.

"The Stalking Horse APA and the Bid Procedures — separately and taken together — are highly confusing, incomplete, replete with inconsistencies, and unlikely to result in the Debtors obtaining the greatest value for their assets," argues Macquarie. "To the contrary, they are, quite obviously, designed to provide the Stalking Horse Bidder the highest value."

Macquarie argues that the process is being rushed, the assets being sold in piecemeal aren't clear, potential bidders will be confused, and the $250 million bid that RM Bidder is making represents an "inadequate benchmark bid because it purports to purchase assets in a manner that violates the rights of senior lenders in various respects."

Much of what's at issue relates to the interplay between the various lenders, obligations under intercreditor agreements, and how the winning bid will buy out collateral.

Macquarie has a security interest in the receivables of domestic distribution agreements — Netflix, iTunes, etc. — on some of Relativity's films through its post-release P&A loans. When Relativity filed Chapter 11, according to the firm's court filing, there were three outstanding post-release P&A loans on the films, The Woman in Black 2, The Lazarus Effect and Beyond the Lights.

And so, a buyer of Relativity's assets will believe it is getting the intellectual property and licensing income of these three films, but Macquarie wants to make sure its own interest is taken care of in the process — and at the moment, doesn't like the bidding procedure that's being proposed.

CIT Bank, which now owns the secured creditor One West Bank and its $28 million claim, has similar concerns over its interest in the films Masterminds and The Disappointment Rooms, though it doesn't go quite as far as attacking the other lenders. Mostly, it's looking to revise the process "to confirm and make clear that any bid for the Collateral relating to either Film must be in cash and in an amount sufficient to repay in full the Production Loan for the related Film." Otherwise, it says it can't get on board the bidding procedure.

Some objections to Relativity's sale are apparently so sensitive they can't be brought in public. Manchester Securities, which is owed $137.1 million (second to only Cortland Capital) has lodged its own motion under seal. In recent weeks, this financial firm has gone above and beyond in its due diligence by subpoenaing all sorts of information from Relativity and deposing Relativity's chief restructuring officer Brian Kushner. Although the motion itself is under seal, various exhibits are not. In perhaps a hint of what's to come, Exhibit A is The Hollywood Reporter's recent cover story on Relativity CEO Ryan Kavanaugh.

As for Netflix, the streaming giant has its own concerns, although it believes these can be addressed at the hearing scheduled on Friday.

"Netflix has no desire to disrupt a sale process that the Debtors and their professionals have devoted substantial effort to, and that may well be in the best interests of creditors," writes an attorney for the company. "At the same time, any sale process that includes assumption and assignment of executory contracts needs to protect the rights of non-debtor parties to the contracts being assumed and assigned. The Bidding Procedures proposed by the Debtors give rise to significant concerns in this regard, and should be modified to protect the rights of non-debtor contract parties."

Under Relativity's agreement with Netflix, the studio provides films and receives income. Not a problem, but one issue that's come up is that Relativity is in danger of not making its "yearly minimums," having only provided two films to Netflix this year.

Netflix wants to make sure it is able to "raise issues of adequate assurance" when the assumption and assignments of contracts get bandied in the auction process. It also believes there is a "serious timing issue," specifically the condensed timeframe of what's happening in early September. Netflix says this "means that parties to executory contracts would be required to raise any objections to assignment of their contracts to the successful bidder before knowing who the successful bidder is, and before having any information on which to evaluate adequate assurance."

The rushed process is something that others are also stressing to the judge.

For example, the Committee of Unsecured Creditors — which includes NBCUniversal — attacks the breakneck speed. "It has been impossible to evaluate the Sale Motion in any meaningful way," states a motion from the group. "Without a fair and reasonable sale process which provides third parties adequate information and the time to evaluate each of the Debtors’ businesses in order to formulate competing offers, it will likewise be impossible for the proper value of those businesses to be realized. It is a deeply flawed sales process."

Viacom agrees with that sentiment. The media giant is not owed a ton by Relativity, but does do a fair amount of licensing business with the studio (for example, Relativity's Catfish airs on MTV) and feels it needs more time evaluating the situation. "Relativity's motion papers give either no information or only the sketchiest of information about which of Viacom's contracts will be affected by the proposed sale," write company lawyers.