Relativity Creditors Reach Settlement Over Big Hits Like 'Bridesmaids,' 'Fast and Furious 6'

The Committee of Unsecured Creditors threatened to sue over the circumstances that in 2011 caused Relativity to shed its stake in a slate of Universal films.

As the Chapter 11 bankruptcy of Relativity Media sprints to a hearing next month over a proposed plan for reorganization, and as Relativity shocks the industry with the announcement that actor Kevin Spacey and producer Dana Brunetti will be running the film and scripted TV business, a new settlement has been proposed on a huge dispute that's until now been lurking in the shadows.

The subject of the dispute is how Paul Singer's hedge fund, Elliott Management, managed in 2011 to obtain Relativity's interest in hits including Bridesmaids, Les Miserables and Fast & Furious 6 as well as bombs like Battleship and Tower Heist.

Before Relativity was taking a quantitative approach to producing its own films, it was working with Elliott to fund a slate of films — dubbed Beverly 2 — for Universal Pictures.

Indebted at the time to Elliott and its affiliate Heatherden Securities Corp., Relativity transferred its Class A stock holdings in Beverly 2 in 2011 for just $1.

But according to a motion for a proposed settlement filed late Friday, the Committee of Unsecured Creditors — which includes NBCUniversal, which we previously reported was in arbitration with Elliott over profits on the Beverly 2 slate — has been making an argument that Relativity was already insolvent in 2011.

The Committee threatened to bring an adversarial proceeding to essentially recover Relativity's interest in what it transferred as a so-called "fraudulent conveyance."

Doing this would potentially tie up the Relativity bankruptcy in protracted litigation, plus there was no certainty that the action would be successful. Elliott and its affiliates were making the counter-arguments that potential claims would be time-barred, the value of the films in 2011 was low and Relativity got enough in its 2011 deal. Plus, Elliott disputes Relativity was really insolvent back then.

If a judge approves the settlement, the two sides can avoid a legal war over this.

The settlement agreement has been drafted in a way whereby the unsecured creditors hope to increase their share of money they'll be due from a reorganized Relativity. This would occur because Manchester — another Elliott subsidiary that asserts it is still owed hundreds of millions from Relativity — would fix its claim at just $137 million and waive its rights to anything from the first $35 million in distributions to general unsecured creditors.

"If approved, due to the size of the Manchester Claim, this Settlement Agreement may have the direct result of substantially increasing the percentage return to general unsecured creditors by at least a factor of two," states the motion.

Additionally, the settlement likely ensures Elliott is on board the Ryan Kavanaugh plan for reorganization, because the agreement stipulates that if Manchester objects to the plan, or the court denies confirmation of the plan, or the judge allows the Relativity estate to be liquidated instead, the Singer companies would be waiving their right to the first $70 million in distributions.

In exchange for this, the Committee will give up the right to sue on its potential claims.