Relativity Liquidation Attempted After Ryan Kavanaugh Allegedly Freezes Out Co-Management

JGJ Equity Holdings tells the judge about delinquent taxes and ongoing losses and raises questions about the "effectiveness and trustworthiness of management."
Getty Images

"The Plan has failed..."

That's what U.S. Bankruptcy Court Judge Michael Wiles was told late Wednesday by two parties with interests in a studio that helped produce films such as The Fighter, Limitless and Beyond the Lights and the TV show Catfish

Relativity, which took a quantitative approach to making films and TV shows and burned through hundreds of millions of dollars in financing, declared Chapter 11 in July 2015.  Less than nine months later, with some of the largest law firms and financial consulting firms in the United States working on the case, the studio emerged from bankruptcy by selling off its television division, reducing its debt load by about $630 million, raising new financing, bringing aboard new management and more.

But two of its latest films bombed (Masterminds and The Disappointments Room), and Relativity continues to struggle — maybe more so than previously reported.

In a motion to convert Relativity Media's bankruptcy case from Chapter 11 to Chapter 7 (liquidation), JGJ Equity Holdings talks of how the reorganization plan called for a new financing round but a lack of interest by others in putting any more money into the studio. "Accordingly, several material defaults have occurred under the Plan," says the JGJ motion.

JGJ also describes its frustration with the current state of affairs.

"Since September 2016, despite its status as a manager of the parent company, JGJ has been shut out of the affairs and operations of the Reorganized Debtors," continues the motion. "Repeated requests for documents and information have been disregarded. The only exceptions were when the company had isolated sales of property which required the consent of JGJ. Kavanaugh was simply operating without the consent or participation of JGJ. Through counsel, JGJ repeatedly advised the company and its counsel that Kavanaugh was acting without the requisite authority, at odds with the terms of the controlling Operating Agreement."

There also appears to be a developing tax situation.

"Because of the bankruptcy, there are 2 different returns due for 2016," states JGJ. "The first return is already delinquent; the second will be due in March. In turn, each of those two consolidated tax returns have at least two key aspects. First, there is cancellation of indebtedness that must be allocated to the current and/or former members of Relativity Holdings, in an amount in excess of $100 million dollars. Second, there are operating losses in excess of $50 million dollars that must be allocated."

Tens of millions of dollars in payments are also said to be owed in professional fees as well as a matured loan during the time of the auction for the television division.

"Although JGJ is a Co-Manager of Relativity Holdings, it has been effectively frozen out of all decision making and has not obtained access to even the most rudimentary information about the Reorganized Debtors," complains JGJ. "Given the material defaults under the Plan, the Reorganized Debtors' ongoing losses and lack of liquidity, and the questions about the effectiveness and trustworthiness of management, it is necessary and appropriate for the Court to convert these cases to one under Chapter 7 so that a trustee may take charge of the modest remaining assets, liquidate them, and distribute the proceeds accordingly."

Kavanaugh didn't immediately respond to an opportunity to comment.