Relativity's Ryan Kavanaugh, Film Financier Duke It Out In New Lawsuits

RKA Film Financing calls the Relativity CEO a "con man" in its second lawsuit against him; Relativity claims the backer is trying to disrupt talks with new investors.
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Ryan Kavanaugh

Relativity and a film finance company are feuding in a pair of new lawsuits.

Hardly a week since RKA Film Financing sued Ryan Kavanaugh for allegedly failing to pay millions of dollars owed, the company filed a second lawsuit against the Relativity CEO, accusing him of fraudulently mismanaging $75 million in funds from RKA. Then the same morning, Relativity filed its own lawsuit against RKA, claiming the company's litigation is a calculated bid to disrupt the embattled studio's negotiations with new investors.

"This case is about a con man — Ryan Kavanaugh — who through dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate their funds," opens RKA’s complaint, filed Friday in New York state Supreme Court.

The company claims he raised money from RKA for the print and advertising (or distribution) costs of specific films, including the studio's delayed Masterminds and upcoming Solace, The Disappointments Room and Before I Wake, then diverted the funding into other company costs like salaries and personal expenses like helicopters for Kavanaugh.

Relativity fired back in a lawsuit for $200 million, claiming in the complaint filed in New York state court RKA knew the loans entered into a general account not required for spending on specific films. "RKA could not have expected, and RKA knew that Relativity did not, borrow these substantial funds for the purpose of having these tens of millions sit unused in a bank account for months," says the complaint, which requests the court declare it didn't spend RKA funding inappropriately.

Says the studio in a statement to The Hollywood Reporter, "As predicted RKA filed a malicious, patently false lawsuit against Ryan Kavanaugh which was conveniently timed to try to interfere with a transaction highly beneficial to Relativity. RKA has been engaged in an underhanded scheme to extract money from Kavanaugh, the company and its lenders all of whom have refused to submit to RKA’s outrageous demands."

RKA frames the new lawsuit as a sequel of sorts to the complaint it filed against Kavanaugh on July 15, in which the company claimed Kavanaugh’s violation of the terms of its loans to him led to a new deal in which he would either pay $7.5 million to RKA or render the company the ownership stake his River Birch Funds holds. The company claimed he never did either.

"Neither I nor the company are worried about these frivolous claims from RKA. I will not be making any payment to RKA," responded Kavanaugh in a lengthy statement on July 16.

RKA returns in Friday’s lawsuit, “After repeatedly throwing Kavanaugh and Relativity Defendants a lifeline to attone for their fraud, and after being rebuffed and fed self-serving lies, RKA is left with no other choice [but to litigate].”

The company claims it agreed to lend funding to Relativity for 10 films (The November Man, The Best of Me, Beyond the LightsThe Woman in Black 2, Black or White, The Lazarus Effect, Solace, Masterminds, Before I Wake and The Disappointments Room) on the conditions Relativity would only spend the funding on distribution costs for the specified films and the films would be released before September 30, 2015.

In April, the company allegedly requested information on the spending for the four unreleased films, Solace, Masterminds, Before I Wake and Disappointments Room. The company claims the info it received indicated Relativity had taken $73.6 million for the four films, but only spent $1.7 million on their distribution. Further, the company claims Relativity then said Solace would likely never be released and The Disappointments Room and Before I Wake would not until after September 30.

The company claims Relativity denied or dodged requests to inspect the studio's accounting for weeks. Then, "On a call with an RKA representative, Kavanaugh admitted that he and other Relativity Defendants had, in fact, directed Relativity to use the P&A funds designed specifically for P&A ... for Relativity's own corporate purposes," states the complaint.

Then RKA learned of Relativity's ongoing financial struggles, continues the complaint. (Kavanaugh has in recent months fought to hold control of the ministudio, finding partners to pay off $120 million in debt by the end of June and fending off board members he claims were attempting a takeover). The production company’s financial problems led RKA to believe further that Relativity had never intended to spend RKA's loans on film distribution and instead spent them "to mislead investors and keep the company afloat."

Represented by four attorneys from Latham Watkins, RKA claims fraud, conspiracy to commit fraud, negligent misinterpretation, conversion and breach of the covenant of good faith and fair dealing. The company wants $90 million in damages.

In the countersuit, Relativity claims the money from RKA went into a general account from which the studio could draw for specific' films previous or anticipated distribution expenses. The studio argues its use of funds from RKA falls under the second category. "Relativity had no obligation to direct these proceeds towards any actually paid or incurred expenses," states the complaint.

Relativity accuses RKA of alleging mismanagement to damage Relativity's relationships with prospective investors and thereby force Relativity into borrowing more.

"By baselessly contending that Relativity had breached the terms of the RKA P&A Facility by misusing loan proceeds, as alleged above, RKA took intentional acts to disrupt Relativity’s economic relationship with prospective investors," states the complaint.

Represented by Jones Day's Thomas Cullen and Todd Geremia, the studio claims tortious interference with prospective economic advantage and violations of California’s unfair competition law and wants the court to declare its spending of RKA loans appropriate.

Representatives for RKA declined to comment on the suit from Relativity.