Rhythm & Hues Bankruptcy Spurs Explosive 'Liquidation' Suggestion

Life of Pi Film Still - H 2013
Fox 2000 Pictures

Life of Pi Film Still - H 2013

A hearing was held Friday in a U.S. federal bankruptcy court in the ongoing drama surrounding Rhythm & Hues, the VFX house behind the majority of the Oscar-winning visual effects in Life of Pi.

But the loudest noise was made Thursday night when a newly formed Committee of Unsecured Creditors filed an explosive document that trashed R&H’s leadership, expressing "serious reservations about the Debtor's business judgment and strategies."

R&H declared bankruptcy on Feb. 13 and has been seeking a quick mid-March sale. To keep the VFX house operating for the next few months, a bankruptcy judge approved $17 million in loans from Universal and Fox so that R&H could complete work on Universal's R.I.P.D., scheduled for release July 19, and Fox's Percy Jackson: Sea of Monsters, scheduled for Aug. 16.

GUEST COLUMN: Why VFX Houses Lose Money on Big Movies

But the Committee of Unsecured Creditors questions whether the plans in place are really better than just "closing the Debtor's doors and conducting an orderly liquidation of the Debtor's assets."

Such a move would no doubt be a huge blow for Universal and Fox, as well as Legendary Pictures, all of which hope to have R&H still working on their big-budget films. The bankrupt VFX house is said to have drawn the interest of South Korea's JS Communications, which reportedly has signed a letter of intent to acquire the company.

But in their filing, the creditors come very close to alleging malfeasance on the part of R&H's leaders in conjunction with Hollywood studios.

The creditors say that they met for the first time on Monday and have been attempting to get up to speed on the state of affairs. But after seeing the studios' $17 million in loans and the "hyper-accelerated sales process," the group declared that the "destiny of this case has already been determined."

Well, maybe not.

STORY: Visual Effects Society Calls for New California Tax Incentives

The creditor group says it was troubled to discover that in 2009 and 2010, R&H's principals "purported to borrow $14 million" from the company on an "unsecured non-recourse basis" to fund the acquisition of its headquarters. Now, it is reported that the principals pledged their notes receivable -- which the creditors call "the single most valuable asset of this estate" -- to Universal and Fox as security for the $17 million loan. The "benefit" of this arrangement is deemed "highly questionable," and, making matters worse, the creditors say that the building is in escrow.

"In the absence of the DIP Loan, those monies might have been the only unencumbered funds available to pay claims in this estate," the creditors write.

By agreeing to the loans from Universal and Fox, the creditors continue, not only did R&H give up the $5 million in proceeds from the sale of real estate and the potential recovery of $9 million from R&H's principals, but the company also "essentially confessed liability, liquidated their claims, secured their claims with all of the assets of the estate, and agreed to pay $500,000 of Fox and Universal's attorneys' fees."

The creditors say there is "no evidence" that going this route, completing existing work for the studios and competing for new work will yield substantial profits.

STORY: Nearly 500 Representing VFX Community Demonstrate on Hollywood Boulevard

"It is clear what Fox and Universal are getting out of the DIP loan," say the creditors. "Their projects will be completed, and then they will be at the front of the line to be repaid. It is not at all clear what other unsecured creditors are getting."

These unsecured creditors appear to be mounting a late attempt to put a stop to the loan, not all of which has been disbursed yet. Additionally, they hope to stop R&H's estate from paying out the studios' attorney fees. And, to top it all off, the creditors want a judge to reject the preliminary process for selling R&H.

"If the Debtor cannot continue operating its business and must close its doors, so be it," the filing states.

THR attempted to contact Lee Burger, president of R&H's film division, and R&H's legal counsel at Greenberg Glusker on Friday, but neither had been reached at press time.