In a damning assessment of Relativity Media and its board and managers, the trustee in the company’s bankruptcy case has filed objections in U.S. Bankruptcy Court in New York, calling into question not only “substantial” payments to the company’s co-founder Ryan Kavanaugh but also saying the books and records were in “disarray.” The trustee noted that the company has not filed timely tax returns or operating reports or paid bankruptcy fees it owed.
According to documents, Kavanaugh possiblywas paid $2.6 million while the company was trying to make ends meet and while Relativity was laying off its staff right before the holidays in 2016. The Debtors “paid substantial sums to its then co-manager Ryan Kavanaugh while it was unable to pay even administrative claims in accordance with the 2016 Plan.”
U.S. Trustee William K. Harrington makes a stunning observation in Tuesday’s filing (read it here): that the company’s books and records are in disarray, and the Chief Revenue Officer cannot account for many of the transactions.
“This is a case that cries out for a robust investigation,” Harrington wrote.
Enter UltraV, a company that came in to acquire Relativity out of bankruptcy. It, as we have reported previously, entered into a consulting agreement with Kavnaugh to pay him $10,000 per month plus expenses for a year. He also stands to collect a one-time payment of $5 million if UltraV reaches a certain valuation.
“Upon information provided to the United States Trustee by the Debtors and as confirmed by testimony at the Meeting of the Creditors, the Debtor’s records show that the Debtors may have paid Kavanaugh approximately $2.6M in salary between April and November 2016.” The information first was found by Deadline sister publication Variety.
It also said that the court should not make a “good faith finding” given that the Debtors and the UltraV group “engaged in arm’s length and spirited negotiations over the terms of the proposed DIP financing, including size and terms … Kavanaugh who stands to benefit from a proposed sale to UltraV under terms of the Consulting Agreement, had access to the Debtor’s computer systems and bank accounts during the time the DIP Facility was negotiated.”
Indeed, the trustee noted that Kavanaugh had access to the company’s computer systems (including its email and bank accounts) throughout the period when the debtor-in-possession financing was negotiated. He didn’t disconnect from the computer systems until May 8 and continued to have access to bank accounts until May 12.
Without evidence showing that Kavanaugh was not involved in the negotiations of the DIP Facility and without knowing that this was not unduly influenced or interfered with by UltraV, who was paying Kavanaugh as a consultant, the Trustee argues that the Court should withhold its good faith finding.