Relativity Lawyers Allege Serious Missteps By Bankruptcy Consulting Firm

EXCLUSIVE: Lawyers for Relativity are questioning “a number of disturbing trends” undertaken by FTI Consulting regarding actions they have engaged in concerning both its television and film business, its corporate governance, its sale process, and the digital studios, including that it made decisions without board approval or consultation. Those decisions included hirings and firings and reducing salaries, including that of Relativity head Ryan Kavanaugh’s “in excess of 99%” followed by telling the CEO that he should leave the company entirely to avoid confusion among employees.

The complaints and accusations were outlined in a confidential letter (read it here) obtained by Deadline that was sent December 8 from lawyer Van Durrerr of Skadden Arps to FTI’s lawyers.

The Relativity lawyers note, for instance, “after three months of control by FTI, the debtor did not obtain any bids for its business other than the stalking horse bid,” but still managed to pay themselves over $4M in fees. In fact, while not obtaining another bidding, FTI managed to approv its own fee requests. They also state, “in a contested litigation, these facts will be evaluated by an impartial decision-maker.”

In other words, they are prepared to litigate and have, indeed, asked FTI for “a litigation hold on documents, including email and text. They are requesting emails from inside FTI and asking for “an immediate production of all email and text message communications, referring or relating to” Relativity and third parties, “including Cortland lenders and/or their affiliates or syndicate members.” They are suggesting a mediation.

FTI Consulting was hired in by Relativity to help the company sort through its finances and assist it through the Chapter 11 bankruptcy process. Relativity lawyers noted that they started finding these problems after the sale of the television division.

And as far as the film business goes, Relativity alleges that there were “multiple misstep” by FTI, citing refusing to approve the sale of the film Collide and failing to consult with its board, and making decisions that ended up preventing a paydown of its debt load and caused further “difficulties” with vendors. The Eran Creevy-directed movie starring Nicholas Hoult, Felicity Jones, Ben Kingsley and Anthony Hopkins had been due for theatrical release in the U.S. on October 30 but was stymied by the bankruptcy. The film was then later bought by Open Road and IM Global and is now scheduled for release in April 2016.

They say that FTI earmarked 230 vendors as “critical,” and among those 96.5% served that division. Of those deemed “critical” 84% were paid, however according to the letter, “FTI disregarded repeated pleas to honor obligations to key film vendors, including payroll companies.”

In the area of corporate governance, Relativity alleges that FTI made many business decisions without board approval or even consultation. Among those, they claim, were hiring and firing decisions and as a case in point, they mention the firing of Relativity chief financial officer and co-chief operating officer Andrew Mathews which was later reversed. “When the board discovered this reversal through probing on a board call … the CRO explained that the decision ‘resolved several issues’ with Cortland lenders on the DIP financing.’ Assuming this is true, the board deserved to hear about it, and make their own judgment, in real time.”

Also, Relativity claims that FTI made salary and bonus decisions without board involvement and pointed specifically to salary cuts of 20% that were implemented across the business “although,” the letter states, “not one cut was implemented in the television business.”

Specifically to do with Kavanaugh, Relativity lawyers say that “without explanation, one executive suffered a salary reduction of in excess of 99% — Ryan Kavanaugh. During this same time frame, the CRO encouraged the CEO to absent himself from the company to avoid ‘confusion among employees,’ and also suggested on multiple occasions that the CEO should resign.”

They further state that although roughly 33% of Relativity’s personnel were let go, none of those leaving the company worked in the television division.

And then there is the sale process where Relativity claims that on June 29 of this year, Catalyst purchased the term loan A position for $140M “and had signed commitments to invest an additional $170M — more than the debtor needed to follow through on its business plan.” However, three months later (and they cite Oct. 1), they say that FTI failed to get anymore bids past the stalking horse. Specifically, the letter states: “Setting aside questions of blame, let’s focus on responsibility. During the pre-petition period, no estate professional was paid more than FTI (over $4M).”

In terms of the film side, Relativity claimed that it had “multiple films ready for release, and foreign output distributors were prepared to make payments to reduce outstanding obligations against such films following the petition date.” But FTI instructed outside lawyers to send cease and desist letters to the distribs “which prevented paydown of debt, and continuing difficulties” with RKA (which was responsible for prints and advertising) and vendor CIT. They said, once again, the board was not consulted.

On the eve of filing their Chapter 11 papers, Relativity, the letter states, “had a proposal for the sale of the film Collide” but that FTI “refused to approve the transaction, and later approved a sale of the same film for 75% less, with payment defered a year.”

Also, they allege mistakes also with Relativity Fashion and Digital Studios. Specifically, Relativity claims that “an insider” (no, they didn’t name that person specifically), offered them $2M to take the fashion division out of the bankruptcy. “Without consulting the board, the CRO determined not to pursue the offer and terminate key personnel within the Fashion division. The consequence was the insider acquired the business for no consideration by collecting key personnel.”

In regards to the Digital Studios, Relativity said that the business plan was to produce five $1M budgeted movies “with such costs borne by the brands to populate the site.” They said that one project was completed and generated a profit of $250K, sold to Maker Studios. “Without consulting the board, the CRO terminated everyone involved with this division except for the division head, which he moved to a consulting arrangement and advised that her sole responsibility was to collect receivables.” They take issue with FTI that it did not continue to put through the initial business plan, which it said, was proven to generate a profit already.

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