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Netflix Barred by Bankruptcy Plan of Relativity From Streaming Films Before Their Release

Relativity Debtors are the “Masterminds” while Netflix sits in “The Disappointment Room”

Faced with debts exceeding $1 billion and lacking liquidity, but hopeful that certain assets would bear bountiful fruit in due course, Relativity Fashion, LLC and a host of affiliates (collectively “Relativity”) filed chapter 11 cases in July 2015 in the United States Bankruptcy Court for the Southern District of New York. Debtor Relativity Media LLC makes and distributes movies for mass release, among many other media-related activities. Relativity filed a plan of reorganization in February 2016, which restructured the debt, assumed various contracts, and set the stage for Relativity to continue in business, provided its upcoming big movie releases — “Masterminds,” starring Kristen Wiig, Jason Sudeikis, Owen Wilson, and Zach Galifianikis, and “The Disappointment Room,” starring Kate Beckinsale — pay off.

Netflix, Inc. objected to confirmation. The plan provided that the debtors would assume the license agreement with Netflix. Netflix argued that under such agreement it was permitted to stream “Masterminds” and “The Disappointment Room” on its internet-based service before their theatrical releases, but that the plan barred such streaming.

The bankruptcy court determined, among other things, that Netflix had taken a contrary position in objecting to the feasibility of the plan: by arguing that the license agreement provided that only previously-released movies could be streamed on Netflix, and that “Masterminds” and “The Disappointment Room” could not be released in time for the debtors to yield receipts that in turn are needed to meet their obligations under the plan. Because Netflix had taken a contrary position, according to the court, Netflix was judicially estopped from taking the position that its license agreement permitted pre-release streaming.

The bankruptcy court overruled Netflix’s objections and confirmed the plan. Netflix appealed to the United States District Court for the Southern District of New York (appeals from bankruptcy courts typically head to the district court that technically referred the case to the bankruptcy court, though some circuits other than the Second Circuit Court of Appeal have established bankruptcy Appellate panels to hear appeals from bankruptcy courts). On September 15, 2016, the district court affirmed the bankruptcy court’s rulings. Netflix has appealed to the Second Circuit Court of Appeals.  Nice job by the attorneys at Jones Day: Erin N. Brady, Bennett L. Spiegel, Richard L. Wynne, and Todd R. Geremia.

Relativity has been producing and distributing films since 2004. At this point who can resist saying that Relativity came “Out of the Furnace” to the “Safe Haven” of chapter 11, hoping to avoid “Zombieland.” Its path to confirmation was relatively “Fast and Furious,” with Netflix having “Come Out Fighting” and alleging “Duplicity” in a film industry “Battle: Los Angeles.”  As for bankruptcy and estoppel law, “It’s Complicated” but a successful reorganization may leave Relativity celebrating the “Lazarus Effect.” Alas, we could not work “Paul Blart: Mall Cop” into that referential narrative.

About Christopher B. Wick

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Christopher B. Wick
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