Approval of Rhythm & Hues Sale Delayed

Side Effects, Prime Focus and JS Communications object to deal for Prana to buy Rhythm & Hues

A decision on whether or not a California bankruptcy court will approve a sale of Rhythm & Hues was delayed Friday after bidders and a creditor objected to a potential deal, throwing a fresh kink in what has already been a roller-coaster auction.

An affiliate of Prana Studios has a deal in principle to buy the bankrupt visual-effects company, winning a turbulent, two-day bidding process, an attorney for Prana told TheWrap.

However, before it can finalize the pact it will have to deal with objections from two former bidders, Prime Focus and JS Communications. Prime Focus, an Indian visual-effects company, was one of the major suitors in the hunt for Rhythm & Hues, but is objecting to the auction because it claims that it was not permitted to make a final bid for the company.

JS Communications had been selected to be the company's stalking horse bidder, although it withdrew from bidding shortly before the auction took place this week. The company's chief executive officer told the Los Angeles Times that he walked away from the bidding because Rhythm & Hues' studio creditors were not being cooperative.

Despite walking away, the South Korean media company says it is unjustly being denied its $425,000 break-up fee. In an objection filed Thursday, the company accuses Rhythm & Hues of attempting to shut it out of the bidding process.

Evan Jones, an attorney for JS Communications told Judge Neil W. Bason that the auction was not done in good faith, labeling the sale as a bag of "smelly goods."

Earlier, Side Effects Software, which licenses 2D to 3D conversion software called Houdini to Rhythm & Hues, also filed an objection. In court filings, the company said it is owed $661,754 in unpaid bills, but was more upset that the new owner would potentially have access to its technology.

"Even if the amount determined to be due as a 'cure' for past defaults were to be paid at the closing of the asset sale, [Side Effects] does not have to consent to the assignment of its Houdini Licenses and cannot be compelled to allow assignment of these licenses and the transfer of [its] 'crown jewel' software to some unknown third party," the objection reads.

The company's objection was resolved, according to an individual with knowledge of the sale.

Brian Davidoff, an attorney for Rhythm & Hues, told Judge Bason that there was also a "language" issue in the sales agreement related to the company's employees that needs to be resolved.

When Rhythm & Hues filed for bankruptcy protection in February, it reported that it had $27.5 million in assets and roughly $33.8 million in liabilities.

As the company has been mired in Chapter 11, three studios have helped it meet its payroll obligations and continue working on a number of projects. All told, Legendary Pictures, Universal Studios and 20th Century Fox Studios, the three in question, have extended about $20 million in loans during the process.

Judge Bason called a recess until 1 p.m. so the sides could look over relevant paperwork.

Davidoff told TheWrap that he did not expect the sale will be approved on Friday, because the judge will likely need more time to sort through the objections.