Rhythm & Hues Creditors Object to Stalking Horse Bidder Break-Up Fee

A hearing on JS Communication's fee is scheduled for June

Rhythm & Hues may have been sold, but the drama surrounding the bankrupt visual-effects company continues.

Rhythm & Hues' unsecured creditors, a group that includes Warner Bros. Pictures, has filed an objection to an attempt by media company JS Communication Corp. to get its $425,000 breakup fee.

A hearing on the objection will be held in U.S. Bankruptcy Court in Los Angeles on June 4 with Judge Neil Bason presiding, according to filings obtained by TheWrap.

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Attorneys for the unsecured creditors and JS Communications did not immediately respond to requests for comment.

The breakup fee was attached to JS Communication's selection as stalking horse bidder for the bankrupt company, but it has become a source of contention after the company withdrew its bid roughly a week before the auction was to commence. JS Communication's chief executive officer told the Los Angeles Times that the company got out of the bidding because Rhythm & Hues' studio creditors were not being cooperative.

In bankruptcy cases, a stalking-horse bidder is selected from a pool of bidders so a financially distressed company can ensure that its assets are not undersold at auction. If it is outbid, it is often entitled to receive a breakup fee.

Rhythm & Hues, a victim of an industry-wide downturn in the visual-effects business, filed for Chapter 11 protection in February, reporting that it has  $27.5 million in assets and roughly  $33.8 million in liabilities.

It was sold to an affiliate of Prana Studios after a turbulent auction process last month. The deal for the Oscar-winning visual-effects company was valued at roughly $18 million. It breaks down to  $1.2 million in cash and roughly $16 million in assumed liabilities.

Pamela Chelin contributed to this report.