Rhythm & Hues Stalking Horse Bidder Settles for $300K Break-Up Fee (Exclusive)

JS Communications agrees to drop claims against visual-effects company

JS Communications has agreed to a $300,000 breakup fee for its role as stalking horse bidder in the March sale of bankrupt visual-effects company Rhythm & Hues Studios, according to court filings.

The two companies have agreed to a settlement on a lawsuit stemming from the auction, but it still must be approved by a bankruptcy court judge. A hearing on the settlement is scheduled for June 4 in Los Angeles. As part of the deal, both companies are waving claims against each other, according to court filings.

Rhythm & Hues has won Oscars and acclaim for its work on films like "Life of Pi" and "Babe," but the Calif.-based firm struggled to compete with foreign companies based in countries that offer lucrative production incentives. It filed for bankruptcy in February, reporting that it had $27.5 million in assets and roughly $33.8 million in liabilities. 

The company was sold to an affiliate of Prana Studios. As part of the company's auction, South Korean media company JS Communications agreed to serve as its stalking horse bidder. However, JS Communications withdrew its bid before the auction was held. Its chief executive officer told the Los Angeles Times at the time that the company's 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. The stalking-horse bid represents the lowest acceptable offer.

Rhythm & Hues maintained that because JS Communications had pulled its bid, it no longer was entitled to a $425,000 break up fee. In court filings, JS Communications claimed it was unjustly denied its money and accused Rhythm & Hues of attempting to shut it out of the bidding process.

In a court hearing last March, 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."

In particular, Jones said that Rhythm & Hues had changed the terms of the auction, so bidders would be encouraged to submit a lower cash component while assuming more of its liabilities. Under the terms of the stalking horse bid, the breakup fee was triggered if they were outbid by at least $525,000.

An attorney for JS Communications declined to comment on the settlement and a spokesman for Rhythm & Hues did not immediately respond to requests for comment.

Pamela Chelin contributed to this report.