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Rhythm & Hues Asks Court to Let Auction Continue

Bidding will reopen on Thursday

A California bankruptcy court judge approved Rhythm & Hues' request to allow it to continue its auction process.

Brian Davidoff, an attorney for Rhythm & Hues, told Judge Neil W. Bason in a hearing Thursday that his client needed more time, because it had decided to invite a previously disqualified bidder back into the auction process. 

He said three bidders remain in contention for the right to own the financially troubled visual-effects company behind "Life of Pi" and "Babe."

One is Prime Focus, according to an individual with knowledge of the bidders. The India-based visual-effects company tried to acquire Rhythm & Hues shortly before it filed for Chapter 11 protection in February, but could not put a deal together in the two week time frame it was given. 

The other is a Chinese company, the individual said. The Los Angeles Times reported that China Lion had emerged as the lead bidder for Rhythm & Hues, but a spokesman for the company emphatically denied that it had participated in the bidding.

Also read: Digital Domain CEO: We Can Still Save the Visual-Effects Industry

Rhythm & Hues had hoped to ask the court to approve a new owner at a Thursday afternoon hearing. Instead, it will be back in court at 10 a.m. on Friday, to ask Judge Bason to authorize any deal.

The auction will reopen on Thursday at 4 p.m. and continue through the evening.

Davidoff said the extension will allow the previously disqualified bidder to re-enter the auction. He said that although Rhythm & Hues had asked for and received final offers from Prime Focus and the Chinese company, new information came to light that indicated that the bidder had been shut out of the auction unnecessarily.

Opening up the auction to another suitor, Davidoff said, will allow Rhythm & Hues "…not only to maximize the return to all parties but also to ensure the future for the parties and this industry."

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 approximately $20 million in loans during the process.

Despite the assistance from the three studios, Rhythm & Hues asked a bankruptcy court judge in early March to speed up its auction process, because it said it was running out of money. Though the company received permission to accelerate the process, the auction has proved rocky. The company selected JS Communications as its stalking horse bidder, only to see the South Korean media company withdraw its bid shortly before the auction took place.

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.

In an objection filed Thursday, JS Communications accused Rhythm & Hues of trying to get out of paying its $425,000 break-up fee and of attempting to shut it out of the bidding process. The company's attorneys allege that Rhythm & Hues instructed bidders to structure their bid so they put up less cash and assumed more liabilities as a way to avoid triggering JS Communications' break-up fee.

"In short, accepting the Debtor’s direction the bidders have structured their bids not to comply with the procedures (and trigger a break-up fee), but to ignore them for a Rube Goldberg scheme designed to avoid the fee," the opposition filing reads. "This Court should not tolerate such a shell-game."