Rhythm & Hues Sale Hearing: Ruling on Stalking-Horse Breakup Fee Pushed Back to April

JS Communications says it is owed its $425,000 breakup fee

A court hearing to approve the sale of Rhythm & Hues Studios to Prana Studios grew heated on Friday afternoon as the bankrupt visual-effects company's stalking-horse bidder argued that it was being robbed of its $425,000 breakup fee.

"This will be interesting," Evan Jones, an attorney for stalking horse bidder JS Communications told TheWrap before proceedings kicked off on Friday.

He delivered on his promise, raising spirited objections to the argument from Rhythm & Hues' attorney that JS Communications forfeited its rights to the payout when it failed to submit an official bid. Judge Neil W. Bason said the court will wait until April 22 to reevaluate the status of the breakup fee.

Roughly a week before the auction was to commence, JS Communications withdrew its bid,  with its chief executive officer telling the Los Angeles Times that the company's 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.The stalking-horse bid represents the lowest acceptable offer.

Despite walking away, JS Communications says it is unjustly being denied its money. 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."

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 the winning bid was less than $525,000 more than its own offer.

Brian Davidoff, an attorney for Rhythm & Hues, said the JS Communications offer included $1 million in cash, while Prana's successful offer included $1.2 million in cash.

Prana's bid was valued at  $17.8 million in cash and assumed liabilities, according to the Hollywood Reporter.

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 helped it meet its payroll obligations and continue working on a number of projects. Legendary Pictures, Universal Studios and 20th Century Fox Studios, the three in question, have extended about $20 million in loans during the process, which will be repaid by Prana if the sale is approved.

Since it was founded in 1987, Rhythm & Hues has won Oscars for its work on "Life of Pi," "Babe" and "The Golden Compass.”