In re Relativity Fashion, LLC

• Decision Date: 22 March 2017
• Docket Number: Case No. 15–11989 (MEW) (Jointly Administered)
• Citation: 565 B.R. 50
• Parties: IN RE: RELATIVITY FASHION, LLC, et al., Reorganized Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

565 B.R. 50

IN RE: RELATIVITY FASHION, LLC, et al., Reorganized Debtors.

Case No. 15–11989 (MEW) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed March 22, 2017

JONES DAY, Attorneys for Debtors, 222 East 41st Street, New York, NY 10017, By: Richard L. Wynne, Esq.SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Attorneys for Ryan Kavanaugh, 300 South Grand Avenue, Suite 3400, Los Angeles, CA 90071, By: Van C. Durrer II, Esq.

BARNES & THORNBURG LLP, Attorneys for Netflix, 2029 Century Park East, Suite 300, Los Angeles, CA 90067, By: Stephen R. Mick, Esq.

MEMORANDUM OPINION REGARDING MOTION FOR AWARDS OF ATTORNEYS' FEES AND EXPENSES AGAINST NETFLIX, INC.

MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE

Relativity (defined below) and Mr. Ryan Kavanaugh have filed a motion seeking reimbursement of attorneys' fees and expenses they incurred during litigation against Netflix, Inc. [Docket No. 1963]. The litigation resulted in an Order and Injunction [Docket No. 1932] that was issued for the reasons set forth in a written bench decision dated June 1, 2016. [Docket No. 1948]. The Court holds that Relativity is entitled to an award of attorneys' fees and expenses as to Relativity's own counsel, but that Mr. Kavanaugh and Relativity are not entitled to reimbursement of fees and expenses incurred by Mr. Kavanaugh's counsel. The Court also holds that the amount that Netflix is obligated to pay to Relativity is $818,547.48, consisting of $795,732.50 in reasonable attorneys' fees and $22,814.98 in litigation expenses. This award is without prejudice to further applications to recover fees and expenses incurred in connection with Netflix's appeals from this Court's Order and Injunction.

Background

Relativity Media, LLC entered into a License Agreement with Netflix dated June 1, 2010. The License Agreement described terms under which first run, theatrically released films would later be made available for distribution by Netflix. In exchange, Netflix agreed to pay license fees that were tied to the theatrical box office receipts. Amendments to the License Agreement assigned the licensor's rights to RML Distribution Domestic, LLC ("RML") and granted certain rights to affiliates of RML as to films in which they had interests. Those affiliates include Armored Car Productions, LLC and DR Productions, LLC, who own rights regarding the films Masterminds and The Disappointments Room . RML, Armored Car Productions, LLC and DR Productions, LLC were debtors in these cases, and for ease of reference these three debtors will be referred to here as "Relativity."¹

Relativity and Netflix executed "Notices of Assignment" under which certain of Relativity's rights regarding license fees for Masterminds and The Disappointments Room were assigned to secured creditors. In the Notices of Assignment, Netflix agreed that minimum license payments would be made to the secured lenders by no later than a specified date, regardless of whether a theatrical release of the films had occurred by that date. After the plan of reorganization in these cases became effective Relativity asked Netflix to execute "Date Extension Amendments" to these Notices of Assignment. The amendments were based on the revised agreements with the secured creditors that had been incorporated in the confirmed plan, and they postponed the dates when Netflix was required to make payments to the secured creditors in light of the new planned theatrical release dates for the two films. However, Netflix refused to execute the proposed amendments. Netflix took the position that it had the contractual right to make payments to the secured lenders in June 2016 and then immediately to distribute Masterminds and The Disappointments Room through Netflix's own delivery services, without waiting for prior theatrical releases of the films.

After a trial, this Court held that Netflix's claimed contractual rights were inconsistent with positions that Netflix had taken during prior hearings and with findings the Court previously made. The Court therefore held that Netflix was barred by res judicata and by judicial estoppel from asserting that Netflix had the contractual rights to distribute the films before they had been theatrically released. The Court also held that Netflix's asserted contract rights were not consistent with the terms of the parties' written agreements and with the evidence at trial, which made clear that Netflix had no right to distribute licensed films without a prior theatrical release.

Paragraph 10.2 of the License Agreement provides that the "prevailing party" in any litigation "arising out of or relating to" the agreement is entitled to reimbursement of its reasonable costs and expenses, including reasonable outside attorneys' fees. Relativity contends that it was a "prevailing party" in the litigation against Netflix. Mr. Kavanaugh (Relativity's CEO and a plan proponent) contends that he, too, was a party to the litigation and that his own attorneys' fees and expenses should be paid by Netflix. Alternatively, Mr. Kavanaugh and Relativity contend that Relativity was obligated to reimburse Mr. Kavanaugh for his fees and expenses and that Mr. Kavanaugh's legal expenses therefore are "expenses" of Relativity that Netflix is contractually obligated to pay. Relativity seeks $795,732.50 in fees and $22,814.98 in expense reimbursements for periods ending May 27, 2016. Mr. Kavanaugh seeks $427,727.50 in fees and $17,775.63 in expense reimbursements for the same period. Relativity and Mr. Kavanaugh also have reserved their rights to seek additional awards of fees and expenses incurred after May 27, 2016 as a result of continuing litigation, including Netflix's appeals from the Order and Injunction. See Transcript, September 15, 2016 [Docket No. 2075] at 19.

Netflix contends that the underlying litigation was an effort to enforce the confirmed plan of reorganization and was not an action "on a contract," and that Netflix has no obligation to pay its opponents' fees and expenses. Netflix further argues that Mr. Kavanaugh was not a moving party or a prevailing party in the underlying litigation; that Mr. Kavanaugh is not a party to the License Agreement and therefore has no rights to seek fees or expense reimbursements under that agreement; and that Relativity's obligation to reimburse Mr. Kavanaugh for his expenses as plan proponent does not entitle Relativity to seek those amounts from Netflix. Netflix also asserts that the fee requests are excessive, and that Relativity is barred from seeking litigation "expenses" (other than taxable costs) through a post-trial motion.

The Submitted Record

Rule 54 of the Federal Rules of Civil Procedure applies to the motion for awards of attorneys' fees. See Fed. R. Bankr. P. 7054, 9014 ; Fed. R. Civ. P. 54. The parties have submitted numerous exhibits, declarations and briefs, and for the most part they have agreed that the Court should resolve the motions based on the submitted materials and the arguments of counsel, without the need for oral testimony or cross-examination. See Transcript, August 18, 2016 [Docket No. 2045] at 12–13 (confirming parties' agreement as to the procedure); 10–54 Moore's Federal Practice—Civil § 54.157 [3] (confirming that requests for attorneys' fees may be resolved by motion and based on briefs and evidentiary submissions and without the need for a trial). The exceptions are as to the requests to recover "expenses" other than taxable court costs. As noted above, Netflix contends that a request to recover nontaxable expenses is a contractual damage claim that cannot be made through a post-trial motion.

Section 1717 of the California Civil Code

The License Agreement is governed by California Law. Section 1717 of the California Civil Code provides in relevant part:

(a) In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.

* * * *

Reasonable attorney's fees shall be fixed by the court, and shall be an element of the costs of suit.

* * * *

(b) (1) The court, upon notice and motion by a party, shall determine who is the party prevailing on the contract for purposes of this section, whether or not the suit proceeds to final judgment. Except as provided in paragraph (2), the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section.

(2) Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.

Cal. Civ. Code § 1717.

Section 1717"was originally enacted to establish mutuality of remedy when a contract makes recovery of attorney fees available only for one party and to prevent the oppressive use of one-sided attorney fees provisions." PL C M Group, Inc. v. Drexler , 22 Cal.4th 1084, 1090–91, 95 Cal.Rptr.2d 198, 997 P.2d 511 (Cal. 2000). Section 1717 entitled a contracting party to attorneys' fees in an action "on a contract" whenever the other contracting party would have had a contractual right to such fees if it had prevailed. "Unilateral" contractual rights to recover fees were automatically made mutual.

Section 1717 has engendered much litigation over the years, and two principles have emerged from the California court decisions that are relevant to the motion before this Court.

First , the California courts have ruled that section 1717 is applicable to all requests for awards of attorneys' fees that arise in actions "on a contract." Accordingly, for example, the rules in section 1717...