On Tuesday, a New York judge got further briefing in advance of a significant decision on whether Steven Mnuchin should remain as a co-defendant in a fraud lawsuit over $60 million lent by RKA Film Financing to Relativity Media.
Before Mnuchin become U.S. Treasury Secretary, his OneWest bank poured $160 million into Relativity, the embattled studio that produced such films as The Fighter, Limitless, Immortals and Act of Valor. In October 2014, Mnuchin became Relativity's co-chairman, a position he held until May 29, 2015, a few weeks before the studio declared Chapter 11 bankruptcy.
RKA, which loaned Relativity money for print and advertising ("P&A") expenses for Solace, Masterminds and The Disappointments Room, claims the funds were instead used either for personal benefit or for Relativity's general purposes. Mnuchin demands to be let out of the lawsuit because he lacked interaction with RKA during his short tenure on Relativity's board.
At a hearing on April 11, New York Supreme Court Judge Charles Ramos focused the parties' attention on the conditions of RKA's loans. If RKA, represented by the prominent law firm of Latham & Watkins, can demonstrate that Mnuchin was sufficiently knowledgeable about misrepresentations in connection with those conditions, Ramos may force the individual currently tasked with President Donald Trump's tax policy to submit to more fact-finding about his time at Relativity.
In a letter to the judge, RKA attorney Christopher Clark details three ways that allegedly establish that Mnuchin knew and approved of lies that Relativity told RKA.
The first pertains to release dates for Solace, Masterminds and Disappointments Room.
"While Mnuchin was Co-Chairman of Relativity's Board, in written statements extrinsic to the Funding Agreement, Defendants caused the Film SPEs to provide specific andrelease dates for the films Solace, Masterminds and Disappointments Room that were earlier than September 30, 2015," states the letter. "As specifically detailed in the SAC, Mnuchin knew at the time of those misrepresentations that none of these three films would be released by September 30, 2015. These material lies - known to Mnuchin to be - were independent from the contract and (if known to RKA) would have excused RKA from having to advance funds."
RKA attempts to make the case that Relativity's financial health was deteriorating to the extent that the studio's leaders were fully aware that such release dates were unfeasible. Of course, film studios routinely push back release dates even under strong financial circumstances. Nevertheless, the plaintiff believes that at this stage, the judge is obligated to accept its version of facts as true. The continuing question is whether RKA's blanket assertion of knowledge on Mnuchin's part without much factual support is enough participation to satisfy the judge that Mnuchin should remain in the case.
The second deals with estimated budgets for Solace, Masterminds and Disappointments Room.
Supposedly, Mnuchin knew "each P&A budget waswhen it was provided to RKA," and that all the defendants "always intended to use RKA's P&A Loans for purposes other than P&A."
Again, Mnuchin's court papers respond he was not aware of these representations. RKA posits this is a factual dispute that isn't appropriate for resolution at this juncture.
"Moreover, to cover his tracks when he knowingly misdirected the RKA P&A Loans for impermissible purposes, Mnuchin surreptitiously obtained a legal opinion that purportedly blessed using those funds as working capital," states the letter. "If RKA had known what Mnuchin knew - namely, that the P&A budgets were empty misrepresentations - it would have never extended loans in December 2014 and March 2015 that Mnuchin then misappropriated (totaling over $50 million)."
Mnuchin may not have had an obligation to share his own due diligence, but did his actions amount to something like certification of alleged misrepresentations? Ramos will need to decide.
The third way that RKA believes establishes conditions rising to Mnuchin's fraud were notices provided of intent to draw down on RKA's P&A loans. Relativity was required to deliver Borrowing Certificates in accordance with this, and as framed by RKA's lawyers, they came with representations and warranties.
"Had RKA known that any of these representations regarding the conditions precedent - which were each extrinsic to the Funding Agreement - wereit could have (and would have) refrained from advancing loans to the Film SPEs," continues the letter. "And, of course, RKA would not have been obligated to provide those loans because the conditions precedent in Section 3.2 of the Funding Agreement would not have been fulfilled to RKA's satisfaction."
Film budgeting gets to the nitty gritty of a studio's business, but Mnuchin isn't merely relying upon his non-relationship with RKA in attempting to escape the lawsuit. He's also characterizing himself as an outside director, not an officer of the company, for his lack of knowledge, involvement and, ultimately, liability. RKA responds that Mnuchin was a "close professional and personal friend" of Ryan Kavanaugh, Relativity's leader, and again begs the judge for opportunity to explore the alleged fraud in greater detail past the motion-to-dismiss phase.