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Cutting the Strings Attached to a Loan Can Result in Legal Action

November 18, 2015

Posted in Business Litigation, Civil Litigation

photo - cutting strings on loanIf you get a loan that needs to be used for one purpose, but you would really like the money to cover over things, you act on your desires at your peril especially if it involves fraud or deception. If you cut the strings that come attached to a loan expect to get tangled up in conflict with the lender at the very least and possibly on the wrong end of a lawsuit at the worst.

A movie studio is accused of misusing funds from a loan and the lender has hit it with two lawsuits, according to Variety. New York based finance company RKA Film Financing has sued Relativity Media CEO Ryan Kavanaugh accusing him of being a “con man…who through dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate their funds.”

These allegations were contained in a lawsuit filed nine days after RKA filed its first legal against Relativity seeking to recover $7.5 million loaned to Relativity. The second lawsuit goes much further than the first, which claimed the loan is in default and needs to be repaid. The second charges Kavanaugh with fraud and inducing victims “to invest hundreds of millions of dollars to prop up a failing entertainment company.” It seeks $90 million in damages.

The second lawsuit claims RKA loaned about $7.5 million to Relativity to be used only for print and advertising expenses on specific films. It alleges,

  • Kavanaugh never intended to limit the spending as specified in their agreement, according to the lawsuit.
  • Instead it was allegedly used “for salaries, bonuses, the fulfillment of Relativity contract debts and other general corporate expenses, including the funding of Relativity’s sports agency and television studio,” and listed on Relativity’s balance sheet to give “the appearance of financial stability for their otherwise cash-strapped entertainment company.”
  • Kavanaugh and Relativity’s actions “hid…their fraud from their current and future investors,” RKA alleges, “and used the…funds as their own personal piggy bank.”
  • There was an increasingly tense relationship between the partied about a year after RKA was formed and started loaning millions for film promotion. Concerned about their loans, RKA in April sought to verify how Relativity subsidiaries were spending the funds.
  • Their efforts met resistance and RKA officials told the company they feared fraud by Relativity. They denied any wrongdoing and stated they were in a healthy financial condition.
  • After RKA demanded to see Relativity’s books, the company responded they couldn’t because their staff was too busy working on an imminent fundraising deal. The real reason is allegedly “to prevent RKA from uncovering Relativity’s imminent insolvency…”
  • When financial information was produced it allegedly overstated Relativity’s financial health and didn’t account for RKA’s funds. After further investigation RKA claims it discovered Relativity “was on the verge of collapse” and Kavanaugh and others “admitted their fraudulent scheme” that the loan was diverted to other uses.

In RKA’s first lawsuit it stated it hoped the parties could reach an agreement and keep Relativity out of bankruptcy to improve its chances of being repaid. There was an agreement in June, but RKA claims Kavanaugh made it clear that he would not follow through it filed the second lawsuit.

Relativity responded to the second lawsuit with a statement stating RKA allegations “patently false” and that it’s involved “in an underhanded scheme to extract money from Kavanaugh, the company and its lenders” through “outrageous demands.” Relativity announced it’s counter suing RKA for $200 million and a ruling that all the money loaned by RKA was properly used.

If you’ve been defrauded and a loan you made won’t be repaid or an investment has become worthless, or you’ve been falsely accused of fraud and need to defend yourself and your company, contact our office so we can talk about the situation, which laws may apply and the best ways to protect your interests.