The departure of video rental giant Blockbuster from its central place in American entertainment retailing is apparently not going to happen smoothly or without a hugely contentious legal fight. Once it became clear that the troubled company did not have the financial resources to pull off a Chapter 11 reorganization (see “Blockbuster Reorg Fails”), Blockbuster accepted a stalking horse bid from Cobalt Video, a group that holds the majority of the company’s secured debt. A bankruptcy court hearing is now examining the offer, and has delayed a decision until at least March 10th. Blockbuster’s unsecured creditors, including major Hollywood studios like the Walt Disney Co., Universal, Summit Entertainment, and Fox, as well as landlords and other vendors are all objecting to the sale.

 

Bloomberg reports that the Justice Department’s Office of the U.S. Trustee, which oversees bankruptcies, filed a motion indicating that since Blockbuster doesn’t have the funds to pay for a reorganization, the company should liquidate under Chapter 7. In a Chapter 7 bankruptcy, a company converts all non-exempt assets into cash with the proceeds divided among creditors.

 

Meanwhile the studios, which are collectively owed some $92 million by Blockbuster, have filed objections to the proposed sale to Cobalt Video, which would likely leave the unsecured creditors (i.e. the studios) with little or nothing. Disney, which is owed $9.2 million, has objected to the sale to Cobalt Video, claiming that Cobalt has dictated the terms of the sale, which are “beneficial to itself and detrimental to the debtors’ estates.”