Blockbuster creditors agree to standstill on opposition to sale proposal

Blockbuster Inc.'s creditors agreed to a standstill on their opposition to a sale process for the bankrupt movie renter that a judge called "aggressive."

U.S. Bankruptcy judge Burton Lifland in Manhattan court today adjourned a hearing on Blockbuster's proposal to hold an auction with a leading bid of $290 million from Cobalt Video, made up of a group of lenders including Monarch Alternative Capital LP. Forty-five creditors had objected to the deal, including Walt Disney Co., Universal Studios, Yahoo! Inc., the U.S. Trustee's office, landlords and a committee of unsecured creditors.

The stalking-horse bid is "the most aggressive document I have seen in 35 years on the bench," Lifland said. "If anything is going to fly, this garbage truck better sprout wings."

Lifland didn't elaborate on his remarks and Stephen Karotkin, a lawyer for Blockbuster, declined to comment.

Objecting creditors have said the sale proposal is aggressive because it lets senior lenders have sole right to convert the case to a Chapter 7 liquidation, repays their debt without requiring them to repay similar priority creditors, and gives them rights to lawsuit proceeds.

Lifland said all creditors with the exception of Summit Distribution LLC agreed to a defer their motions to reclaim assets or liquidate the company until next week. A hearing on their oppositions to the sale will be held March 10, and Summit should get an accounting of how much money Blockbuster makes from its product until then, Lifland said.

New committee

Separately, movie studios formed an ad hoc committee to represent their interests. Robert J. Feinstein is a lawyer for the committee, which includes Paramount Home Entertainment Inc., Twentieth Century Fox Home Entertainment, Universal Studios Home Entertainment and Warner Bros. Home Entertainment Inc., according to court papers filed today. Members of the committee have undetermined claims for business done with Blockbuster before and after its filing, according to the document.

Blockbuster's proposal to use the $290 million stalking- horse bid from Monarch, Owl Creek Asset Management LP, Stonehill Capital Management LLC and Varde Partners Inc. was unfair because of those lenders' other involvement with the company, creditors said in court papers. They also financed Blockbuster's operations after it filed for bankruptcy, under a $125 million debtor-in-possession loan.

'Administratively insolvent'

Summit, an independent movie producer and distributor, was the first studio to file papers seeking to reclaim products after it wasn't paid for shipments made following Blockbuster's Chapter 11 filing in September. The world's largest movie-rental company is "administratively insolvent," or unable to pay the costs of its bankruptcy, Summit said.

The Cobalt Video group holds more than half of Dallas- based Blockbuster's $630 million debt in 11.75 percent senior secured notes. It made no commitment to continue the business.

The lenders' "illusory" $125 million loan after Blockbuster filed for bankruptcy induced landlords, studios and other creditors to keep supplying Blockbuster, unsecured creditors said in court papers. The sale process will let the lenders walk away unscathed while leaving "restructuring carnage" behind, the unsecured creditors said.

Lyme Regis Partners LLC, an investor in Blockbuster notes, asked in its objection to the sale that Carl Icahn and affiliates be excluded from the auction. Icahn is an insider because of his position on the board when the company issued notes, Lyme Regis said.

Blockbuster began reorganizing in September with 5,600 stores, including 3,300 in the U.S. Of the U.S. stores, 3,000 were owned and the rest were franchised. About 200 stores closed before the bankruptcy.

The petition listed assets of $1.02 billion against debt of $1.47 billion. Blockbuster estimated it owes $57 million in accounts payable in addition to the secured and subordinated notes.

The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

(Published by Bloomberg - March 2, 2011)