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Justice Department: Blockbuster Should Liquidate

1 Mar, 2011 By: Erik Gruenwedel

A representative from the United States Trustee Program — a branch of the Justice Department — filed a motion saying Blockbuster doesn’t have the funds to bankroll its fiscal reorganization and should therefore liquidate under Chapter 7.

Under Chapter 7, a debtor converts all non-exempt property into cash through a sale, which is then distributed among creditors. The filing is considered a relatively quick way to begin anew.

Tracy Hope Davis, a United States trustee for Region 2, filed the motion Feb. 28 with U.S. Bankruptcy Court in New York regarding Blockbuster’s attempt to begin an asset auction sale with a $265 million bid from a group of senior lenders. Davis, in her filing, said Blockbuster’s proposed auction process will only benefit senior lenders and leave little or nothing for the Dallas-based rental icon.

“Based on the monthly operating reports and other information, it appears unlikely that there will be any balance to be paid to [Blockbuster following a sale],” Davis wrote.

In addition Davis said the current reorganization process discriminates between creditors, including studios, possibly. She said attempts to identify so-called “critical expenses” Blockbuster says should be given priority over others have proven unsuccessful.

Indeed, the motion cited Blockbuster’s accounts payables (monies owed) exceeding $130 million through Jan. 2, which includes $92.9 million in product (rental discs and video games).

“Without the missing sale budget to identify the critical expenses among the pre-sale administrative expenses that will be paid in full, it is not possible to determine the extent to which the estate will be administratively insolvent after the proposed sale is completed, although the amount would appear to be quite large,” Davis wrote.

Separately, the court March 1 delayed Blockbuster’s auction bidding process until March 10 in order to accommodate the flurry of third-party objections filed. The March 2 meeting to discuss the objections will proceed as planned.

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