Ruling: Video Update Can Seek Creditor Approval of Reorganization Plan25 Sep, 2001 By: Joan Villa
Video Update received the go-ahead from U.S. Bankruptcy Court to seek creditor approval of its reorganization plan, clearing the way to emerge in early November as a wholly owned subsidiary of Movie Gallery, its top creditor.
However, the committee of unsecured creditors revealed that it has investigated possible fraud activities of “certain of the former officers of Video Update,” according to attorney Michael Bloom of Morgan, Lewis & Bockius LLP in Philadelphia, who represents the committee. As a result, the reorganization plan will be revised to include a trust benefiting unsecured creditors in the event that litigation claims against the former officers are successful, Bloom said.
Bloom says he gave copies of the investigation report, conducted by a division of Morgan, Lewis, to the bankruptcy court, Video Update and the U.S. Trustee’s office. However, he declined to name either the individuals or the alleged improprieties contained in the investigation.
Former Update chairman and c.e.o. Dan Potter, chief operating officer and board member Daniel Howard and executive v.p. Richard Bedard all resigned June 8 in a bankruptcy hearing brought by Update management that also ousted Update’s five-person board. Earlier this year, president John Bedard left the company he co-founded with Potter.
The chain is now run by a three-person board chaired by former Sight & Sound executive John J. Jump, along with court-appointed chief restructuring officer James Skelton, who took over as interim president and c.e.o.
At the Sept. 24 hearing, the U.S. Bankruptcy court ordered some revisions to the Video Update disclosure statement but essentially delayed hearing several objections filed by a franchisee and secured creditor Sterling Ltd, which owns 8% of Update’s bank debt. Movie Gallery purchased 92% of Update’s $125 million outstanding debt in May for $9.2 million.
Judge Judith Wizmur urged the parties to resolve any disagreements prior to the Oct. 31 hearing that she set for the reorganization plan, but also “penciled in” Nov. 1-2 to give the case ample time to be heard, attorneys say.
The plan will now circulate to Update’s creditors for a vote. In order to be approved, at least half the creditors representing two-thirds the dollar amount owed in each class must vote in favor of the plan, according to Update attorney Charles Dale III of Boston firm Gadsby Hannah.
“If it’s possible to resolve the differences, we were told to do that,” Dale explains.
Marshall Martin, attorney for retailer William J. Busching, who has 23 stores covered by two separate franchise agreements in Virginia and New Hampshire, says he will continue to ensure that Busching has adequate assurances Video Update will have the resources to manage franchisees after becoming a subsidiary of Movie Gallery, which has no franchise division.
“This [ruling] is not surprising and it doesn’t mean that our issues won’t be heard,” Martin says.
Dale responds that Video Update will prove to the court’s satisfaction that “it can run and will continue to run a franchise organization.”
When Video Update filed for Chapter 11 protection on Sept. 18, 2000, it operated more than 600 stores. The St. Paul, Minn.-based chain anticipates emerging with 220 stores in the United States and 80 in Canada, after closing hundreds of unprofitable locations.