Blockbuster Creditors Question Studio Payments

22 Oct, 2010 By: Erik Gruenwedel

A group of unsecured creditors Oct. 22 filed a motion questioning proposed payments of millions of dollars by Blockbuster Inc. to the major movie studios.

Dallas-based Blockbuster, which filed bankruptcy Sept. 23 citing more than $1.4 billion in liabilities, owed studios and related content holders about $120 million, according to the filing with U.S. Bankruptcy Court for the Southern District of New York.

The court Sept. 27 authorized Blockbuster to pay pre-petition (early) claims to 20th Century Fox Home Entertainment, Warner Home Video and Sony Pictures Home Entertainment totaling $28 million — a little more than half the $53.8 million owed the studios. The interim order also authorized payment of more than $12 million to other unidentified “essential” content suppliers.

At the time of the Chapter 11 filing, Blockbuster owed secured creditors Walt Disney Studios Home Entertainment $8.5 million and Universal Studios Home Entertainment $8.2 million.

Specifically, the creditors are concerned that Blockbuster is rushing millions of dollars in payments to select studios with little or no guarantees they will honor revenue-sharing agreements (which expire Dec. 31) or continue delivering content to Blockbuster under existing or favorable terms.

“The decision to pay substantial pre-petition claims of the studios must not be considered in a vacuum,” read the motion.

Attorney Jay Indyke, who represents the unsecured creditors and wrote the motion, said there are “heightened standards” that have to be met when pre-petitioned debt is paid ahead of other creditors.

Indyke said typical early payments to select creditors in a bankruptcy are done in exchange for concessions and vendors providing product, in this case DVD and Blu-ray Disc movies, under normal terms.

“You don’t just transfer money on pre-petitioned debt in exchange for a promise to negotiate [down the road] in good faith,” he said. “It’s not enough to send people money and hope they do business with you.”

Indyke said specific rev-share agreements and distribution terms were established early during Movie Gallery’s initial bankruptcy. He said the current pre-packaged Chapter 11 filing has Blockbuster converting its senior secured debt into equity and leaving little or nothing to unsecured creditors, which include some smaller studios.

“We just want to see standards met that are applicable in other critical types of vendor situations the courts have approved,” he said.

Indyke said the group he represents is looking to see actual agreements between Blockbuster and the major studios outlining distribution going forward. He said that without a concrete business plan in place and limited available cash, studio agreements are key to Blockbuster’s survival.

“If they have accommodations in place with studios for appropriate extensions of time, then we’re not going to have issue with respect to the payments,” he said. “If there are studios that have not done it, then we do have issues.”