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Blockbuster Failure

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4-1-2013
A Blockbuster Failure: How an Outdated Business
Model Destroyed a Giant
Todd Davis
John Higgins Recommended Citation
Davis, Todd and Higgins, John, "A Blockbuster Failure: How an Outdated Business Model Destroyed a Giant" (2013). Chapter 11 Bankruptcy Case Studies. http://trace.tennessee.edu/utk_studlawbankruptcy/11
This Article is brought to you for free and open access by the College of Law Student Work at Trace: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chapter 11 Bankruptcy Case Studies by an authorized administrator of Trace: Tennessee Research and Creative Exchange. For more information, please contact trace@utk.edu.

A Blockbuster Failure: How an Outdated Business Model Destroyed a Giant

Todd Davis, John Higgins

Table of Contents I. Introduction 1
II. Background Information 1
a. Business Model 5
b. Key Events Leading to Chapter 11 7
III. Chapter 11 12
a. “The Plan” 12
b. Filing 14
c. Petition Schedules: Liabilities, Creditors, and Assets 15
d. First Day Motions 19
e. DIP Financing 28
f. The Unsecured Creditors Committee 32
g. Administrative Expenses – Professional Fees 32
IV. The § 363 Sale 38
a. Road to the § 363 Sale 38
b. The Motion 41
c. Sale Terms 42
d. Blockbuster’s Business Justification for the § 363 Sale 46
e. Assumption and Assignment 48
f. Administrative Relief Requested 49
g. Creditors Object to the Proposed Purchase Agreement 50
h. Court’s Approval of Motion for Sale of Property 53
i. Dish Declared Winning Bidder after Auction 55
j. Why did Dish acquire Blockbuster? 59
V. What’s Next for Blockbuster? 60
Appendix A 63

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I. Introduction The rise of the Internet in the 1990s and 2000s rapidly created new markets. Companies like Apple seized on the ability to distribute music online for a lower price than independent record stores, or even large-scale ones like Tower Records could afford, driving record stores to near-extinction. A similar fate has fallen upon the video rental stores. Giants Movie Gallery and Blockbuster, driven by physical rental stores, began struggling to compete with streaming and mailing platforms. Both were driven into bankruptcy because they failed to adapt quickly enough. A series of poor choices by Blockbuster, including passing on the acquisition of Netflix for a mere $50 million, led the company to file Chapter 11 to reduce its roughly one billion dollar debt. This paper tells the story of Blockbuster’s venture into and through bankruptcy in an attempt to reclaim its place in the video rental world. II. Background Information In 1985, the first Blockbuster store opened its doors in Dallas, Texas. The company was the brainchild of David Cook, a computer programmer. Cook’s background proved crucial to
Blockbuster’s early success. Cook programmed Blockbuster’s computers to track inventory and consumer preferences. Thus, Blockbuster thrived off its ability to provide the films that consumers wanted at individual stores. In addition to its ability to customize store selection to local neighborhoods, a large distribution center in Dallas helped Blockbuster grow quickly. Wayne Huizenga, founder of WasteManagement, purchased a controlling interest in Blockbuster with two colleagues in 1987 for $18 million.8 Huizenga believed that Blockbuster had immense potential because, like McDonalds, it was a one-product business holding national appeal. Huizenga guided the company through a period of expansive acquisition. In 1987, Blockbuster owned eight stores and franchised eleven. Within a year, it had become the largest video chain in the world and, by 1991, Blockbuster owned 1,654 stores in the United States alone. Blockbuster expanded in part by buying out both video and music chain competitors like Erol, Sound Warehouse, and Music Plus. After seven years under Huizenga, Viacom purchased Blockbuster for $8.4 billion.
Without Huizenga’s guidance, however, the company faltered. By 1996, Blockbuster had lost half of its value. A large part of this downswing was Viacom’s prioritizing more than just renting movies. Breaking from Huizenga’s singular focus, Viacom instead tried to use Blockbuster stores as outlets for Paramount and MTV merchandise, books, toys, and selected clothing. In 1996, Blockbuster rebranded. Blockbuster Entertainment Corporation was renamed
Blockbuster, Inc. and retail stores changed from Blockbuster Video to simply Blockbuster.18 By
8 H. Wayne Huizenga: The Billionaire Garbageman, ENTREPRENEUR, (Oct. 10, 2008), http://www.entrepreneur.com/article/197648; Gandel, supra note 4. the end of the year, the company announced plans to relocate its headquarters from Fort Lauderdale to Dallas. Additionally, Jim Antioco took control as CEO in 1997. Antioco would retain this role until 2007. Under Antioco’s leadership, Blockbuster refocused on its video rental business, leading to a brief upswing in profits. But this success was short-lived, as Blockbuster made a series of mistakes regarding new media and new competitors. These choices would haunt Blockbuster, as it began to lose business and post losses. By the time Viacom spun off Blockbuster in 2004, the company lost $984 million despite a $5.9 billion revenue. Internet and subscription services emerged to challenge Blockbuster’s brick-and-mortarbased dominance in the video rental business. The best-known new competitor, Netflix, started as a DVD by-mail subscription service in 1997. Netflix employed a flat monthly fee, but did not charge late fees. Blockbuster continued to charge late fees, even after it began charging a monthly fee.27 By the time Blockbuster started a competing by-mail subscription service in 27 2004, Netflix had already cut into its customer base. Blockbuster finally discontinued its late fee program later that year. Instead of focusing on video rental competitors Netflix and Redbox, Blockbuster spent the turn of the century expanding into the videogame rental market. Blockbuster purchased competitors in this market, like Gamestation, and employed various programs to promote instore rentals. By 2002, Blockbuster had placed video game ministores representing all the major contemporary gaming platforms in 90 percent of its stores. Blockbuster continued expanding into these fields after separating from Viacom in 2004. One expansion program, Blockbuster Gamerush, allowed for video game and DVD trading in 3,000 stores to enter into the secondary market. Financier Carl Icahn, a key player throughout Blockbuster’s Chapter 11, launched a proxy fight to displace John Antioco in 2007 following a failed bid to takeover failing rival Hollywood Video. Icahn had gambled on the deal, owning a substantial number of shares of both Blockbuster and Hollywood Video. After suffering large losses following the failed acquisition, Icahn sought to curtail spending on Blockbuster Online and reinstate late fees. The proxy fight occurred after Antioco resisted these measures.35 Under Ichan-approved CEO Jim
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Keyes, Blockbuster approved the cuts, temporarily boosting the value of shares. Within a few years, Blockbuster filed bankruptcy. a. Business Model Blockbuster originally established its retail channels to customers through its “bricks and mortar” stores in the United States and abroad. As of August 29, 2010, Blockbuster had 3,306 operating stores, which offered movies and games for rent and purchase in addition to other entertainment products relating to consumer electronics and accessories. Blockbuster believed its advantage over its competitors lay with its ability to make available new releases of movies, while other competitors would not have access to new released movies for the initial 28 days of release. In 2009, certain movie studios imposed this 28-day window on the rental of newly released titles after the initial distribution date. In the early 2000s, Blockbuster expanded its operations to include new distribution channels. In early 2009, Blockbuster launched BLOCKBUSTER Express® with NCR Corporation (“NCR”). BLOCKBUSTER Express® branded vending kiosks to compete directly with a competitor that provides movie rentals though vending kiosks. As of September 19, 2010, NCR had approximately 6,630 kiosks operating under the BLOCKBUSTER Express® brand in the United States. Additionally, Blockbuster made its products available through mail and digital distribution channels. Blockbuster offered a by-mail subscription program through both its retail chain and its website, allowing customers rent products that were delivered directly by mail.45 Through its BLOCKBUSTER Total Access ™ program, Blockbuster customers could augment their subscription s with the ability to exchange up to five online movie rentals for instore movies at its retail locations. Blockbuster tried to promote its by-mail channel by launching a marketing partnership with Comcast Cable Corporation (“Comcast”). The marketing partnership offered Comcast customers Blockbuster’s by-mail services through a cobranded website, www.DVDsbymail.com, as an additional service within Comcast packages. In return, Blockbuster installed Comcast-dedicated kiosks in select stores that allowed customers to learn about and sign up for Comcast services. To help establish its digital channel, Blockbuster purchased Movielink from a consortium of movie studios in 2007. Consequently, Blockbuster’s website allowed customers to download and watch movies on their personal computers. Blockbuster also formed partnerships with third-party consumer electronics device developers to digitally deliver media entertainment to customers through devices like Internet-connected televisions. To expand in mobile markets, Blockbuster partnered with device makers, such as Motorola and HTC, to include Blockbuster’s digital applications in their new models for Verizon and T-Mobile. Domestically, in 2010, Blockbuster employed 25,500 employees, of whom approximately 7,500 were full-time and approximately 18,000 were part-time. Blockbuster paid a substantial portion of its employees, about 88%, on an hourly basis.54 In dealing with retail and by-mail channels, Blockbuster managed its inventory out of the 850,000 square foot distribution center in McKinney, Texas.55 Blockbuster used a network of third-party delivery
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55 agents for distributing merchandise from this distribution center to domestic stores. Along with the McKinney distribution center, Blockbuster operated 39 additional distribution centers across the United States to support its by-mail subscription program. Blockbuster also operated stores internationally, including owned retail operations in
Canada, the United Kingdom, Denmark, Italy, Mexico, Argentina, and Uruguay. Additionally, Blockbuster franchised retail operations in Australia, Brazil, Chile, Columbia, Guatemala, Israel,
Italy, Mexico, New Zealand, Panama, Portugal, and Taiwan. As of August 29, 2010, Blockbuster owned 2,333 stores in 16 markets outside of the United States. Blockbuster was aware that brick and mortar stores could not compete in the twenty-first century. Despite Blockbuster’s efforts to expand into new retail channels, Blockbuster continued to struggle against its competitors. In the end, Blockbuster had to file for bankruptcy protection. b. Key Events Leading to Chapter 11 A changing market paved the way into bankruptcy for Blockbuster. Jeffery Stegenga,
Chief Restructuring Officer of Blockbuster, attributed Blockbuster’s declining revenue to five main events: (i) increased competition in the media entertainment industry; (ii) technological advances that changed the landscape of the industry; (iii) changing consumer preferences; (iv) the rapid growth of disruptive new competitors; and (v) the general economic environment. Along with these changes and difficult operating environment, Blockbuster was hindered by the high level of debt that the business had incurred during earlier periods of significantly lower competition and higher operating performance.62 In particular, the greatest challenge for Blockbuster was the rapid rise of new competitors utilizing alternative distribution methods to meet customer demand.63 These competitors
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63 acquired substantial market shares and eroded the size of Blockbuster’s traditional store-based customer market. Even though Blockbuster initiated other channels of distribution to customers, the revenues and profits from these other channels have not compensated for the declining revenue from the reduced traffic within its traditional store-based channel. Furthermore, Blockbuster faced an overall lapse in the market for the rental and sale of physical disks. Instead, the increasing number of competitors providing direct delivery media entertainment replaced the demand for rental and sale of physical disks. The rise of competitors arguably could not have happened at a worse time, as the economic recession from 2009 to 2010 exacerbated the hard times felt by Blockbuster. During this economic recession, domestic unemployment remained high, keeping consumer spending consistently low. Therefore, customers became more sensitive to pricing and convenience, negatively impacting the performance of most retailers, including Blockbuster. From 2009 to 2010, Blockbuster responded to these continued economic challenges and changing media industry with a number of proactive steps. Specifically, Blockbuster (i) reduced general and administrative expenses, resulting in a $333 million decrease of administrative expenses in 2009; (ii) closed unprofitable and underperforming domestic stores; (iii) evaluated the divestiture of certain of its international assets; (iv) completed two refinancing transactions in 2009 to extend debt maturities and amortizations schedules; (v) negotiated the release of significant restricted cash associated with letters of credit relating to historical lease guarantees; and (vi) granted certain studios a security interest in the assets of its Canadian operation in exchange for enhanced credit terms.72 Consequently, from 2009 to 2010,
Blockbuster closed 1,061 domestic company-operated stores.73
72
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In February 2009, Blockbuster sought Rothschild, Inc. (“Rothschild”) to serve as investment banker and financial advisor, specifically to help evaluate its capital structure and financing alternatives. Worried about the imminent maturity of its revolving credit facility and its lack of access to new capital, Blockbuster replaced its maturing revolver with a steeply amortizing term loan. This amortizing term loan carried high rates of interest and fees; moreover, the amortization schedule significantly reduced available liquidity and constrained operations. Then, in October 2009, Blockbuster successfully completed the issuance of the Senior Secured Notes to refinance the existing credit facility term loans ahead of scheduled amortization payments that were to take place in 2010 and 2011. The issuance of the Senior Secured Notes gave Blockbuster an extension of maturities and additional liquidity.
Blockbuster invested heavily in its inventory levels to gear up for the key 2009 holiday season. Although the issuance of the Senior Secured Notes allowed Blockbuster to prepare for the 2009 holiday season, the fourth quarter of 2009 proved extremely difficult for Blockbuster. During this quarter, Blockbuster faced the ever-present rapid expansion from key competitors like Netflix. Blockbuster suffered from deeply discounted sales of new-release titles by bigbox retailers.82 It further failed to secure the anticipated 28-day window advantage on key titles ahead of the holidays.83 Consequently, the operating results and period-ending liquidity for the final quarter of 2009 fell significantly short of projections.84 This disappointing quarter capped
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83 84 off a terrible year for Blockbuster, in which it reported a loss of $558.2 million and a 15.6% decline in its domestic segment. Shortly thereafter in the beginning of 2010, Blockbuster, Rothschild, and attorneys for the Debtors, Weil, Gotshal & Manges LLP (“Weil”) engaged in negotiations with financial and legal advisors, respectively, to select holders of the Senior Secured Notes (the “Senior Secured Noteholders”). Additionally, Blockbuster, Rothschild, and Weil started discussions with financial and legal advisors to group of holders of the Senior Subordinated Notes (the “Senior Subordinated Noteholders”). These negotiations between the respective parties centered upon an infusion of capital by the Senior Secured Noteholders and a recapitalization of Blockbuster pursuant to reorganization under Chapter 11 of the Bankruptcy code. As 2010 progressed, and Blockbuster’s business continued to decline, the New York Stock Exchange sent Blockbuster notice that it was no longer in compliance with the Exchange’s continued listing standard. In order to boost liquidity for a $43 million payment on the Senior
Secured Notes due on April 1, 2010, Blockbuster pledged the collateral of Blockbuster’s nonDebtor Canadian operations to certain studios to receive an additional 30 days of credit terms
(the “Canadian Lien”). After entering this pledge agreement, Blockbuster further failed to raise new capital with an unsuccessful offer to exchange the Senior Secured Notes for equity.91 As a result, in late April 2010, Blockbuster retained Alvarez & Marsal North America
LLC (“A&M”) to serve as restructuring advisors.92 Then, in early July 2010, A&M appointed Jeffery Stegenga as Chief Restructuring Officer of the Blockbuster project.93 Blockbuster’s liquidity further deteriorated due to its lagging performance, the tightening of credit by non-
91
92
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studio vendors, and loss of trade credit at the international operations that normally carried material cash flow to Blockbuster. Realizing that recapitalization would require even more capital, Blockbuster and its advisors negotiated a transaction that would exchange a portion of the debt under the Senior Secured Notes for equity under a reorganized Blockbuster. This exchange would be achieved through a debtor-in-possession financing agreement once Chapter 11 was commenced. Besides focusing on how to capitalize the reorganized Blockbuster, the Debtors also sought proposals of acquisitions from other financial partners. Meanwhile, Blockbuster continued to suffer significant shortfalls with both its operating performance and liquidity. On July 7, the New
York Stock Exchange suspended trading of Blockbuster’s common stock. In response, Blockbuster entered into a Forbearance Agreement with Senior Secured
Noteholders to defer a $42.4 million payment of interest and principal which was due on July 1,
2010. Blockbuster publicized the (for clarity, what exactly is the news) disappointing news on August 13, 2010. Consequently, Blockbuster experienced a material decline in the trading prices of all its securities and received adverse media attention. During this time, Blockbuster’s management along with the Senior Secured Noteholders negotiated heavily with certain key studios regarding new trade agreements. Blockbuster understood that the reorganization of the business depended on preserving relationships with its trade creditors, especially the studios. Therefore, in order to prevent the expiration of trade agreements with the studios, the parties agreed to extend the terms of the Forbearance Agreement to September 30, 2010. Finally, on September 1, 2010, Blockbuster missed a $13.5 million payment on the Senior Secured Notes. Aware of the approaching deadlines for the forbearance and payment grace periods, Blockbuster believed the best way to protect the interests of its stakeholder while maximizing the value of the business was to seek protection under Chapter 11 of the Bankruptcy Code. III. Chapter 11 a. “The Plan” As discussed above, Blockbuster and its advisors had worked closely with a large number of interested parties to smooth its transition into a new organization, including the Sponsoring Noteholders and their advisors. As a result of these negotiations, Blockbuster entered into an agreement with these parties regarding the terms of Chapter 11. The goal of the plan was to “substantially delever” Blockbuster so it could carry on as a new organization. To accomplish this goal, the plan provided that all of the Senior Secured Notes would convert into equity in the new Blockbuster. This move, believed the involved parties, would provide the financial flexibility necessary for the company to compete in the market going forward. Blockbuster estimated that it could reduce its debt from over $1 billion to an estimated $100 million or less.113 Under the plan, holders of Blockbuster’s outstanding subordinated debt, preferred stock, and common stock would not recover.114 Blockbuster attempted to pursue a long-term strategy of standing out as the only market player providing access across multiple delivery channels while providing convenience and value to customers.115 In pursuing new opportunities in the digital market, the new Blockbuster aimed to capitalize on its brand, library of titles, and relationships with major studios.116 Encouraging the company in its reorganization was the success of other traditionally strong brands, like Apple, who thrived with a new business model.117 Blockbuster planned to evaluate the overall profitability of its 3,000 American stores during bankruptcy.118 At the time of filing, none of these stores had yet been closed.119 This part of the plan demonstrates Blockbuster’s self-belief in competing with a hybrid of brick-andmortar stores, delivery services, and streaming media. Essentially, Blockbuster viewed Chapter 11 as an opportunity to temporarily hold off creditors and restructure into a better version of what it already was, using financing to expand its pursuits into newer forms of media. It believed that it needed only increased liquidity to effectuate these changes.

113 BLOCKBUSTER CORPORATE, NEWS RELEASE: BLOCKBUSTER RECEIVES FINAL COURT APPROVAL OF
'DIP' FINANCING, (Oct. 27, 2010) http://phx.corporate-ir.net/phoenix.zhtml?c=99383&p=irolhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/phxblockbustercorporate.pdfnewsArticle&id=1487994. 114 BLOCKBUSTER CORPORATE, NEWS RELEASE: TO IMPLEMENT RECAPITALIZATION, COMPANY
INITIATES "PRE-ARRANGED" CHAPTER11 PROCEEDINGS BLOCKBUSTER STORES AND OPERATIONS
CONDUCTING BUSINESS IN THE ORDINARY COURSE SECURES $125 MILLION DIP FINANCING COMMITMENT, (Sep. 23, 2010) http://investor.blockbuster.com/phoenix.zhtml?c=99383&p=irolhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/newsreleasetoimplementrecap.pdfnewsArticle&id=1474126. 115 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). 116 Id. 117 Austin Carr, Blockbuster CEO Jim Keyes on Bankruptcy, Netflix, and Becoming the Next Apple, FAST COMPANY, (Jun. 21, 2010), http://www.fastcompany.com/1661556/blockbuster-ceo-jim-keyeshttp://www.fastcompany.com/1661556/blockbuster-ceo-jim-keyes-bankruptcy-netflix-and-becoming-next-applebankruptcy-netflix-and-becoming-next-apple. 118 News Release, supra note 113. 119 Id.
b. Filing Blockbuster filed a Voluntary Petition (the “Petition”) for bankruptcy protection on September 23, 2010 in the Southern District of New York. Blockbuster is from Dallas, TX, and its principle place of business is Dallas County. As mentioned earlier, Blockbuster retained Weil Gotshal, an international law firm based out of Houston, TX, to file its petition. Stephen Karotkin served as lead counsel. Blockbuster’s Vice President, General Counsel, and Secretary, signed the petition on behalf of the company. Blockbuster filed as a retail corporation. The Petition estimated that Blockbuster had over 100,000 creditors, greater than one billion dollars in assets, and greater than one billion dollars in liabilities. The debts are denoted as primarily business debts. At the time of filing, Blockbuster estimated that funds would be available for distribution to unsecured creditors. Exhibit A of the Petition provided more specific information regarding the financial situation current to August 1, 2010. According to Exhibit A, Blockbuster had $1,017,035,832 in total assets and $1,464,939,759 in total debt. As of September 2, 2010, Blockbuster had 32,610 shares of preferred stock and 223,801,559 shares of common stock outstanding. More than 500 holders held approximately $930,000,000 worth of debt securities.132

Rider 2 of the Petition includes a list of the thirteen affiliated entities that would request a consolidated hearing for procedural purposes.133 The Petition also includes a list of the various names Blockbuster used over the eight years prior to filing for Chapter 11 protection.134 The Petition included a list of the 50 largest unsecured claims against the various
Blockbuster affiliates.135 However, the Petition does not include the list of creditors, whom Blockbuster listed later in its Schedules.136 Blockbuster instead filed a motion requesting a waiver of this requirement pursuant to sections 105(a), 342(a), and 521(a)(1) of title 11 of the
United States Code, Rules 1007(a)(1) and 2002(a), (f), and (l) of the Federal Rules of Bankruptcy Procedure, as well as some local rules.137 c. Petition Schedules: Liabilities, Creditors, and Assets Blockbuster filed Petition Schedules (“Schedules”) for its thirteen affiliates on October 22, 2010.138 There are ten different types of Schedules. Debtors are supposed to include real property assets in a Schedule A, personal property assets in a Schedule B, and exempted property in a Schedule C. Creditors holding secured claims are to be listed in a Schedule D, creditors holding unsecured priority claims should be listed in a Schedule E, while creditors holding unsecured non-priority claims need to be listed in a Schedule F. Schedules G and H reflect

132 Approximately 41 institutional holders out of possibly more than 500 total holders held $630,000,000 in 11.75% Senior Secured Notes due 2014. Approximately 11 institutional holders out of possibly more than 500 total holders held $300,000,000 in 9% Senior Subordinated Notes due 2012. Id. 133 Id. at Rider 2. 134 Id. at Rider 1. 135 Id. at 1. 136 Id. 137 Id. 138 DEBTORS’ SCHEDULES (Blockbuster Inc., Blockbuster Digital, Trading Zone, Movielink, B2,
Blockbuster Video Italy, Blockbuster Canada, Blockbuster Distribution, Inc., Blockbuster Gift Card,
Blockbuster Global Services, Blockbuster International Spain, Blockbuster Procurement), In re
Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). Pursuant to an order granted on October 23, 2010, Blockbuster received an additional 15 days to file its Schedules on top of the 14 day period under § 1007(c). ORDER PURSUANT TO 11 U.S.C. § 521 AND FED. R. BANKR. P. 1007(C)
EXTENDING TIME TO FILE SORCHEDULES OF ASSETS AND LIABILITIES, SCHEDULES OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES, AND STATEMENTS OF FINANCIAL AFFAIRS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). executory contracts and unexpired leases and codebtors, respectively. Debtors list current income in Schedule I and current expenditures in Schedule J. i. Blockbuster, Inc. The Schedules filed for Blockbuster, Inc. contained the bulk of the total assets and liabilities for the affiliates. Schedule A listed an estimated $10,240,132 in real property assets,139 while Schedule B listed an estimated $607,426,522 in personal property assets. Real property assets largely included stores owned by the Debtor. Personal property assets included cashon-hand in store registers, checking and savings accounts, lease deposits, movie memorabilia, accounts receivable, machinery, office equipment, and inventory. The largest personal property asset, at $275,672,540, was Blockbuster’s rental inventory. Blockbuster, Inc. listed $665,831,108 in secured claim liabilities, $486,105,509.97 in unsecured non-priority liabilities, and no unsecured priority liabilities. The secured claim amount listed on Blockbuster, Inc.’s Schedule D wholly stemmed from the principle and interest due on the Senior Secured Notes. The unsecured priority claims include a large number of undetermined payroll, income, and property tax liabilities. The unsecured non-priority claims
139 DEBTOR’S SCHEDULE A (Blockbuster Inc.), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 420) include large amounts of trade payable, including over a million dollars to Coca Cola and its subsidiaries, for example. Others falling in this category are claims for leases, unclaimed property claims, litigation liabilities, workers’ compensation, and stock options, amongst others. Blockbuster, Inc. claimed no property exemptions; as a corporation, it was not entitled to any. The codebtors mainly included the Blockbuster affiliates and CBS affiliates formerly associated with Blockbuster through Viacom. Blockbuster Inc.’s Schedule G, listing its executory contracts, contains 775 pages of various marketing agreements, property leases, public relations agreements, and franchise agreements. Likely due to the massive scope of its operations, Blockbuster, Inc. did not attempt to estimate its current income or expenditures. The information in the Schedules roughly corresponds to the estimates include in the Voluntary Petition. ii. Blockbuster Digital Blockbuster Digital’s filings were substantially shorter than those of Blockbuster, Inc. Only Blockbuster Digital’s Schedules B and F listed any determined asset or liability. However, Schedules D and E allowed for the possibility of undetermined amounts owed to creditors. At the time of filing, Blockbuster Digital held an estimated $110,493.00 in assets and $4,335,368.83 in liabilities. iii. Blockbuster Procurement Blockbuster Procurement listed personal property assets include accounts receivable and cash in corporate accounts. In total, Blockbuster Procurement held $1,278,103.95 in determined assets. The filings for Blockbuster Procurement listed roughly $900,000.00 in determined unsecured non-priority liabilities. iv. Blockbuster Canada, Blockbuster Distribution, Inc., Blockbuster Gift Card,
Blockbuster Global Services, Blockbuster International Spain, Blockbuster
Investments LLC, Blockbuster Video Italy, Movielink, Blockbuster Trading Zone, and B2 In even simpler filings, a majority of the Blockbuster subsidiaries only included one determined asset, a personal property asset described as “intercompany receivable.” All of these subsidiaries faced undetermined amounts of liabilities, mainly tax and insurance liabilities. The largest intercompany receivable belonged to Blockbuster Distribution, Inc.
Blockbuster Distribution listed $502,560.00 in intercompany receivable. Listing $1,000 in intercompany receivables were Blockbuster Canada,163 Blockbuster Gift Card,164 Blockbuster International Spain, Blockbuster Investments, Blockbuster Video Italy, Movielink,
Blockbuster Trading Zone, and B2. Schedule B of Blockbuster Global Services listed $200.00 of the same generic asset. d. First Day Motions Blockbuster’s first day motions reflect the goals of the company’s bankruptcy plan. Blockbuster planned to emerge from Chapter 11 as an invigorated, optimal version of what it had been previously. Blockbuster’s first-day motions can be separated into two groups, those that were primarily administrative motions and those that were largely substantive motions. Administrative Motions For the sake of procedural convenience, Blockbuster filed a motion requesting joint administration for the thirteen companies falling under the greater Blockbuster umbrella. The
163 See DEBTOR’S SCHEDULES (Blockbuster Canada), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 423). 164 See DEBTOR’S SCHEDULES (Blockbuster Liquidating), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 427). court granted this motion on September 23, 2010.173 The motion sought to reduce administrative costs and reduce the burden on the court, creditors, and the debtors. The size of the case could have potentially caused problems had Blockbuster attempted to comply explicitly with all the default requirements of the Bankruptcy Code. Blockbuster asked the court to waive the requirement to file a list of creditors and equity security holders under section 521(a)(1) of the Bankruptcy Code, amongst other rules.174 In the same motion, to comply with notice requirements in a more efficient manner, Blockbuster requested that it be able to hire Kurtzman Carson Consultants.175 Amongst other things, Kurtzman Carson maintained a website listing important dates and parties.176 While Kurtzman Carson used a list of creditors and equity holders to furnish notice, Blockbuster also published its notice of commencement in the Wall Street Journal, the New York Times, the Dallas Morning news, as well as on the Blockbuster and Kurtzman Carson websites.177 Blockbuster also requested an extension of the period in which to file it schedules of assets and liabilities, schedules of executory contracts and unexpired leases, and statements of financial affairs.178 The Bankruptcy Code, under Rule 1007(c), normally provides a fourteen- ADMINISTRATION OF CHAPTER11 CASES, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) at 1. (No. 3). 173 ORDER SIGNED ON 9/23/2010 GRANTING MOTION DIRECTING THE PROCEDURAL CONSOLIDATION AND JOINT ADMINISTRATION OF THE CHAPTER11 CASES, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 39). 174 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 342(A), AND
521(A)(1), FED. R. BANKR. P. 1007(A) AND 2002(A), (D), (F), AND (L), AND LOCAL BANKRUPTCY RULE
1007-1 REQUESTING (I) A WAIVER OF THE REQUIREMENT THAT DEBTORS FILE LISTS OF CREDITORS AND
EQUITY SECURITY HOLDERS AND (II) APPROVAL OF THE FORM AND MANNER OF NOTIFYING CREDITORS
OF COMMENCEMENT OF DEBTORS CHAPTER11 CASES AND FIRST MEETING OF CREDITORS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 6). 175 Id. 176 Listed parties include Counsel to the Debtors, Counsel to the Official Committee of Unsecured
Creditors, and the United States Trustee. Contact information for all is provided. KURTZMAN CARSON CONSULTANTS, BB Liquidating Inc., et al. (f/k/a Blockbuster Inc., et al.), http://www.kccllc.net/blockbuster. 177 APPLICATION TO EMPLOY KURTZMAN CARSON CONSULTANTS LLC AS NOTICE AND CLAIMS AGENT, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 24). 178 MOTION TO EXTEND TIME / DEBTORS' MOTION PURSUANT 11 U.S.C. § 521 AND FED. R. BANKR. P. 1007(c), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 7). day period to file these documents. Blockbuster sought an additional forty-five days to file, giving it fifty-nine days total after commencing the Chapter 11 case. The Bankruptcy Court granted both these motions in their entirety. These sorts of arrangements are both necessary and common in large Chapter 11 cases as, without them, the administrative expense of literal compliance with the Code and Rules would only increase what are already typically stunningly high fees for case administration in Chapter 11. Substantive Motions The rest of Blockbuster’s first-day motions dealt with continuing various aspects of its business. With continuity as an overriding goal, Blockbuster filed a motion on September 24, 2010 to allow for the employment and retention of employees in the ordinary course of business. Otherwise, it would have been forced to submit separate employment applications and retention orders for court approval for each individual professional. A company of Blockbuster’s magnitude could not possibly conform to this sort of regulation in a cost-effective manner—it employed attorneys, accountants, real estate brokers, and other professionals all over the country. This motion was granted by the court on October 21, 2010. Blockbuster utilized a complex cash management system in the ordinary course of its business. Various bank accounts funneled into a centralized system to collect, transfer, and disperse funds.186 According to their filings, Blockbuster cash management system involved $46 million flowing through accounts at over 200 banks.187 Due to the complexity of its cash management system, Blockbuster did not want to open new “debtor in possession” bank accounts.188 Accordingly, Blockbuster filed a motion to preserve the cash management system.189 The court granted this motion on an interim basis on the filing date,190 and permanently on October 21, 2010.191 Blockbuster also sought to continue its insurance programs via its first-day motions.192 In this motion, Blockbuster requested the court allow it to pay both prepetition and postpetition insurance obligations.193 Blockbuster also sought to maintain various liability programs through different carriers.194 In addition, it sought to modify the automatic stay with respect to worker’s BANK ACCOUNTS AND BUSINESS FORMS; AND (II) AN EXTENSION OF TIME TO COMPLY WITH SECTION 345(B) OF THE BANKRUPTCY CODE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 8). 186 Id. at 8. 187 Id. at 9. 188 Id. 189 Id. 190 INTERIM ORDER SIGNED ON 9/23/2010 GRANTING (I) AUTHORITY TO (A) CONTINUE TO OPERATE THE
DEBTORS CASH MANAGEMENT SYSTEM, (B) HONOR CERTAIN PREPETITION OBLIGATIONS ON ACCOUNT
OF SERVICE CHARGES RELATED THERETO, AND (C) MAINTAIN EXISTING BANK ACCOUNTS AND BUSINESS FORMS AND (II) AN EXTENSION OF TIME TO COMPLY WITH 11 U.S.C. SECTION 345(B), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 58). 191 FINAL ORDER SIGNED ON 10/20/2010 GRANTING (I) AUTHORITY TO (A) CONTINUE TO OPERATE THE
DEBTORS CASH MANAGEMENT SYSTEM, (B) HONOR CERTAIN PREPETITION OBLIGATIONS ON ACCOUNT
OF SERVICE CHARGES RELATED THERETO, AND (C) MAINTAIN EXISTING BANK ACCOUNTS AND BUSINESS FORMS AND (II) AN EXTENSION OF TIME TO COMPLY WITH 11 U.S.C. SECTION 345(B), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 391). 192 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§105(A), 363(B), AND 503(B)
AND FED. R. BANKR. P. 4001, 6003, AND 6004 FOR (I) AUTHORITY TO (A) CONTINUE THE DEBTORS'
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) TO DIRECT FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 12). 193 Id. at 7-12. 194 Such programs include “various property, casualty, workers’ compensation, and management liability related insurance coverage for liabilities relating to, among other things, general commercial claims, property damage, workers’ compensation, automobile damage, general foreign liability, directors’ and compensation claims.195 This motion was granted on an interim basis on the filing date196 and the court permanently granted the motion on October 21, 2010,197 allowing Blockbuster’s banks to receive, honor, process, and pay these claims, to the extent funds were available.198 A failure to pay insurance premiums would vest the right of carriers to terminate programs vital to carrying on Blockbuster’s business.199 Blockbuster also sought permission to continue honoring certain employee obligations via first-day motion.200 Effectively, Blockbuster felt it needed to continue business as usual, to officers’ liability, fiduciary liability, crime, excess umbrella, and various other product and property related and general liabilities.” Id. at 7; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). 195 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§105(A), 363(B), AND 503(B)
AND FED. R. BANKR. P. 4001, 6003, AND 6004 FOR (I) AUTHORITY TO (A) CONTINUE THE DEBTORS'
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) TO DIRECT FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) at 11-12. (No. 12). 196 INTERIM ORDER SIGNED ON 9/23/2010 (I) AUTHORIZING DEBTORS TO (A) CONTINUE THEIR
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) DIRECTING FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 58). 197 FINAL ORDER SIGNED ON 10/20/2010 (I) AUTHORIZING DEBTORS TO (A) CONTINUE THEIR
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) DIRECTING
FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 394). 198 Id. 199 Not only would Blockbuster be exposed to risk of a virtually unlimited proportion, it was also required by several state and federal laws to maintain several of these programs. Because Blockbuster sought to emerge from Chapter11 as a going concern, it was necessary to maintain these payments. AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). 200 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), AND 507 AND
FED. R. BANKR. P. 6003 AND 6004 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) FOR
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re
Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) (No. 9). These obligations included compensation, garnishment, supplemental workforce, independent contractor, reimbursement, payroll tax, incentive, and employee benefit obligations, in addition to severance and retention plans. Id.; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). every possible extent, concerning employee compensation to be viable. A freeze on compensation would severely limit its ability to emerge from Chapter 11 as a going concern, as it could result in a flight of talent from the workforce.201 Talent flight is a common problem in bankruptcy, recently evidenced in the Borders’ Chapter 11.202 In addition, Blockbuster would need to meet general staffing needs to account for natural attrition.203 On a more personal level, Blockbuster employees relied on these contracts to pay bills.204 The court, understanding this analysis, approved this motion on an interim basis on September 23205 and permanently on October 21, 2010.206 While death is not guaranteed, corporations must face the other inevitability of “life”— taxes. Not meeting these responsibilities could have disastrous effects on a business.
Accordingly, Blockbuster filed for the ability to pay “valid and undisputed taxes,” (as though they would willingly pay taxes they disputed and deemed “invalid” outside of bankruptcy) that it incurred through its business operations.207 A failure to pay taxes could result in liens, frustrating the deleveraging purpose of bankruptcy. 201See, e.g. Jeff Amy, Deposed Arby's owner says it's not his fault that workers weren't paid, PRESSREGISTER (Oct. 14, 2010) http://blog.al.com/live/2010/10/deposed_arbys_owner_says_its_n.html. 202 Up to 47 corporate employees, including two high level executives left during Borders’ Chapter11 case, causing serious staffing issues. Jason Boog, Borders Has Lost 47 Corporate Employees Since Bankruptcy, GALLEYCAT (Apr. 14, 2011) http://www.mediabistro.com/galleycat/borders-has-lost-47http://www.mediabistro.com/galleycat/borders-has-lost-47-corporate-employees-since-bankruptcy_b27761corporate-employees-since-bankruptcy_b27761. 203 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), AND 507 AND FED. R. BANKR. P. 6003 AND 6004 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) FOR
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re
Blockbuster, Inc. at 13-14. (No. 9). 204 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 38. 205 INTERIM ORDER SIGNED ON 9/23/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) DIRECTING
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 52). 206 FINAL ORDER SIGNED ON 10/20/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) DIRECTING
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 392). 207 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), 507(A)(8), AND 541 AND FED. R. BANKR. P. 6003 AND 6004 REQUESTING AUTHORITY TO PAY PREPETITION TAXES AND ASSESSMENTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 10)
Such taxes include sales, use, franchise, income, real and personal property, and annual report taxes, in Another important aspect of taxes, for both mega-corporations like Blockbuster and individuals with a modest net worth, is the ability to realize the benefits of losses and credits. Blockbuster filed a motion to implement procedures to protect the potential value of its net operating tax loss carryforward amounts, net unrealized built-in losses in its assets, and certain other tax and business credits.208 Blockbuster was concerned with transactions that could pose a serious risk under change of ownership tests, which could destroy the company’s tax attributes.209 These tax attributes, according to Blockbuster, were valuable assets.210 Additionally, Blockbuster attempted to carry on in the ordinary course of business through Chapter 11 was requesting the authority to continue selected customer programs.211 To Blockbuster, part of remaining competitive in the market hinged on honoring certain programs developed to “ensure customer satisfaction, promote rental and sales growth, meet competitive pressures, develop and sustain customer loyalty, improve profitability, and generate goodwill.”212 Competitors had already taken a significant portion of Blockbuster’s market share forcing it into bankruptcy,213 so an inability to honor customer programs could provide a stumbling block in the reorganization efforts. A significant portion of Blockbuster’s prepetition competitive advantage was its stellar relationship with key studios.214 Blockbuster positioned itself to receive a number of exclusive addition to business license assessments, along with any penalties and interest associated with these taxes. Id. 208 Additionally, the motion proposed restrictions on certain transfers. The procedures proposed in the motion served to notify stockholders of an injunction prohibiting acquiring ownership of such stock above a certain threshold while imposing restrictions to ensure Blockbuster received the full benefits of the automatic stay. AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 39-40. 209 Id. at 40. 210 Id. 211 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A) AND 503(B)(1) FOR AUTHORIZATION TO HONOR CERTAIN PREPETITION CUSTOMER PROGRAMS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 14). 212 Id. at 7; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 41. 213 Ruth Sara Lee, Corporate Reorganization as Corporate Reinvention: Borders and Blockbuster in Chapter11, HARVARD BUSINESS LAW REVIEW, http://www.hblr.org/2011/03/corporate-reorganizationhttp://www.hblr.org/2011/03/corporate-reorganization-as-corporate-reinvention-borders-and-blockbuster-in-chapter-11/as-corporate-reinvention-borders-and-blockbuster-in-chapter-11/. 214 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). rights.215 To maintain this advantage and, on an even more basic level, to procure product for its customers, Blockbuster filed a motion authorizing the payment of both prepetition and postpetition obligations.216 Success in the movie and video game rental business hinges on a constant stream of product; if Blockbuster lost access to new video games, it “essentially would be out of business.”217 The importance of this motion is hard to overstate, as Blockbuster had little control over the product it received from the studios.218 In the same motion, Blockbuster requested that it be allowed to pay the secured studios’ legal expenses as an administrative expense, to help Blockbuster maintain its relations with the studios.219 The court granted this motion on an interim basis on September 27, 2010.220 Following some objections in response contesting this action, the court eventually granted Blockbuster’s motion on October 27, 2010.221 Similarly, to maintain its competitive advantage, Blockbuster needed a cost-effective manner to transport the product from the studios to Blockbuster and, ultimately, from 215 Id. 216 MOTION TO AUTHORIZE /DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105, 363(B)(1), AND 503(B)
AND FED R. BANKR. P. 6003 AND 6004 REQUESTING (I) AUTHORITY TO PAY CERTAIN PREPETITION
CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 16). 217 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 42. Blockbuster claimed that under the Canadian Lien Agreement, a failure to pay these claims would cause a default likely resulting in a likely shutdown of the Canadian operations. 218 Id. at 43. 219 MOTION TO AUTHORIZE /DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105, 363(B)(1), AND 503(B)
AND FED R. BANKR. P. 6003 AND 6004 REQUESTING (I) AUTHORITY TO PAY CERTAIN PREPETITION
CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) at 22. (No. 16). 220 INTERIM ORDER SIGNED ON 9/27/2010 PURSUANT TO 11 U.S.C. SECTIONS 105, 363(B)(1), AND 503(B) AND FED. R. BANKR. P. 6003 AND 6004 REQUESTING (I) AUTHORITY TO PAY CERTAIN PREPETITION CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 114). 221 FINAL ORDER SIGNED ON 10/27/2010 GRANTING (I) AUTHORITY TO PAY CERTAIN PREPETITION
CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 469). Blockbuster to the consumer.222 With the rise of by-mail subscriptions, maintaining relationships with common carriers took on increased importance. One of Blockbuster’s competitive advantages was a 28-day non-compete window after a movie’s release.223 While discussing the 28-day advantage in a 2010 interview, CEO Jim Keyes stated that a “majority of our business— as much as 80%—has been in new releases.”224 A delay in shipping could effectively destroy this advantage, one of the few Blockbuster maintained at the time it filed for Chapter 11 protection. Rather than attempt to set up new contracts, Blockbuster filed a motion to allow it to maintain its existing common carriers and fulfill prepetition debts,225 which the court granted the same day on an interim basis.226 Like many of the other first-day motions, the court approved the motion on October 21, 2010.227 Blockbuster also filed a first-day motion for authority to honor certain prepetition obligations to selected vendors, suppliers, and service providers.228 Blockbuster needed to maintain receiving product from these vendors to maintain its inventory in stores, protecting it revenue streams and its value as a going concern.229 The court approved this motion on an interim basis on September 27, 2010230 and permanently on October 21, 2010.231 222 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A) AND 363
REQUESTING (I) AUTHORITY TO PAY PREPETITION CLAIMS OF COMMON CARRIERS, AND (II) DIRECTION OF BANKS AND OTHER FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC
PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 13). 223 See id.; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 44-45; Carr, supra note 117. 224 Carr, supra note 117. 225 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A) AND 363
REQUESTING (I) AUTHORITY TO PAY PREPETITION CLAIMS OF COMMON CARRIERS, AND (II) DIRECTION OF BANKS AND OTHER FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC
PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 13). 226 INTERIM ORDER SIGNED ON 9/23/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN PREPETITION
CLAIMS OF COMMON CARRIERS AND OTHER LIEN CLAIMANTS, AND (II) DIRECTING BANKS AND OTHER
FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 56). 227 FINAL ORDER SIGNED ON 10/20/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN PREPETITION
CLAIMS OF COMMON CARRIERS AND OTHER LIEN CLAIMANTS, AND (II) DIRECTING BANKS AND OTHER
FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 395). 228 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), AND 503(B)
REQUESTING AUTHORITY TO HONOR CERTAIN UNDISPUTED PREPETITION OBLIGATIONS OF CERTAIN ESSENTIAL VENDORS, SUPPLIERS, AND SERVICE PROVIDERS, In re Blockbuster, Inc. Case No.1:10-bk14977 (Bankr. S.D.N.Y. 2010). (No. 15). 229 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 45-46. The final first-day motion filed by Blockbuster requested entry of an order confirming the pre-negotiated terms of the DIP financing.232 Six parties filed an objection to this motion.233 This motion is explored in more detail in the following section. Reading the first-day motions, one gets the picture of a company convinced it could succeed, or at least appearing so. The motions reflect a commitment to the prepetition plan. However, Blockbuster would soon realize its flaws. e. DIP Financing As discussed above, Blockbuster’s decision to file for Chapter 11 protection was highly prepared and negotiated. Blockbuster explored several options for obtaining DIP financing.234 When searching for a DIP lender, debtors frequently look to existing creditors, as these creditors

230 INTERIM ORDER SIGNED ON 9/27/2010 AUTHORIZING THE DEBTORS TO PAY CERTAIN UNDISPUTED PREPETITION OBLIGATIONS OF CERTAIN ESSENTIAL VENDORS, SUPPLIERS, AND SERVICE PROVIDERS, In re Blockbuster, Inc. Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 106). 231 FINAL ORDER SIGNED ON 10/20/2010 AUTHORIZING THE DEBTORS TO PAY CERTAIN UNDISPUTED PREPETITION OBLIGATIONS OF CERTAIN ESSENTIAL VENDORS, SUPPLIERS, AND SERVICE PROVIDERS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (NO. 396). 232 MOTION TO APPROVE DEBTOR IN POSSESSION FINANCING / DEBTORS' MOTION FOR ENTRY OF AN
ORDER, ON AN INTERIM AND FINAL BASIS, (I) AUTHORIZING THE DEBTORS TO OBTAIN POSTPETITION
SUPERPRIORITY FINANCING PURSUANT TO 11 U.S.C. §§ 105, 361, 362, 364(C), 364(D)(1), AND 364(E), (II)
AUTHORIZING DEBTORS' USE OF CASH COLLATERAL PURSUANT TO 11 U.S.C. § 363, (III) GRANTING
LIENS AND SUPERPRIORITY CLAIMS TO DIP LENDERS PURSUANT TO 11 U.S.C. § 364, (IV) PROVIDING
ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364, AND (V) SCHEDULING A
FINAL HEARING PURSUANT TO BANKRUPTCY RULES 2002, 4001(B), 4001 (C), AND 6004, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 17). 233 See OBJECTION TO MOTION TO APPROVE DIP FINANCING, In re Blockbuster Inc., Case No.1:10-bk14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION TO INTERIM ORDER AND ENTRY OF FINAL
ORDER RE: DIP FINANCING, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION LIMITED OBJECTION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION FOR ENTRY OF AN ORDER, ON AN INTERIM AND FINAL BASIS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION FOR ENTRY OF AN ORDER, ON AN INTERIM AND FINAL BASIS, In re Blockbuster, Inc., Case No.1:10-bk-14977
(Bankr. S.D.N.Y. 2010); OPPOSITION TO DIP MOTION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). 234 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr.
S.D.N.Y. 2010) at 20; Christopher Norton, Blockbuster In The Market For $150M DIP Loan, LAW360, http://www.law360.com/bankruptcy/articles/174715/blockbuster-in-the-market-for-150m-dip-loan. seek to prevent a further deterioration of their interests.235 Blockbuster explored this option, looking to obtain its DIP financing largely from its senior bondholders. In the weeks prior to the filing, it was reported that Blockbuster sought in the area of $150 million in DIP financing.236
Blockbuster itself claimed to have negotiated with “two separate large, financially capable” parties regarding DIP financing.237 Eventually, Blockbuster settled on a plan with its existing bondholders worth $125 million.238 The terms of the reorganization exchanged the company’s 11¾ percent senior secured notes for equity in the reorganized Blockbuster.239 Upon exiting Chapter 11, the $125 million DIP loan would convert to an exit loan facility upon consummation of the plan and a new exit revolving credit facility of up to $50 million.240 The court initially allowed Blockbuster access to $20 million.241 On October 27, 2010, the court approved the Debtor’s DIP financing agreement (“DIP Facility”), allowing the Senior Secured Creditors to give Blockbuster up to $125 million in principal for post-petition financing.242 In return for the DIP loans, the Senior Secured 235 BRYAN CAVE, Bankruptcy, Restructuring and Creditors’ Rights: Devtor-in-Possession Lenders, http://www.bryancave.com/debtor-in-possession-lenders-practices. 236 Norton, supra note 234. 237 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 23. 238 PLAN SUPPORT AGREEMENT, at http://google.brand.edgarhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/PSA.pdfonline.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=8038996-471395http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/PSA.pdf494995&SessionID=i5lcFC33MvGSNd7. 239 Id.; Blockbuster Corporate, News Release: To Implement Recapitalization, Company Initiates "PreArranged" Chapter11 Proceedings Blockbuster Stores and Operations Conducting Business in the Ordinary Course Secures $125 Million DIP Financing Commitment, http://investor.blockbuster.com/phoenix.zhtml?c=99383&p=irol-newsArticle&id=1474126. 240 PLAN SUPPORT AGREEMENT, supra note 238. 241 BRIDGE ORDER (I)AUTHORIZING POSTPETITION SUPERPRIORITY SECURED FINANCING
(II)AUTHORIZING POSTPETITION USE OF CASH COLLATERAL (III)GRANTING ADEQUATE PROTECTION
AND (IV)SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULES 4001(B) AND 4001(C), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 85). 242 FINAL ORDER (I) AUTHORIZING POSTPETITION SUPERPRIORITY SECURED FINANCING PURSUANT TO
11 U.S.C. §§ 105(A), 361, 362, 364(C)(1), 364(C)(2), 364(C)(3), 364(D)(1) AND 364(E), (II) AUTHORIZING
POSTPETITION USE OF CASH COLLATERAL PURUSANT TO 11 U.S.C. § 363, AND (III) GRANTING ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Feb. 21, 2011) at 1-2. (No. 470). Noteholders received adequate protection from the court and held a lien with administrative priority and superpriority on the Revolving DIP loan. Furthermore, all debtors associated with Blockbuster agreed to waive and release all claims against the Senior Secured Noteholders. The court also held the Senior Secured Obligations, the prepetition claims against Blockbuster, to constitute legal, valid, and binding obligations of the Debtors. An important part of the DIP Facility was the roll-up provision. A roll-up provision is when postpetition financing pays, in whole or in part, prepetition secured debt. Here, the Senior Secured Notes, the prepetition claims by the Senior Secured Noteholders, constituted
“Roll-Up Notes.” As a result, the prepetition secured claims owed to the Senior Secured
Noteholders were secured by the DIP liens on the DIP collateral. Additionally, the Senior
Secured Notes were given superpriority claims on top of their continuing claims and liens as Senior Secured Notes.249 Thus, the prepetition debt owed to the Senior Secured Noteholders was given the same priority as the postpetition debt owed to the Senior Secured Noteholders.250 This type of manipulation of the securities is known as “cross-collateralization” and allows lenders to obtain additional security for both their postpetition loans and prepetition claims.251 How the Senior Secured Noteholders handled the prepetition security and postpetition loans is common in Chapter proceedings. DIP Lenders tend to be the Secured Creditors of the prepetition claims; accordingly, the DIP Lenders use the DIP financing agreement to preserve their collateral and seniority. Another important provision of the DIP Facility was the carve-out expenses. The DIP Facility maintained that a carve-out of the proceeds must go to the payment of court fees and expenses incurred by the trustee.255 More importantly, a carve-out of the proceeds must go to the payment of fees owed to any professionals or professional firms retained by the Debtors.256 This provision is also commonly found in DIP Financing agreements, ensuring that the debtor’s lawyers will be paid from the bankruptcy proceedings.257 Such was the case for Blockbuster. Thus, through the combination of cross-collateralization, roll-up notes, and carve-outs for professional fees, the Senior Secured Creditors and the debtor’s counsel, Weil Gotshal, were able to use the Chapter proceedings to their advantage over unsecured creditors. The DIP Facility spelled out seven circumstances that could terminate the Debtor’s authority to use the proceeds of the DIP financing or prepetition collateral. One such circumstance was an “Event of Default” under the DIP loan documents. In Section 8 of the DIP Facility, the agreement listed a multitude of events that would constitute “Default.” Other circumstances included: (i) an outstanding payment for post-petition final judgment in excess of $250,000, (ii) the debtor’s failure to provide updates about financing, and (iii) a conversion from Chapter 11 to a Chapter 7 case. Overall, the DIP Financing agreement between the Debtors and the Senior Secured Noteholders was an example of how senior creditors and Bankruptcy professionals could expertly use the Bankruptcy Code to control Chapter 11 cases. The provisions of the DIP Facility ensured that the largest Chapter 11 bankruptcy would be driven by a select few. f. The Unsecured Creditors Committee As a cursory glace at Blockbuster’s filings demonstrates, and common sense suggests, Blockbuster had an almost indeterminate number of unsecured creditors and an estimated $486 million in unsecured claims. The goal of an unsecured creditors committee is to provide a fiduciary acting to preserve the maximum value possible for unsecured creditors of a debtor.
On October 1, 2010, the United States Trustee appointed nine members to the Official
Committee of Unsecured Creditors. The nine were The Bank of New York Mellon Trust
Company, N.A., Scott Siegel, David A. Segal, Universal Studios Home Entertainment LLC,
Integrated Process Technologies, AT&T Services, Inc., Weingarten Realty, Developers Diversified Realty Corp., and Centro Properties Group. On October 6, 2010, the unsecured creditors committee announced that Cooley LLP would represent it as legal counsel. Cooley had one of the largest bankruptcy practices in the country at the time, making its selection unsurprising. g. Administrative Expenses – Professional Fees

Administrative expenses are given priority under the Bankruptcy Code.266 Section 503 of the Code defines administrative expenses.267 One of the major carve outs for administrative expenses is: reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.268 Blockbuster retained several leading law and accounting firms269 in the course of this case. As one would expect, these organizations cost a significant amount of money. Alvarez & Marshall served as chief restructuring officer in Blockbuster’s Chapter 11.270 Throughout its representation of Blockbuster, Alvarez & Marshal filed eight quarterly fee statements seeking reimbursement.271 The total amount billed by Alvarez & Marshal for fees and expenses was $6,274,423.272 266 See 11 U.S.C. § 507. 267 See 11 U.S.C. § 503. 268 11 U.S.C. § 503(b)(4). 269 Three of the “Big Four” accounting firms handled various portions of Blockbuster’s bankruptcy. 270 See ORDER SIGNED ON 10/27/2010 AUTHORIZING THE DEBTORS TO (I) RETAIN ALVAREZ & MARSAL
NORTH AMERICA, LLC TO PROVIDE THE DEBTORS A CHIEF RESTRUCTURING OFFICER AND CERTAIN
ADDITIONAL PERSONNEL AND (II) DESIGNATE JEFFREY J. STEGENGA AS CHIEF RESTRUCTURING OFFICER FOR THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 468). 271 See APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION / FIRST QUARTERLY FEE STATEMENT,
In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Apr. 29, 2011) (NO. 1867); STATEMENT / SECOND QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Jul. 14, 2011) (NO. 2162); STATEMENT / THIRD QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997
(S.D.N.Y. Dec. 22, 2011) (NO. 2714); STATEMENT / FOURTH QUARTERLY FEE STATEMENT, In re
Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Dec. 22, 2011) (NO. 2715); STATEMENT / FIFTH QUARTERLY
FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Apr. 30, 2012) (NO. 2924);
STATEMENT / SIXTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Jul. 31, 2012) (NO. 2950); STATEMENT /SEVENTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Oct. 12, 2012) (NO. 2979); STATEMENT / EIGHTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Jan. 24, 2013) (NO. 2987). 272 See APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION / FIRST QUARTERLY FEE STATEMENT,
In re Blockbuster, Inc. (NO. 1867); STATEMENT / SECOND QUARTERLY FEE STATEMENT, In re As discussed earlier, Weil Gotshal represented Blockbuster as lead counsel. In the firm’s first application for fees, it attempted to charge $3,078,770.25 in fees and $102,072.66 in expenses.273 The court reduced the fees to $2,463,016.20, but awarded the expenses in full. In its second application, Weil Gotshal requested $3,846,128.25 in fees and $133,318.61 in expenses. The third application sought fees of $955,533.25 and expenses of $45,998.10. These applications drew an objection from the US Trustee. Shortly after, the court awarded fees of $3,028,853.65 and $716,651.44, respectively. Expenses of $131,278.35 and $45,383.78 were also granted. Blockbuster, Inc. (NO. 2162); STATEMENT / THIRD QUARTERLY FEE STATEMENT, In re Blockbuster, Inc.
(No. 2714); STATEMENT / FOURTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2715);
STATEMENT / FIFTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2924); STATEMENT /
SIXTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2950); STATEMENT /SEVENTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2979); STATEMENT / EIGHTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2987). 273 FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR WEIL, GOTSHAL & MANGES, LLP, DEBTOR'S ATTORNEY, PERIOD: 9/23/2010 TO 1/31/2011, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Mar. 15, 2011). (No. 1323). Other law firms were retained as special counsel to handle various aspects of the case from litigation to intellectual property.280 One of these firms, Ray & Glick, billed $291,250.00 in fees for its services from the filing through the end of January 2011, of which $233,000.00 was awarded.281 For its work from February 2011 through June of that year, Ray & Glick charged $876,750.00.282 The court granted $743,150.00. Also retained as special counsel was the Chaiken Legal Group. For its work, the court approved $189,220.00 and $297,599.00. Additionally, Bloodworth Carroll received $315,266.00 for its legal work on behalf of Blockbuster. Vinson & Elkins served as special
280 ORDER SIGNED ON 11/23/2010 AUTHORIZING DEBTORS TO EMPLOY AND RETAIN RAY & GLICK, LTD. AS SPECIAL COUNSEL, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 615). 281 See FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR RAY & GLICK, LTD.,
SPECIAL COUNSEL, PERIOD: 9/23/2010 TO 1/31/2011, In re Blockbuster Inc. (992); ORDER SIGNED ON
6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL
SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc. (No. 2038). 282 SECOND APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR RAY & GLICK, LTD., SPECIAL COUNSEL, PERIOD: 2/1/2011 TO 6/30/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2326). counsel for certain litigation and corporate governance matters.288 For this work, they were paid $119,050.00 in fees and compensated $2,634.60 for expenses.289 As mentioned earlier, Blockbuster employed Rothschild, Inc. as financial special counsel and investment banker.290 The court approved fees of $437,333.34 and expenses of $49,844.41 from Rothschild’s first application for compensation.291 From its second and third application, the court awarded $2,731,879.27 in fees and $22,201.86 in expenses.292 In addition to law firms, other professionals are needed to guide a company through Chapter 11. Blockbuster retained Deloitte as a tax advisor and Deloitte FAS for providing a valuation.293 Deloitte Tax filed two fee applications, requesting a total of $582,765.00 in fees and $966.12 in expenses.294 Another accounting firm, Ernst & Young, served as Blockbuster’s

288 ORDER SIGNED ON 10/5/2011 AUTHORIZING DEBTORS' APPLICATION TO EMPLOY AND RETAIN VINSON
& ELKINS, LLP AS SPECIAL COUNSEL ON CERTAIN LITIGATION AND CORPORATE GOVERNANCE MATTERS PURSUANT TO SECTIONS 327(E) AND 330 OF THE BANKRUPTCY CODE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2455). 289 ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906). 290 ORDER SIGNED ON 11/2/2010 AUTHORIZING THE RETENTION AND EMPLOYMENT OF ROTHSCHILD INC. AS FINANCIAL ADVISOR AND INVESTMENT BANKER, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 511). 291 ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM
COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In Blockbuster, Inc. (No. 2038) 292 ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906). 293 ORDER SIGNED ON 11/9/2010 AUTHORIZING THE RETENTION AND EMPLOYMENT OF DELOITTE TAX
LLP AS TAX ADVISOR NUNC PRO TUNC TO THE COMMENCEMENT DATE, In re Blockbuster, Inc., Case
No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 582); ORDER SIGNED ON 2/8/2011 AUTHORIZING THE RETENTION AND EMPLOYMENT OF DELOITTE FINANCIAL ADVISORY SERVICES, LLP AS VALUATION SERVICES PROVIDER NUNC PRO TUNC TO NOVEMBER 10, 2010, In re Blockbuster, Inc., Case No.1:10bk-14977 (Bankr. S.D.N.Y. 2010). (No. 986). 294 See FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR DELOITTE TAX LLP,
OTHER PROFESSIONAL, PERIOD: 9/23/2010 TO 1/31/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1333) (requesting a fee of $412,112.50 and expenses of $966.12); SECOND
APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR DELOITTE TAX LLP, OTHER
PROFESSIONAL, PERIOD: 2/1/2011 TO 4/30/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. internal auditors.295 In its first application for compensation, Ernst & Young asked for $216,150.85 in fees and nominal expenses.296 The second application requested $235,054.51 in fees.297 Between the two applications, the court granted a total of $360,964.29 in fees.298 A third accounting firm, PricewaterhouseCoopers served as an independent auditor.299 Its operations were expanded to include the role of accounting advisors on February 28, 2012.300 For its work, the court awarded PricewaterhouseCoopers $1,395,478.92 in fees and $23,575.50 in expenses.301 S.D.N.Y. 2010). (No. 2380) (requesting a fee of $170,652.50 and no expenses); ORDER SIGNED ON
6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM SEPTEMBER 23, 2010
THROUGH JANUARY 31, 2011, In re Blockbuster, Inc. (No. 2038); ORDER SIGNED ON 4/4/2012 GRANTING
APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30,
2011, In re Blockbuster, Inc. (No. 2906). 295 ORDER SIGNED ON 4/4/2010 PURSUANT TO 11 U.S.C. §§ 327, 328(A), AND 330, FED. R. BANKR. P. 2014(A) AND 2016, AND LOCAL BANKRUPTCY RULES 2014-1 AND 2016-1 AUTHORIZING THE RETENTION AND EMPLOYMENT OF ERNST & YOUNG, LLP, In re Blockbuster, Inc., Case No.1:10-bk14977 (Bankr. S.D.N.Y. 2010). (No. 1578). 296 FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR ERNST & YOUNG LLP, AUDITOR, PERIOD: 12/9/2010 TO 1/31/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1869). The application requested only $55.00 in expenses. 297 SECOND APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR ERNST & YOUNG LLP, AUDITOR, PERIOD: 2/1/2011 TO 5/31/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2359). 298 ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM
FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906) (granting
$235,054.51 in fees); ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF
INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc., (No. 2038) (granting $172,920.68 in fees and $55.00 in expenses). 299 ORDER SIGNED ON 2/8/2011 AUTHORIZING THE RETENTION AND EMPLOYMENT OF
PRICEWATERHOUSECOOPERS, LLP AS INDEPENDENT AUDITORS TO THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 985). 300 ORDER SIGNED ON 2/28/2012 AUTHORIZING THE DEBTORS TO EXPAND THE SCOPE OF THEIR RETENTION OF PRICEWATERHOUSECOOPERS, LLP AS ACCOUNTING ADVISORS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2853). 301 See ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc. (2038);
ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION Consultants for the Committee of Unsecured Creditors also received substantial payment. Its legal counsel, Cooley, received over two million dollars in fees and almost seventy thousand dollars in expenses.302 Working as financial advisor on behalf of the Committee of Unsecured Creditors, FTI Consulting, Inc. received fees of $707,333.00 and expenses of $25,164.70.303

Karotkin filed a motion on behalf of Blockbuster to establish a deadline and procedures for administrative claims on May 19, 2011.304 A day later, the court set a deadline of June 15, 2011.305 IV. The § 363 Sale a. Road to the § 363 Sale As previously mentioned, Blockbuster’s decision to commence its Chapter 11 bankruptcy proceeding stemmed from several months of negotiations.306 When filing for bankruptcy, FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906). 302 See ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM
COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc.(No. 2038) (granting $1,475,597.20 in fees and $30,834.37 in expenses); ORDER SIGNED ON 4/4/2012 GRANTING
APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED
AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906) (granting $636,462.50 in fees, $37,163.05 in expenses for the second compensation application and $56,420.50 in fees, $338.25 in expenses for the third compensation application). 303 See ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM
COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster Inc. (2038); ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster Inc. (No. 2906). 304 STATEMENT / DEBTORS' EX PARTE MOTION, PURSUANT TO 11 U.S.C. § 503(A), FED. R. BANKR. P. 3003(C)(3) AND LOCAL RULE 3003-1, TO ESTABLISH A DEADLINE AND PROCEDURES FOR FILING
CERTAIN ADMINISTRATIVE CLAIMS AND APPROVE THE FORM AND MANNER OF NOTICE THEREOF, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1914). 305 ORDER SIGNED ON 5/20/2011 ESTABLISHING A DEADLINE AND PROCEDURES FOR FILING CERTAIN
ADMINISTRATIVE CLAIMS AND APPROVING THE FORM AND MANNER OF NOTICE THEREOF, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1918). Blockbuster originally intended to confirm a Chapter 11 plan of reorganization with its creditors.307 In order to reach confirmation of a Chapter 11 plan, Blockbuster entered into a Plan Support Agreement (“PSA”) with the Senior Secured Noteholders.308 The PSA called for the conversion of the Senior Secured Notes into equity to help provide Blockbuster the DIP financing necessary to continue its ordinary course of business during restructuring.309 The court eventually approved the DIP Facility after extensive negotiations with the Creditors’ Committee.310 Thus, due to the liquidity runway of the DIP Facility and support of key constituencies, Blockbuster originally hoped to confirm a plan of reorganization within the time fame set forth in the PSA.311 However, in the end, Blockbuster failed to accomplish the objectives set out in the PSA, depriving it of any chance to reach an agreement with creditors to confirm a plan of reorganization.312 First, Blockbuster suffered poor holiday sales in the last quarter of 2010.313 As a result, Blockbuster continued to experience deteriorating business operations.314 Second, Blockbuster could not reach a consensus with DIP Lenders regarding a long-term business plan.315 Third, perhaps most importantly, Blockbuster defaulted on its DIP Facility, constituting a “Termination Event” and a “Roll-Up Event” under both the PSA and the DIP facility.316 306 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN
ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Feb. 21, 2011) at 3,¶ 3. (No. 947). 307 Id. 308 Id. 309 Id. at 4, ¶ 4 310 Id. 311 Id. 312 Id. at 4, ¶ 5. 313 Id. 314 Id. 315 Id. Accordingly, the Senior Secured Noteholders terminated Blockbuster’s DIP financing.317
Consequently, after consulting with the Steering Committee, Blockbuster determined that the Plan was no longer feasible.318 With its original plan in shambles, Blockbuster was forced in a different direction. The choice of action Blockbuster pursued involved a sale of the company’s assets.319 Blockbuster agreed with the Steering Committee to pursue a sale of substantially all of the company’s assets on an expedited basis under § 363 of the Bankruptcy Code.320 Both Blockbuster and the Steering
Committee believed this approach would maximize the value of Blockbuster’s estates.321 Recognizing that the DIP Lenders were only willing to provide financing for a limited period of time, Blockbuster determined to select one of two proposals from among particular members of the Steering Committee who had expressed an interest in serving as a stalking horse bidder.322 A stalking horse bid is the initial bid on a bankrupt company’s assets from an interested buyer, who is chosen by the debtor, generally in concert with the committee of unsecured creditors.323 Blockbuster required these two proposals be furnished by January 28, 2011 so that the sale process could advance promptly.324 316 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 317 Id. 318 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 4,¶ 5. (No. 947). 319 Id. 320 Id. 321 Id. at 5, ¶ 6. 322 Id. 323 Definition of ‘Stalking Horse Bid’, INVESTOPEDIA (April 25, 2013 11:15 AM), http://www.investopedia.com/terms/s/stalkinghorsebid.asp 324 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D) After thoroughly evaluating both proposals, Blockbuster chose Cobalt Video Holdco, LLC (“Cobalt Video”) as its stalking horse bidder.325 Cobalt Video, led by Carl Icahn, existed solely to acquire Blockbuster’s assets.326 Cobalt Video was formed by funds managed by Monarch Alternative Capital LP, Owl Creek Asset Management LP, Stonehill Capital Management LLC and Varde partners, Inc., all Senior Secured Note holders of Blockbuster.327 The four entities comprising Cobalt Video collectively held more than half of Blockbuster’s outstanding 11.75% Senior Secure Notes.328 After reaching a Purchase Agreement with Cobalt Video, as a stalking horse bidder, Blockbuster filed a motion to authorize an auction process for the Company.329 b. The Motion On February 21, 2011, the Debtors filed a motion for sale of the property pursuant to 11 U.S.C. § 363(b).330 Blockbuster divided the motion into two basic requests.331 First,
Blockbuster moved, pursuant to 11 U.S.C. §§ 105, 362, 363, 364, 365 and 503, for the court to ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 4,¶ 5. (No. 947). 325 Blockbuster Initials Process to Sell Company, Enters into “Stalking Horse” Purchase Agreement with Investor Group, BUSINESSWIRE, (Feb. 21, 2011, 3:47 PM), http://www.businesswire.com/news/home/20110221006024/en/Blockbuster-Initiates-Process-Sellhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/businesswireBlockbusterInitialsProcesstoSellCompany.pdfCompany-Enters-%E2%80%9CStalking.

326 Id. 327 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 328 Id. 329 Id. 330 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 1. (No. 947). 331 Id.

approve: (i) bid procedures in connection with the § 363 sale; (ii) stalking horse expense reimbursement; (iii) sale notice for the auction; (iv) assumption procedures for the assignment of executory contracts and unexpired leases; (v) prioritization of the sale-related administrative expenses, and (vi) injunction (“Administrative Stay” ) to enjoin any collection efforts for administrative expenses occurring during the pre-sale period. Second, Blockbuster moved the court to approve the sale of its assets free and clear of all liens, claims, and encumbrances to the successful bidder. Blockbuster’s motion to request the court’s approval of the § 363 sale along with the sale procedures was nothing out of the ordinary. However, Blockbuster’s request for the court to enjoin collection efforts on any administrative expenses occurring between the commencement date and February 24, 2011 garnered much attention from other creditors. c. Sale Terms Under the terms of the proposed Purchase Agreement, the Cobalt Video agreed to pay either $265 million or $290 million, contingent upon an event, referred as the “Studio Condition” in the Purchase Agreement. For the Studio Condition to occur, two things must happen. First, at least five of the six major studios needed to continue their support of Blockbuster’s digital business and provide Blockbuster stores with physical copies of movies in sufficient amounts. Second, all of the studios that were secured creditors refrained from taking any administrative action to foreclose on the assets to secure payments under the Collateral Trust Agreement prior to the closing of the sale. If all these conditions were met, then the Studio Condition applied, setting the sale price at $265 million.339
339

Additionally, the Purchase Agreement contained price adjustments for the amounts of
Blockbuster’s cash and inventory at the closing of the sale and a proposed decrease up to $5 million for reimbursement of the purchaser’s expenses.340 The Purchase Agreement lacked any provision reimbursing Cobalt Video for any expenses in the event it was not the winning bidder.341 However, if Cobalt Video terminated pursuant to Section 4.4 of the Purchase Agreement, it was entitled to an expense reimbursement.342 This was Cobalt Video’s only protection in the Purchase Agreement.343 The Purchase Agreement also gave the Cobalt Video another option, the Agency Alternative, which allowed it, under certain circumstances,344 to compel a conversion to a case under Chapter 7 of the Bankruptcy Code.345 In return for cash consideration, the Cobalt Video was to acquire all assets, except for Excluded Assets,346 defined in the proposed Purchase Agreement, or the proceeds of the disposition of the store liquidations if it elected the Agency Alternative.347 The assets exchanged

340 Id. 341 Id. 342 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 25, ¶ 19. (No. 947). 343 Id. 344 Section 8.8(b) of Proposed Purchase Agreement, spell out the circumstances for the Purchaser to convert the case to a Chapter7 case. The circumstances pertain the Purchaser’s ability to assume property leases. If the Purchaser cannot obtain the right to assume unexpired leases, then Purchaser may elect agency alternative, which leads to store liquidations. 345 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 346 The Proposed Purchase Agreement spelled out specific assets that would not acquired by the purchaser, which include defined Excluded Contracts, equity interests in the Sellers, any claim, right or interest of any Seller in or to any refund, rebate, abatement or other recovery for Taxes ending on or before the Closing Date, all rights and claims of the Sellers under the Transaction documents, all Debtor Benefits plans; and all restricted cash relating to cash collateralized letters of credit and/or Excluded liabilities. (link) in the Purchase Agreement included all of the outstanding ownership interests in each of the foreign subsidiaries of Blockbuster, all Blockbuster’s cash and cash equivalents, all
Blockbuster’s accounts and notes receivable, all deposits and deferred charges of Blockbuster, all tangible personal property related to Blockbuster’s business operations, franchise agreements, intellectual property, and all goodwill associated with the company.348 The sale of the assets was to be free and clear of all liens, claims, encumbrances, and other interests except for those permitted encumbrances and assumed liabilities.349 The assumed liabilities in the proposed Purchase Agreement comprised the liabilities from the assumed contracts, unpaid wages to employees, employee benefits and tax expenses. However, the Purchase Agreement limited liabilities to an aggregate amount of $1.6 million.350 The proposed Purchase Agreement also defined the allocation of proceeds coming from the auction sale.351 “Carve-Out Expenses” were given first priority.352 The amounts due to the DIP Agent or Senior Indenture Trustee received second priority.353 After satisfying the “Carve-
Out Expenses” and amounts due to the DIP Agent, the proceeds went to satisfy the “Estimated Wind Down Expenses,” the sellers’ reasonable good faith estimate of expenses expected to incur with the closing of the bankruptcy estate.354 Fourth priority was a twenty million dollar deposit 347 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 3,¶ 3. (No. 947). 348 Id. at 14-15. 349 Id. at 26. 350 PROPOSED ASSET PURCHASE AND SALE AGREEMENT, Section 2.3: Assumption of Liabilities. 351 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 13-14. (No. 947). 352 Id. 353 Id. 354 into the Purchase Price Adjustment Escrow. Fifth, the proceeds covered an amount due under the DIP Credit Agreement. The sixth priority was the Administrative Priority Expenses paid directly to the sellers. Seventh, the proceeds went to cover the amount due to the Roll-Up Noteholders under the DIP Facility. Last, any remaining proceeds went to the sellers. After facing various objections from major studios and other creditors, the Debtors later amended the allocation of proceeds defined in the proposed Purchased Agreement in order to receive court approval of the sale. In addition, the Purchase Agreement laid out specific obligations with respect to the stores. First, Blockbuster needed to seek from all parties having leased properties an extension of at least 90 days for the purchaser to determine which leases to assume. Second, Blockbuster needed to commence liquidation of 609 particular stores. Along with commencing liquidation, Blockbuster needed to consult the purchaser as to how to conduct these liquidations and provide estimation of aggregate expenses. Third, for all leased properties not designated as a purchaser Assumed Contract, the purchaser had to either designate such leased property as any purchaser Assumed Contract or have the seller retain such leased property as an excluded asset. Fourth, the Purchase Agreement laid out a specific set of orders for Blockbuster to follow if the purchaser elected the Agency Alternative. Finally, Blockbuster also had other standard obligations, such as conducting the business in its ordinary course before close and not to use any trademark property upon close.366 366 Along with its standard features, the proposed Purchase Agreement contained several unique aspects not found in a typical § 363 asset sale.367 First, Blockbuster was only authorized to continue outstanding gift cards for 45 days from February 21, 2011.368 Second, as mentioned earlier, Cobalt Video had the right to convert the case to a Chapter 7 liquidation proceeding under special circumstances.369 Third, the agreement provided the Purchaser with an option to
“direct the estates liquidation of their inventory under an agency agreement.”370 Cobalt Video had no obligation to continue operating any portion of Blockbuster’s business after close.371 Thus, the proposed Purchase Agreement opened the door for Cobalt Video to close all Blockbuster’s “brick and mortar” stores that had proven to be dead weight.372 d. Blockbuster’s Business Justification for the § 363 Sale Because Blockbuster’s sale of assets was outside the ordinary course of the business, Blockbuster needed to provide the court a sound business justification for the proposed sale. Once Blockbuster provided the court its justification for the sale, the court had to determine whether (i) Blockbuster had provided the interested parties with adequate and reasonable notice, (ii) the sale was fair and reasonable, and (iii) the purchaser proceeded in good faith.373 Here, Blockbuster stressed how expediting the sale process was critical to preserving and maximizing the company’s value.374 Blockbuster added that an asset sale under § 363 was the

367 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER 11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 368 Id. 369 Id. 370 Id. 371 Id. 372 Id. 373 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 38, ¶ 33. (No. 947). 374 at 38, ¶ 34. only alternative due to the company’s failing business model and liquidity constraints. Furthermore, Blockbuster emphasized that reorganization no longer provided a viable option because the DIP Lenders declined to provide any more financing. In other words, Blockbuster had no other choice. Blockbuster also maintained that the notice was reasonable because it would serve interested parties promptly and notice would be published in newspapers of general circulation. In order to prove the fairness of the sale price, Blockbuster asserted that implementing Cobalt Video’s stalking horse bid as a minimum bid would guarantee a reasonable sale price. Moreover, the Agency Alternative, which gave the successful bidder the option to convert to a Chapter 7 case, provided the court another option in the event of a deficient sale price. In the motion, Blockbuster assured to the court that the DIP Lenders would consent to the sale; thus the purchaser would be free and clear of any and all liens, claims, encumbrances, and other interests, satisfying the conditions set forth in § 363(f). Blockbuster also maintained that the asset sale met the good faith purchaser requirement under section 363(m), as the successful bidder would be a product of an arm’s length, good-faith negotiation. Furthermore, as a condition for the sale, the proposed Purchase Agreement required that the court find the successful bidder to be a good-faith purchaser based upon the record made at the sale hearing. As mentioned earlier, Cobalt Video only received protection through the Expense Reimbursement provision of the Purchase Agreement. The Expense Reimbursement was a contingent payment in the event that Cobalt Video terminated the Purchase Agreement under

certain circumstances. Blockbuster justified the Expense Reimbursement provision as necessary to induce Cobalt Video to purchase the assets. Without the Expense
Reimbursement, Blockbuster argued that Cobalt Video would not commit to purchasing the assets, which would be fatal to the estate. Accordingly, Blockbuster sought to make the Expense Reimbursement a superpriority claim in the proposed Purchase Agreement to induce the stalking horse bid. Thus, by alleging that Cobalt Video’s bid ensured a fair sale price, Blockbuster asserted that the prioritizing of the Expenses Reimbursement was necessary as well. e. Assumption and Assignment In its motion to sell, Blockbuster sought to assume and assign certain contracts
(“Designated Contracts”) to the successful bidder. The Purchase Agreement generally defined
Designated Contracts as “executory contracts and unexpired leases that the Successful Bidder has designated it wants to assume.” If a court finds that a debtor exercised sound business judgment in determining whether to assume an executory contract or unexpired lease, then the court should approve the assumption under § 365 of the Bankruptcy Code. Additionally, § 365(b)(1) requires adequate assurance that the assignee had the ability to promptly cure the defaults of the assigned contracts. Here, Blockbuster maintained that the combination of the procedures defined by the Plan Agreement and the sale hearing provided the necessary assurance for the court to approve the assumption and assignment of contracts. Specifically, the sale hearing provided the court and other interested parties the opportunity to evaluate the ability of the Successful Bidder. If the successful bidder demonstrated sufficient financial health and resources during the hearing, then the court and other interested parties were assured that the successful bidder met the obligations of the assumed contracts. Blockbuster needed the court to approve these procedures because the assumption and assignment of the contracts would expedite the sale. f. Administrative Relief Requested Along with seeking approval of the proposed Purchase Agreement and the sale procedures, Blockbuster sought administrative relief from the court. Specifically, it moved the court to prioritize all administrative expenses connected with § 363 sale and enjoin any collection efforts with respect to administrative expenses that occurred between the petition date of September 23, 2010 and February 24, 2011. Blockbuster first referred to § 364(c)(1) of the Bankruptcy Code as the legal basis for its relief. In particular, this section empowers a court to give priority to a particular debt or credit over other administrative expenses when a debtor in possession is unable to procure unsecured credit. Additionally, § 105(a) of the Bankruptcy Code allows a court to issue any order, process, or judgment that is necessary to carry out the provisions under Chapter 11, including § 364(c)(1). In persuading the court to grant administrative relief, Blockbuster maintained that the § 363 sale was the only viable option, and therefore, the court should move in a direction that best serves the sale process. In explaining how the administrative relief best served the § 363 sale, Blockbuster alleged that such relief provides assurance to parties who supply goods and services to it, which maintained the value of the company for the sale. In particular, Blockbuster quoted that such relief was “essential to ensure creditors—such as movie studios, game providers, maintenance and janitorial service providers, landlords, utilities, and employees—are not further prejudiced on account of their extension of unsecured credit during the Sale Process Period.” Thus, the administrative relief allowed Blockbuster to continue paying employee salaries, professional fees, medical and workers’ compensation coverage premiums, certain customer obligations, and other essential costs and expenses during the sale process. g. Creditors Object to the Proposed Purchase Agreement After filing its motion to sell its assets, Blockbuster faced objections from over 40 creditors, including major Hollywood movie studios and unsecured creditors. Even the United States Trustee filed an objection to the proposed purchase agreement. The common theme among the objections was that the sale agreement was highly unfavorable and discriminated among the administrative expenses. Accordingly, some of the creditors, including the United States Trustee, moved the court to convert the case to a Chapter 7 case. In particular, counsel representing U.S. Trustee Tracy Hope Davis, described the
Blockbuster’s efforts as a plan to “effectively impose a ‘virtual Chapter 7 within the Chapter 11 case[] that… will allow [the Senior Secured Noteholders] to improperly discriminate among the administrative expenses while retaining control over their efforts to maximize their recovery and minimize their expenses.” Moreover, the U.S. Trustee’s counsel maintained that Blockbuster and secured lenders appeared to be the only real beneficiaries of the proposed sale agreement.

The numbers appear to validate the U.S. Trustee’s assertions. The stalking horse bid ranged from $265 million to $290 million, yet the secured lenders held a combined secured claim of about $630 million.413 Hence, any competing bid would be very unlikely to pay off the Secured Lenders.414 In supporting the request for the case to convert to Chapter 7, the U.S. Trustee’s counsel highlighted how Blockbuster abandoned any meaningful reorganization activity, instead reducing the estate through the incurring of administrative expenses.415 The Bankruptcy Code, under 11 U.S.C. § 1112(b), gives a court the power to convert a Chapter 11 proceeding to a Chapter 7 case if the movant establishes cause.416 Here, the U.S. Trustee tried to establish cause under § 1112(b) by referring to the Senior Secured Noteholder’s efforts in diminishing the estate.417 Walt Disney Company (“Disney”) raised a similar argument in its objection, maintaining that the Senior Secured Noteholders had dictated sale terms beneficial to themselves, while running up administrative expenses that were deteriorating the Debtor’s estate.418 Additionally, Disney criticized the proposed bid procedures, which it claimed were configured to enhance recoveries for the Senior Secured Noteholders.419 Disney moved the court to modify the agreement to give administrative claims from creditors outside the Senior Secured Noteholders more priority.420

413 Id. 414 Id. 415 Id. at 12, ¶ 34. 416 Id. at 12, ¶ 32. 417 Id. 418 OBJECTION OF THE WALT DISNEY COMPANY TO DEBTORS’ MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001, 6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN
ORDER APPROVING (A) BID PROCEDURES, (B) STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE
OF SALE, AUCTION, AND SALE HEARING, (D) ASSUMPTION PROCEDURES AND RELATED NOTICES, (E)
INCURRENCE OF SALE-RELATED ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, No. 10-14997 (S.D.N.Y. Feb. 28, 2011) at 2. (No. 1001). 419 at 3. 420 at 4.
Disney was just one of many creditors holding substantial administrative claims against Blockbuster. However, Blockbuster’s request to bifurcate the administrative claims would prevent creditors, such as Disney, from obtaining payment of their claims. Thus, Disney asserted that the proposed sale created “a large group of priority creditors who will have first claim on the few scraps left after the sale.” This left the court to decide whether it was “appropriate for bankruptcy courts to facilitate a sale that benefits nobody except the senior lenders.” In essence, several creditors outside the Senior Secured Noteholders and the United States Trustee criticized the proposed Purchase Agreement for “hijacking” the Chapter 11 case. A § 363 sale enables secured creditors to avoid the “lengthy process of negotiating, proposing confirming, and consummating a plan of reorganization—not to mention the potential for more pervasive scrutiny of transaction at multiple junctures by the court, creditors, the United States Trustee, and other parties present.” Because all transferred assets in a § 363 sale are free and clear of all interests and claims, the sale turns into a “federal unified foreclosure process orchestrated by secured creditors who are assisted by insiders of the debtor and the insolvency community.” Here, the Senior Secured Noteholders attempted to avoid the lengthy process of confirming a Chapter 11 plan by proposing a sale that would basically only benefit themselves. The Senior Secured Noteholders could not “hijack” the case without help from Blockbuster’s counsel, Weil Gotshal. At the risk of sounding cynical, Weil Gotshal also would receive guaranteed payment from the § 363 sale through the Carve-out Expenses, which were given first priority in the allocation of proceeds.428 Unsurprisingly, over 40 creditors objected to such this proposal.429 In response to these objections, the Senior Noteholders asserted that their cash, and their cash alone, had kept Blockbuster alive.430 All the objections led to negotiations taking place on March 10, 2011.431 From these negotiations, the parties amended the allocation of proceeds, giving more money upfront to trade creditors and large studios.432 h. Court’s Approval of Motion for Sale of Property Following this series of events, on March 17, 2011, the court granted Blockbuster’s motion to sell the property.433 Specifically, the court first approved the bid procedures and the Expense Reimbursement.434 It noted that the Expense Reimbursement was necessary to preserve the estate and, in light of the size and nature of the sale, was reasonable.435 As a result, the Expense Reimbursement survived the termination of the stalking horse bid and constituted a superpriority administrative claim against the estate pursuant to § 364(1) of the Bankruptcy Code.436 The court also approved the assumption and assignment of the Designated Contracts.437 428 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 13-14. (No. 947). 429 Ahmed, supra note 407. 430 Lubben, supra note 423. 431 Ahmed, supra note 407. 432 Id. 433 ORDER, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, 365 AND 503 FED. B. BANKR. P. 2002, 4001, 6004,
6006, 9008, 9014, AND 9019 APPROVING (A) BID PROCEDURES, (B) STALKING HORSE EXPENSE
REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION AND SALE HEARING, (D) ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY, In re Blockbuster, Inc., Case No. 10-14997 (S.D.N.Y. Mar. 17, 2011) at 4. (No. 1336). 434 Id. at 4, 6-7. 435 at 3. 436 at 7. Additionally, the court set the auction to take place on April 4, 2011 at 10:00 a.m., at the United
States Bankruptcy Court for the Southern District of New York. Lastly, the court set March 31, 2011 as a deadline for all objections to the sale and scheduled a sale hearing the day after the auction to approve the successful bidders. Although the court approved the bid procedures and Expense Reimbursement, the original order for the allocation of proceeds had changed due to the objections from creditors. As mentioned earlier, movie studios argued that the terms of the sale were highly unfavorable to creditors outside the Senior Secured Noteholders. On March 10, 2011, the studios and bondholders reached agreement altering the original allocations of proceeds. As a result, the Purchase Agreement granted the studios and other creditors more money upfront for what they were owed in addition to receiving a share of any offer exceeding the $290 million bid. Specifically, the Purchase Agreement listed particular studios that received 50% of its aggregate liabilities owed. These studios included Twentieth Century Fox Home Entertainment LLC, Sony Pictures Home Entertainment Inc., Warner Home Video, a Division of
Warner Bros. Home Entertainment Inc., Paramount Home Entertainment Inc., Universal Studios
Home Entertainment LLC, The Walt Disney Company, and Summit Entertainment LLC.
Furthermore, the Purchase Agreement capped the wind down expenses at $12.5 million.
Additionally, unsecured lenders could receive up to $7.5 million of the estimated $40 million owed to them.447 In the end, the court approved a Purchase Agreement that added four more priority stages to the original proposal, creating a total of twelve priority stages regarding the distribution of proceeds.448 The court also approved the administrative relief requested by Blockbuster.449 Consequently, it did not have to make any payment with respect to any administrative costs or expenses occurring from the commencement date of Chapter 11 through February 24, 2011.450 Moreover, no holder of a pre-sale period administrative claim could take any action until June 21, 2011 to collect such claim.451 By approving the bid procedures and auction date and issuing administrative relief, the court set the stage for the ultimate sale of Blockbuster’s assets and bring an end to the bankruptcy proceedings.

i. Dish Declared Winning Bidder after Auction In accordance with the court order, Blockbuster conducted the auction from April 4, 2011 to April 6, 2011.452 In the end, Dish Network Corp. (“Dish”) was declared the successful bidder with a $320 million bid.453 After price adjustments, acquiring Blockbuster’s assets cost Dish roughly $228 million in cash.454 Creditors of Blockbuster received about $178.8 million from

447 Ahmed, supra note 407. 448 ORDER, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, 365 AND 503 FED. B. BANKR. P. 2002, 4001, 6004,
6006, 9008, 9014, AND 9019 APPROVING (A) BID PROCEDURES, (B) STALKING HORSE EXPENSE
REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION AND SALE HEARING, (D) ASSUMPTION PROCEDURES
AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED ADMINISTRATIVE PRIOIRTY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY, In re Blockbuster, Inc. at 10, ¶ 16. (No. 1336). 449 Id. at 13-17. 450 Id. at 13. 451 Id. 452 DEBTOR’S EMERGENCY MOTION, PURSUANT TO 11 U.S.C. §§ 105 AND 363 AND FED. R. BANKR. P.
2002, 4001, 6004, AND 9014, FOR ENTRY OF A SUPPLEMENTAL ORDER APPROVING AMENDED AND RESTATED ASSET PURCHASE AND SALE AGREEMENT BY AND AMONG BLOCKBUSTER, INC., THE DEBTOR SUBSIDIARIES PARTY THERETO, AND DISH NETWORK CORP., In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. April 21, 2011) at 3, ¶ 5. (No. 1692). 453 Id. 454 Hals, Tom & Baker, Liana, Dish expands its scope with Blockbuster win, REUTERS (April 6, 2011 5:
39 PM) http://www.reuters.com/article/2011/04/06/us-blockbuster-dishnetworkhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/Hallsreutersdishtoexpandscope.pdfidUSTRE7351VA20110406.
Dish’s bid, with the remainder covering the expenses of the auction and other bankruptcy fees. Dish defeated the stalking horse bid, Cobalt Video. The next day, April 7, 2011, the court held a hearing to consider the sale motion and the outcome of the auction. During the sale hearing, Blockbuster produced the original Purchase Agreement, which Dish agreed to purchase subject to court approval. (What does this mean?) Dish targeted a closing date of April 21, 2011. Although the original Purchase Agreement allowed certain executory or unexpired real property leases, known as the Designated Contracts, to be assumed and assigned to the Purchaser, Blockbuster did not seek the assumption and assignment of any contracts to Dish at the sale hearing. It explained its failure to assign contracts by noting the expedited timeframe and the multitude of objections filed as to proposed cure amounts and adequate assurance of future performance. Immediately thereafter, Blockbuster consulted with the Creditors’ Committee and counsel for the objecting counterparties. Following these negotiations, Blockbuster agreed to enter into a revised sale order with Dish. The court examined this revised sale order at a hearing on April 14, 2011. At this hearing, the court approved the sale order, which ratified the original Purchase Agreement and authorized the parties to consummate the sale. The court order contained many findings of fact that were significant in closing the sale.464 First, it found that the auction was conducted in good faith, as the parties received sufficient notice and a reasonable opportunity to object. Second, the court found the Purchase Agreement and any related agreement to be in good faith and from arm’s-length position. Third, it found that neither the Dish nor its affiliates were an “insider” of any of the Blockbuster companies pursuant to § 101(31) of the Bankruptcy Code. Therefore, under this analysis, the court found Dish to be a good faith purchaser. As a good faith purchaser, Dish was entitled to all of the benefits and protections of § 363(m) of the Bankruptcy Code. Additionally, the court found that Blockbuster possessed full corporate authority to execute the Purchase Agreement and that consideration for the sale was reasonable. Furthermore, Blockbuster demonstrated both sound business purposes and compelling circumstances to justify the fact that the transaction was outside the ordinary course of business. Most importantly, the court held that the transfer of assets vested Dish with “all right, title, and interest of the Debtors to the Assets free and clear of all Liens,” and satisfied the standards set forth in § 363(f) of the Bankruptcy code. Even though the court approved the sale order, it still required Dish to provide the schedule of executory contracts and unexpired leases that it would assume and assign by no later than April 18, 2011. The court chose this date to accommodate the target closing date of April
464 ORDER, PURUSANT TO 11 U.S.C. §§ 105(A), 363, AND 365 AND FED. R. BANKR. P. , 6004, 6006
AND 9014 AUTHORIZING AND APPROVING (A) THE SALE OF DEBTORS’ ASSETS FREE AND CLEAR OF INTERESTS AND (B) PROCEDURES FOR THE ASSUMPTION AND ASSIGNMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES TO THE PURCHASER, In re Blockbuster, No. 10-14997 (S.D.N.Y. Apr. 14, 2011). at 3. (No. 1602). 21, 2011. Shortly after the hearing on April 14, 2011, Dish informed Blockbuster that it did not have sufficient time to finalize its decision to designate the contracts, totaling an approximate 1,500 contracts. Consequently, Dish requested an amendment to the original Purchase Agreement that would extend the time to designate the assumed contracts through an additional post-closing period of 90 days. After negotiating with Dish, Blockbuster modified the assumption procedures set forth in sections 2.5 and 8.8 of the Purchase Agreement. Specifically, these modifications allowed Dish to assume executory agreements and lease agreements 90 days following the closing date. In return for this extended time, Dish covered all expenses and obligations relating to the pending contracts. Furthermore, Dish covered as much as $4.9 million in professional fees and expenses and $3.5 million in employee benefits in exchange for the extended 90 days. On April 21, 2011, the targeted closing date, Blockbuster filed a motion to extend Dish’s time to designate which executory contracts and unexpired leases it wishes to maintain as part of the go-forward Blockbuster business. The request for extended time was documented in sections 2.5 and 8.8 of the Modified Purchase Agreement. Blockbuster emphasized Dish’s pledge to cover all obligations from pending contracts to prove that no counterparty would be prejudiced by the modification.

The Senior Secured Noteholders objected to this motion. They argued that one revision, in particular, waived a $3 million penalty for a delay in completing the sale. Lions Gate Films, Inc. also asserted that Dish and Blockbuster must honor a revenue-sharing agreement. A few days later, on April 26, 2011, the court granted Blockbuster’s motion by approving the modified Purchase Agreement. As a result, the asset purchase agreement between Dish and Blockbuster officially closed, with Dish maintaining the ability to determine which contracts to assume after the closing date. j. Why did Dish acquire Blockbuster? Initially, Dish pursued the acquisition so that it could utilize the Blockbuster brand and physical locations for cross-sale opportunities. Soon after the auction closed, Tom Cullen, Executive Vice President of Sales for Dish, remarked that “[w]ith [Blockbuster’s] more than 1,700 store locations, a highly recognizable brand and multiple methods of delivery, Blockbuster will complement our existing video offerings while presenting cross-marketing and service extension opportunities for Dish Network.” Thus, evidence exists that Dish believed the acquisition gave it the ability to implement free or discounted Blockbuster rentals, adding value to its paid television subscribers. However, a large incentive existed for Dish in acquiring Blockbuster’s streaming rights to a number of video titles. An acquisition of these rights could be used to expand Dish’s own streaming rights. With $3 billion of cash on hand, Dish could easily afford to purchase Blockbuster. Thus, the Blockbuster acquisition made Dish a more viable competitor in streaming videos online at a reasonable expense. The acquisition also made sense in light of Dish’s acquisition of satellite provider DBSD North America. However, Dish did not act quickly to make these synergies payoff. Even after acquiring more streaming rights, Dish faced stiff competition from old Blockbuster foes Hulu and Netflix. V. What’s Next for Blockbuster? Almost a year after Blockbuster declared bankruptcy, Dish announced Blockbuster Movie Pass to compete with services like Netflix and Hulu. In Blockbuster Movie Pass, Dish offered customers access to by mail, streaming, and television access in one bundle. This package appeared similar to the one Blockbuster planned to offer, with the addition of television service. The service originally cost $10 a month, but was free for customers of Dish’s $39.99 monthly package. Dish’s Blockbuster package sought to consolidate services to offer one product. Dish projected that it could offer more shows and movies than competitors Comcast, DirectTV, Netflix, and Qwickster. These shows could be accessed via live television or streaming media. Additionally, customers were offered the ability to exchange DVDs and games at Blockbuster locations. However, betting on a platform including brick-and-mortar stores would once again prove costly. The Blockbuster Movie Pass program failed, with Dish abandoning it in October 2012. At this time, Dish scrapped plans to use Blockbuster as a nationwide streaming or mail service. The program evolved into a similar program, Blockbuster @Home. While Dish spokesman John Hall claimed that the company is looking to leverage its existing stores with television and streaming services, it continues to “evaluate each store on a case-by-case basis for its profitability and future potential." Since acquiring Blockbuster in 2011, Dish has closed more than 2/3 of 1,700 stores it inherited. These closures resulted in the layoff of almost 40% of Blockbuster’s work force. Analysts doubt Dish’s interest in utilizing the brick-and-mortar stores. According to Charlie Moffat of Sanford C. Bernstein, “[i]t seems like whatever [Dish Chairman Charlie Ergen] had in mind for Blockbuster originally, it's not that now, and it doesn't seem like it's getting a whole lot of corporate attention anymore.” Perhaps some of the reason for the skepticism involves the limited risk Dish faced in acquiring Blockbuster. Upon its acquisition by Dish, Blockbuster had around $100 million in cash. A complete sale of the 1,700 stores was projected to net $300 million.512 This combined amount could have netted Dish a profit, without using the brand for anything, according to Dish CEO Charlie Ergen. With this information in mind, it is hard to predict the future of the Blockbuster brand. Dish could continue to move forward in utilizing Blockbuster as a streaming service or let the brand die altogether. As Ergen states, “[w]orst case, we’ll take our money after having wasted some time [on Blockbuster], not much money, and life goes on.”
4-1-2013
A Blockbuster Failure: How an Outdated Business
Model Destroyed a Giant
Todd Davis
John Higgins Recommended Citation
Davis, Todd and Higgins, John, "A Blockbuster Failure: How an Outdated Business Model Destroyed a Giant" (2013). Chapter 11 Bankruptcy Case Studies. http://trace.tennessee.edu/utk_studlawbankruptcy/11
This Article is brought to you for free and open access by the College of Law Student Work at Trace: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chapter 11 Bankruptcy Case Studies by an authorized administrator of Trace: Tennessee Research and Creative Exchange. For more information, please contact trace@utk.edu.

A Blockbuster Failure: How an Outdated Business Model Destroyed a Giant

Todd Davis, John Higgins

Table of Contents I. Introduction 1
II. Background Information 1
a. Business Model 5
b. Key Events Leading to Chapter 11 7
III. Chapter 11 12
a. “The Plan” 12
b. Filing 14
c. Petition Schedules: Liabilities, Creditors, and Assets 15
d. First Day Motions 19
e. DIP Financing 28
f. The Unsecured Creditors Committee 32
g. Administrative Expenses – Professional Fees 32
IV. The § 363 Sale 38
a. Road to the § 363 Sale 38
b. The Motion 41
c. Sale Terms 42
d. Blockbuster’s Business Justification for the § 363 Sale 46
e. Assumption and Assignment 48
f. Administrative Relief Requested 49
g. Creditors Object to the Proposed Purchase Agreement 50
h. Court’s Approval of Motion for Sale of Property 53
i. Dish Declared Winning Bidder after Auction 55
j. Why did Dish acquire Blockbuster? 59
V. What’s Next for Blockbuster? 60
Appendix A 63

ii

I. Introduction The rise of the Internet in the 1990s and 2000s rapidly created new markets. Companies like Apple seized on the ability to distribute music online for a lower price than independent record stores, or even large-scale ones like Tower Records could afford, driving record stores to near-extinction. A similar fate has fallen upon the video rental stores. Giants Movie Gallery and Blockbuster, driven by physical rental stores, began struggling to compete with streaming and mailing platforms. Both were driven into bankruptcy because they failed to adapt quickly enough. A series of poor choices by Blockbuster, including passing on the acquisition of Netflix for a mere $50 million, led the company to file Chapter 11 to reduce its roughly one billion dollar debt. This paper tells the story of Blockbuster’s venture into and through bankruptcy in an attempt to reclaim its place in the video rental world. II. Background Information In 1985, the first Blockbuster store opened its doors in Dallas, Texas. The company was the brainchild of David Cook, a computer programmer. Cook’s background proved crucial to
Blockbuster’s early success. Cook programmed Blockbuster’s computers to track inventory and consumer preferences. Thus, Blockbuster thrived off its ability to provide the films that consumers wanted at individual stores. In addition to its ability to customize store selection to local neighborhoods, a large distribution center in Dallas helped Blockbuster grow quickly. Wayne Huizenga, founder of WasteManagement, purchased a controlling interest in Blockbuster with two colleagues in 1987 for $18 million.8 Huizenga believed that Blockbuster had immense potential because, like McDonalds, it was a one-product business holding national appeal. Huizenga guided the company through a period of expansive acquisition. In 1987, Blockbuster owned eight stores and franchised eleven. Within a year, it had become the largest video chain in the world and, by 1991, Blockbuster owned 1,654 stores in the United States alone. Blockbuster expanded in part by buying out both video and music chain competitors like Erol, Sound Warehouse, and Music Plus. After seven years under Huizenga, Viacom purchased Blockbuster for $8.4 billion.
Without Huizenga’s guidance, however, the company faltered. By 1996, Blockbuster had lost half of its value. A large part of this downswing was Viacom’s prioritizing more than just renting movies. Breaking from Huizenga’s singular focus, Viacom instead tried to use Blockbuster stores as outlets for Paramount and MTV merchandise, books, toys, and selected clothing. In 1996, Blockbuster rebranded. Blockbuster Entertainment Corporation was renamed
Blockbuster, Inc. and retail stores changed from Blockbuster Video to simply Blockbuster.18 By
8 H. Wayne Huizenga: The Billionaire Garbageman, ENTREPRENEUR, (Oct. 10, 2008), http://www.entrepreneur.com/article/197648; Gandel, supra note 4. the end of the year, the company announced plans to relocate its headquarters from Fort Lauderdale to Dallas. Additionally, Jim Antioco took control as CEO in 1997. Antioco would retain this role until 2007. Under Antioco’s leadership, Blockbuster refocused on its video rental business, leading to a brief upswing in profits. But this success was short-lived, as Blockbuster made a series of mistakes regarding new media and new competitors. These choices would haunt Blockbuster, as it began to lose business and post losses. By the time Viacom spun off Blockbuster in 2004, the company lost $984 million despite a $5.9 billion revenue. Internet and subscription services emerged to challenge Blockbuster’s brick-and-mortarbased dominance in the video rental business. The best-known new competitor, Netflix, started as a DVD by-mail subscription service in 1997. Netflix employed a flat monthly fee, but did not charge late fees. Blockbuster continued to charge late fees, even after it began charging a monthly fee.27 By the time Blockbuster started a competing by-mail subscription service in 27 2004, Netflix had already cut into its customer base. Blockbuster finally discontinued its late fee program later that year. Instead of focusing on video rental competitors Netflix and Redbox, Blockbuster spent the turn of the century expanding into the videogame rental market. Blockbuster purchased competitors in this market, like Gamestation, and employed various programs to promote instore rentals. By 2002, Blockbuster had placed video game ministores representing all the major contemporary gaming platforms in 90 percent of its stores. Blockbuster continued expanding into these fields after separating from Viacom in 2004. One expansion program, Blockbuster Gamerush, allowed for video game and DVD trading in 3,000 stores to enter into the secondary market. Financier Carl Icahn, a key player throughout Blockbuster’s Chapter 11, launched a proxy fight to displace John Antioco in 2007 following a failed bid to takeover failing rival Hollywood Video. Icahn had gambled on the deal, owning a substantial number of shares of both Blockbuster and Hollywood Video. After suffering large losses following the failed acquisition, Icahn sought to curtail spending on Blockbuster Online and reinstate late fees. The proxy fight occurred after Antioco resisted these measures.35 Under Ichan-approved CEO Jim
35

Keyes, Blockbuster approved the cuts, temporarily boosting the value of shares. Within a few years, Blockbuster filed bankruptcy. a. Business Model Blockbuster originally established its retail channels to customers through its “bricks and mortar” stores in the United States and abroad. As of August 29, 2010, Blockbuster had 3,306 operating stores, which offered movies and games for rent and purchase in addition to other entertainment products relating to consumer electronics and accessories. Blockbuster believed its advantage over its competitors lay with its ability to make available new releases of movies, while other competitors would not have access to new released movies for the initial 28 days of release. In 2009, certain movie studios imposed this 28-day window on the rental of newly released titles after the initial distribution date. In the early 2000s, Blockbuster expanded its operations to include new distribution channels. In early 2009, Blockbuster launched BLOCKBUSTER Express® with NCR Corporation (“NCR”). BLOCKBUSTER Express® branded vending kiosks to compete directly with a competitor that provides movie rentals though vending kiosks. As of September 19, 2010, NCR had approximately 6,630 kiosks operating under the BLOCKBUSTER Express® brand in the United States. Additionally, Blockbuster made its products available through mail and digital distribution channels. Blockbuster offered a by-mail subscription program through both its retail chain and its website, allowing customers rent products that were delivered directly by mail.45 Through its BLOCKBUSTER Total Access ™ program, Blockbuster customers could augment their subscription s with the ability to exchange up to five online movie rentals for instore movies at its retail locations. Blockbuster tried to promote its by-mail channel by launching a marketing partnership with Comcast Cable Corporation (“Comcast”). The marketing partnership offered Comcast customers Blockbuster’s by-mail services through a cobranded website, www.DVDsbymail.com, as an additional service within Comcast packages. In return, Blockbuster installed Comcast-dedicated kiosks in select stores that allowed customers to learn about and sign up for Comcast services. To help establish its digital channel, Blockbuster purchased Movielink from a consortium of movie studios in 2007. Consequently, Blockbuster’s website allowed customers to download and watch movies on their personal computers. Blockbuster also formed partnerships with third-party consumer electronics device developers to digitally deliver media entertainment to customers through devices like Internet-connected televisions. To expand in mobile markets, Blockbuster partnered with device makers, such as Motorola and HTC, to include Blockbuster’s digital applications in their new models for Verizon and T-Mobile. Domestically, in 2010, Blockbuster employed 25,500 employees, of whom approximately 7,500 were full-time and approximately 18,000 were part-time. Blockbuster paid a substantial portion of its employees, about 88%, on an hourly basis.54 In dealing with retail and by-mail channels, Blockbuster managed its inventory out of the 850,000 square foot distribution center in McKinney, Texas.55 Blockbuster used a network of third-party delivery
54
55 agents for distributing merchandise from this distribution center to domestic stores. Along with the McKinney distribution center, Blockbuster operated 39 additional distribution centers across the United States to support its by-mail subscription program. Blockbuster also operated stores internationally, including owned retail operations in
Canada, the United Kingdom, Denmark, Italy, Mexico, Argentina, and Uruguay. Additionally, Blockbuster franchised retail operations in Australia, Brazil, Chile, Columbia, Guatemala, Israel,
Italy, Mexico, New Zealand, Panama, Portugal, and Taiwan. As of August 29, 2010, Blockbuster owned 2,333 stores in 16 markets outside of the United States. Blockbuster was aware that brick and mortar stores could not compete in the twenty-first century. Despite Blockbuster’s efforts to expand into new retail channels, Blockbuster continued to struggle against its competitors. In the end, Blockbuster had to file for bankruptcy protection. b. Key Events Leading to Chapter 11 A changing market paved the way into bankruptcy for Blockbuster. Jeffery Stegenga,
Chief Restructuring Officer of Blockbuster, attributed Blockbuster’s declining revenue to five main events: (i) increased competition in the media entertainment industry; (ii) technological advances that changed the landscape of the industry; (iii) changing consumer preferences; (iv) the rapid growth of disruptive new competitors; and (v) the general economic environment. Along with these changes and difficult operating environment, Blockbuster was hindered by the high level of debt that the business had incurred during earlier periods of significantly lower competition and higher operating performance.62 In particular, the greatest challenge for Blockbuster was the rapid rise of new competitors utilizing alternative distribution methods to meet customer demand.63 These competitors
62
63 acquired substantial market shares and eroded the size of Blockbuster’s traditional store-based customer market. Even though Blockbuster initiated other channels of distribution to customers, the revenues and profits from these other channels have not compensated for the declining revenue from the reduced traffic within its traditional store-based channel. Furthermore, Blockbuster faced an overall lapse in the market for the rental and sale of physical disks. Instead, the increasing number of competitors providing direct delivery media entertainment replaced the demand for rental and sale of physical disks. The rise of competitors arguably could not have happened at a worse time, as the economic recession from 2009 to 2010 exacerbated the hard times felt by Blockbuster. During this economic recession, domestic unemployment remained high, keeping consumer spending consistently low. Therefore, customers became more sensitive to pricing and convenience, negatively impacting the performance of most retailers, including Blockbuster. From 2009 to 2010, Blockbuster responded to these continued economic challenges and changing media industry with a number of proactive steps. Specifically, Blockbuster (i) reduced general and administrative expenses, resulting in a $333 million decrease of administrative expenses in 2009; (ii) closed unprofitable and underperforming domestic stores; (iii) evaluated the divestiture of certain of its international assets; (iv) completed two refinancing transactions in 2009 to extend debt maturities and amortizations schedules; (v) negotiated the release of significant restricted cash associated with letters of credit relating to historical lease guarantees; and (vi) granted certain studios a security interest in the assets of its Canadian operation in exchange for enhanced credit terms.72 Consequently, from 2009 to 2010,
Blockbuster closed 1,061 domestic company-operated stores.73
72
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In February 2009, Blockbuster sought Rothschild, Inc. (“Rothschild”) to serve as investment banker and financial advisor, specifically to help evaluate its capital structure and financing alternatives. Worried about the imminent maturity of its revolving credit facility and its lack of access to new capital, Blockbuster replaced its maturing revolver with a steeply amortizing term loan. This amortizing term loan carried high rates of interest and fees; moreover, the amortization schedule significantly reduced available liquidity and constrained operations. Then, in October 2009, Blockbuster successfully completed the issuance of the Senior Secured Notes to refinance the existing credit facility term loans ahead of scheduled amortization payments that were to take place in 2010 and 2011. The issuance of the Senior Secured Notes gave Blockbuster an extension of maturities and additional liquidity.
Blockbuster invested heavily in its inventory levels to gear up for the key 2009 holiday season. Although the issuance of the Senior Secured Notes allowed Blockbuster to prepare for the 2009 holiday season, the fourth quarter of 2009 proved extremely difficult for Blockbuster. During this quarter, Blockbuster faced the ever-present rapid expansion from key competitors like Netflix. Blockbuster suffered from deeply discounted sales of new-release titles by bigbox retailers.82 It further failed to secure the anticipated 28-day window advantage on key titles ahead of the holidays.83 Consequently, the operating results and period-ending liquidity for the final quarter of 2009 fell significantly short of projections.84 This disappointing quarter capped
82
83 84 off a terrible year for Blockbuster, in which it reported a loss of $558.2 million and a 15.6% decline in its domestic segment. Shortly thereafter in the beginning of 2010, Blockbuster, Rothschild, and attorneys for the Debtors, Weil, Gotshal & Manges LLP (“Weil”) engaged in negotiations with financial and legal advisors, respectively, to select holders of the Senior Secured Notes (the “Senior Secured Noteholders”). Additionally, Blockbuster, Rothschild, and Weil started discussions with financial and legal advisors to group of holders of the Senior Subordinated Notes (the “Senior Subordinated Noteholders”). These negotiations between the respective parties centered upon an infusion of capital by the Senior Secured Noteholders and a recapitalization of Blockbuster pursuant to reorganization under Chapter 11 of the Bankruptcy code. As 2010 progressed, and Blockbuster’s business continued to decline, the New York Stock Exchange sent Blockbuster notice that it was no longer in compliance with the Exchange’s continued listing standard. In order to boost liquidity for a $43 million payment on the Senior
Secured Notes due on April 1, 2010, Blockbuster pledged the collateral of Blockbuster’s nonDebtor Canadian operations to certain studios to receive an additional 30 days of credit terms
(the “Canadian Lien”). After entering this pledge agreement, Blockbuster further failed to raise new capital with an unsuccessful offer to exchange the Senior Secured Notes for equity.91 As a result, in late April 2010, Blockbuster retained Alvarez & Marsal North America
LLC (“A&M”) to serve as restructuring advisors.92 Then, in early July 2010, A&M appointed Jeffery Stegenga as Chief Restructuring Officer of the Blockbuster project.93 Blockbuster’s liquidity further deteriorated due to its lagging performance, the tightening of credit by non-
91
92
93

studio vendors, and loss of trade credit at the international operations that normally carried material cash flow to Blockbuster. Realizing that recapitalization would require even more capital, Blockbuster and its advisors negotiated a transaction that would exchange a portion of the debt under the Senior Secured Notes for equity under a reorganized Blockbuster. This exchange would be achieved through a debtor-in-possession financing agreement once Chapter 11 was commenced. Besides focusing on how to capitalize the reorganized Blockbuster, the Debtors also sought proposals of acquisitions from other financial partners. Meanwhile, Blockbuster continued to suffer significant shortfalls with both its operating performance and liquidity. On July 7, the New
York Stock Exchange suspended trading of Blockbuster’s common stock. In response, Blockbuster entered into a Forbearance Agreement with Senior Secured
Noteholders to defer a $42.4 million payment of interest and principal which was due on July 1,
2010. Blockbuster publicized the (for clarity, what exactly is the news) disappointing news on August 13, 2010. Consequently, Blockbuster experienced a material decline in the trading prices of all its securities and received adverse media attention. During this time, Blockbuster’s management along with the Senior Secured Noteholders negotiated heavily with certain key studios regarding new trade agreements. Blockbuster understood that the reorganization of the business depended on preserving relationships with its trade creditors, especially the studios. Therefore, in order to prevent the expiration of trade agreements with the studios, the parties agreed to extend the terms of the Forbearance Agreement to September 30, 2010. Finally, on September 1, 2010, Blockbuster missed a $13.5 million payment on the Senior Secured Notes. Aware of the approaching deadlines for the forbearance and payment grace periods, Blockbuster believed the best way to protect the interests of its stakeholder while maximizing the value of the business was to seek protection under Chapter 11 of the Bankruptcy Code. III. Chapter 11 a. “The Plan” As discussed above, Blockbuster and its advisors had worked closely with a large number of interested parties to smooth its transition into a new organization, including the Sponsoring Noteholders and their advisors. As a result of these negotiations, Blockbuster entered into an agreement with these parties regarding the terms of Chapter 11. The goal of the plan was to “substantially delever” Blockbuster so it could carry on as a new organization. To accomplish this goal, the plan provided that all of the Senior Secured Notes would convert into equity in the new Blockbuster. This move, believed the involved parties, would provide the financial flexibility necessary for the company to compete in the market going forward. Blockbuster estimated that it could reduce its debt from over $1 billion to an estimated $100 million or less.113 Under the plan, holders of Blockbuster’s outstanding subordinated debt, preferred stock, and common stock would not recover.114 Blockbuster attempted to pursue a long-term strategy of standing out as the only market player providing access across multiple delivery channels while providing convenience and value to customers.115 In pursuing new opportunities in the digital market, the new Blockbuster aimed to capitalize on its brand, library of titles, and relationships with major studios.116 Encouraging the company in its reorganization was the success of other traditionally strong brands, like Apple, who thrived with a new business model.117 Blockbuster planned to evaluate the overall profitability of its 3,000 American stores during bankruptcy.118 At the time of filing, none of these stores had yet been closed.119 This part of the plan demonstrates Blockbuster’s self-belief in competing with a hybrid of brick-andmortar stores, delivery services, and streaming media. Essentially, Blockbuster viewed Chapter 11 as an opportunity to temporarily hold off creditors and restructure into a better version of what it already was, using financing to expand its pursuits into newer forms of media. It believed that it needed only increased liquidity to effectuate these changes.

113 BLOCKBUSTER CORPORATE, NEWS RELEASE: BLOCKBUSTER RECEIVES FINAL COURT APPROVAL OF
'DIP' FINANCING, (Oct. 27, 2010) http://phx.corporate-ir.net/phoenix.zhtml?c=99383&p=irolhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/phxblockbustercorporate.pdfnewsArticle&id=1487994. 114 BLOCKBUSTER CORPORATE, NEWS RELEASE: TO IMPLEMENT RECAPITALIZATION, COMPANY
INITIATES "PRE-ARRANGED" CHAPTER11 PROCEEDINGS BLOCKBUSTER STORES AND OPERATIONS
CONDUCTING BUSINESS IN THE ORDINARY COURSE SECURES $125 MILLION DIP FINANCING COMMITMENT, (Sep. 23, 2010) http://investor.blockbuster.com/phoenix.zhtml?c=99383&p=irolhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/newsreleasetoimplementrecap.pdfnewsArticle&id=1474126. 115 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). 116 Id. 117 Austin Carr, Blockbuster CEO Jim Keyes on Bankruptcy, Netflix, and Becoming the Next Apple, FAST COMPANY, (Jun. 21, 2010), http://www.fastcompany.com/1661556/blockbuster-ceo-jim-keyeshttp://www.fastcompany.com/1661556/blockbuster-ceo-jim-keyes-bankruptcy-netflix-and-becoming-next-applebankruptcy-netflix-and-becoming-next-apple. 118 News Release, supra note 113. 119 Id.
b. Filing Blockbuster filed a Voluntary Petition (the “Petition”) for bankruptcy protection on September 23, 2010 in the Southern District of New York. Blockbuster is from Dallas, TX, and its principle place of business is Dallas County. As mentioned earlier, Blockbuster retained Weil Gotshal, an international law firm based out of Houston, TX, to file its petition. Stephen Karotkin served as lead counsel. Blockbuster’s Vice President, General Counsel, and Secretary, signed the petition on behalf of the company. Blockbuster filed as a retail corporation. The Petition estimated that Blockbuster had over 100,000 creditors, greater than one billion dollars in assets, and greater than one billion dollars in liabilities. The debts are denoted as primarily business debts. At the time of filing, Blockbuster estimated that funds would be available for distribution to unsecured creditors. Exhibit A of the Petition provided more specific information regarding the financial situation current to August 1, 2010. According to Exhibit A, Blockbuster had $1,017,035,832 in total assets and $1,464,939,759 in total debt. As of September 2, 2010, Blockbuster had 32,610 shares of preferred stock and 223,801,559 shares of common stock outstanding. More than 500 holders held approximately $930,000,000 worth of debt securities.132

Rider 2 of the Petition includes a list of the thirteen affiliated entities that would request a consolidated hearing for procedural purposes.133 The Petition also includes a list of the various names Blockbuster used over the eight years prior to filing for Chapter 11 protection.134 The Petition included a list of the 50 largest unsecured claims against the various
Blockbuster affiliates.135 However, the Petition does not include the list of creditors, whom Blockbuster listed later in its Schedules.136 Blockbuster instead filed a motion requesting a waiver of this requirement pursuant to sections 105(a), 342(a), and 521(a)(1) of title 11 of the
United States Code, Rules 1007(a)(1) and 2002(a), (f), and (l) of the Federal Rules of Bankruptcy Procedure, as well as some local rules.137 c. Petition Schedules: Liabilities, Creditors, and Assets Blockbuster filed Petition Schedules (“Schedules”) for its thirteen affiliates on October 22, 2010.138 There are ten different types of Schedules. Debtors are supposed to include real property assets in a Schedule A, personal property assets in a Schedule B, and exempted property in a Schedule C. Creditors holding secured claims are to be listed in a Schedule D, creditors holding unsecured priority claims should be listed in a Schedule E, while creditors holding unsecured non-priority claims need to be listed in a Schedule F. Schedules G and H reflect

132 Approximately 41 institutional holders out of possibly more than 500 total holders held $630,000,000 in 11.75% Senior Secured Notes due 2014. Approximately 11 institutional holders out of possibly more than 500 total holders held $300,000,000 in 9% Senior Subordinated Notes due 2012. Id. 133 Id. at Rider 2. 134 Id. at Rider 1. 135 Id. at 1. 136 Id. 137 Id. 138 DEBTORS’ SCHEDULES (Blockbuster Inc., Blockbuster Digital, Trading Zone, Movielink, B2,
Blockbuster Video Italy, Blockbuster Canada, Blockbuster Distribution, Inc., Blockbuster Gift Card,
Blockbuster Global Services, Blockbuster International Spain, Blockbuster Procurement), In re
Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). Pursuant to an order granted on October 23, 2010, Blockbuster received an additional 15 days to file its Schedules on top of the 14 day period under § 1007(c). ORDER PURSUANT TO 11 U.S.C. § 521 AND FED. R. BANKR. P. 1007(C)
EXTENDING TIME TO FILE SORCHEDULES OF ASSETS AND LIABILITIES, SCHEDULES OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES, AND STATEMENTS OF FINANCIAL AFFAIRS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). executory contracts and unexpired leases and codebtors, respectively. Debtors list current income in Schedule I and current expenditures in Schedule J. i. Blockbuster, Inc. The Schedules filed for Blockbuster, Inc. contained the bulk of the total assets and liabilities for the affiliates. Schedule A listed an estimated $10,240,132 in real property assets,139 while Schedule B listed an estimated $607,426,522 in personal property assets. Real property assets largely included stores owned by the Debtor. Personal property assets included cashon-hand in store registers, checking and savings accounts, lease deposits, movie memorabilia, accounts receivable, machinery, office equipment, and inventory. The largest personal property asset, at $275,672,540, was Blockbuster’s rental inventory. Blockbuster, Inc. listed $665,831,108 in secured claim liabilities, $486,105,509.97 in unsecured non-priority liabilities, and no unsecured priority liabilities. The secured claim amount listed on Blockbuster, Inc.’s Schedule D wholly stemmed from the principle and interest due on the Senior Secured Notes. The unsecured priority claims include a large number of undetermined payroll, income, and property tax liabilities. The unsecured non-priority claims
139 DEBTOR’S SCHEDULE A (Blockbuster Inc.), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 420) include large amounts of trade payable, including over a million dollars to Coca Cola and its subsidiaries, for example. Others falling in this category are claims for leases, unclaimed property claims, litigation liabilities, workers’ compensation, and stock options, amongst others. Blockbuster, Inc. claimed no property exemptions; as a corporation, it was not entitled to any. The codebtors mainly included the Blockbuster affiliates and CBS affiliates formerly associated with Blockbuster through Viacom. Blockbuster Inc.’s Schedule G, listing its executory contracts, contains 775 pages of various marketing agreements, property leases, public relations agreements, and franchise agreements. Likely due to the massive scope of its operations, Blockbuster, Inc. did not attempt to estimate its current income or expenditures. The information in the Schedules roughly corresponds to the estimates include in the Voluntary Petition. ii. Blockbuster Digital Blockbuster Digital’s filings were substantially shorter than those of Blockbuster, Inc. Only Blockbuster Digital’s Schedules B and F listed any determined asset or liability. However, Schedules D and E allowed for the possibility of undetermined amounts owed to creditors. At the time of filing, Blockbuster Digital held an estimated $110,493.00 in assets and $4,335,368.83 in liabilities. iii. Blockbuster Procurement Blockbuster Procurement listed personal property assets include accounts receivable and cash in corporate accounts. In total, Blockbuster Procurement held $1,278,103.95 in determined assets. The filings for Blockbuster Procurement listed roughly $900,000.00 in determined unsecured non-priority liabilities. iv. Blockbuster Canada, Blockbuster Distribution, Inc., Blockbuster Gift Card,
Blockbuster Global Services, Blockbuster International Spain, Blockbuster
Investments LLC, Blockbuster Video Italy, Movielink, Blockbuster Trading Zone, and B2 In even simpler filings, a majority of the Blockbuster subsidiaries only included one determined asset, a personal property asset described as “intercompany receivable.” All of these subsidiaries faced undetermined amounts of liabilities, mainly tax and insurance liabilities. The largest intercompany receivable belonged to Blockbuster Distribution, Inc.
Blockbuster Distribution listed $502,560.00 in intercompany receivable. Listing $1,000 in intercompany receivables were Blockbuster Canada,163 Blockbuster Gift Card,164 Blockbuster International Spain, Blockbuster Investments, Blockbuster Video Italy, Movielink,
Blockbuster Trading Zone, and B2. Schedule B of Blockbuster Global Services listed $200.00 of the same generic asset. d. First Day Motions Blockbuster’s first day motions reflect the goals of the company’s bankruptcy plan. Blockbuster planned to emerge from Chapter 11 as an invigorated, optimal version of what it had been previously. Blockbuster’s first-day motions can be separated into two groups, those that were primarily administrative motions and those that were largely substantive motions. Administrative Motions For the sake of procedural convenience, Blockbuster filed a motion requesting joint administration for the thirteen companies falling under the greater Blockbuster umbrella. The
163 See DEBTOR’S SCHEDULES (Blockbuster Canada), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 423). 164 See DEBTOR’S SCHEDULES (Blockbuster Liquidating), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 427). court granted this motion on September 23, 2010.173 The motion sought to reduce administrative costs and reduce the burden on the court, creditors, and the debtors. The size of the case could have potentially caused problems had Blockbuster attempted to comply explicitly with all the default requirements of the Bankruptcy Code. Blockbuster asked the court to waive the requirement to file a list of creditors and equity security holders under section 521(a)(1) of the Bankruptcy Code, amongst other rules.174 In the same motion, to comply with notice requirements in a more efficient manner, Blockbuster requested that it be able to hire Kurtzman Carson Consultants.175 Amongst other things, Kurtzman Carson maintained a website listing important dates and parties.176 While Kurtzman Carson used a list of creditors and equity holders to furnish notice, Blockbuster also published its notice of commencement in the Wall Street Journal, the New York Times, the Dallas Morning news, as well as on the Blockbuster and Kurtzman Carson websites.177 Blockbuster also requested an extension of the period in which to file it schedules of assets and liabilities, schedules of executory contracts and unexpired leases, and statements of financial affairs.178 The Bankruptcy Code, under Rule 1007(c), normally provides a fourteen- ADMINISTRATION OF CHAPTER11 CASES, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) at 1. (No. 3). 173 ORDER SIGNED ON 9/23/2010 GRANTING MOTION DIRECTING THE PROCEDURAL CONSOLIDATION AND JOINT ADMINISTRATION OF THE CHAPTER11 CASES, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 39). 174 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 342(A), AND
521(A)(1), FED. R. BANKR. P. 1007(A) AND 2002(A), (D), (F), AND (L), AND LOCAL BANKRUPTCY RULE
1007-1 REQUESTING (I) A WAIVER OF THE REQUIREMENT THAT DEBTORS FILE LISTS OF CREDITORS AND
EQUITY SECURITY HOLDERS AND (II) APPROVAL OF THE FORM AND MANNER OF NOTIFYING CREDITORS
OF COMMENCEMENT OF DEBTORS CHAPTER11 CASES AND FIRST MEETING OF CREDITORS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 6). 175 Id. 176 Listed parties include Counsel to the Debtors, Counsel to the Official Committee of Unsecured
Creditors, and the United States Trustee. Contact information for all is provided. KURTZMAN CARSON CONSULTANTS, BB Liquidating Inc., et al. (f/k/a Blockbuster Inc., et al.), http://www.kccllc.net/blockbuster. 177 APPLICATION TO EMPLOY KURTZMAN CARSON CONSULTANTS LLC AS NOTICE AND CLAIMS AGENT, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 24). 178 MOTION TO EXTEND TIME / DEBTORS' MOTION PURSUANT 11 U.S.C. § 521 AND FED. R. BANKR. P. 1007(c), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 7). day period to file these documents. Blockbuster sought an additional forty-five days to file, giving it fifty-nine days total after commencing the Chapter 11 case. The Bankruptcy Court granted both these motions in their entirety. These sorts of arrangements are both necessary and common in large Chapter 11 cases as, without them, the administrative expense of literal compliance with the Code and Rules would only increase what are already typically stunningly high fees for case administration in Chapter 11. Substantive Motions The rest of Blockbuster’s first-day motions dealt with continuing various aspects of its business. With continuity as an overriding goal, Blockbuster filed a motion on September 24, 2010 to allow for the employment and retention of employees in the ordinary course of business. Otherwise, it would have been forced to submit separate employment applications and retention orders for court approval for each individual professional. A company of Blockbuster’s magnitude could not possibly conform to this sort of regulation in a cost-effective manner—it employed attorneys, accountants, real estate brokers, and other professionals all over the country. This motion was granted by the court on October 21, 2010. Blockbuster utilized a complex cash management system in the ordinary course of its business. Various bank accounts funneled into a centralized system to collect, transfer, and disperse funds.186 According to their filings, Blockbuster cash management system involved $46 million flowing through accounts at over 200 banks.187 Due to the complexity of its cash management system, Blockbuster did not want to open new “debtor in possession” bank accounts.188 Accordingly, Blockbuster filed a motion to preserve the cash management system.189 The court granted this motion on an interim basis on the filing date,190 and permanently on October 21, 2010.191 Blockbuster also sought to continue its insurance programs via its first-day motions.192 In this motion, Blockbuster requested the court allow it to pay both prepetition and postpetition insurance obligations.193 Blockbuster also sought to maintain various liability programs through different carriers.194 In addition, it sought to modify the automatic stay with respect to worker’s BANK ACCOUNTS AND BUSINESS FORMS; AND (II) AN EXTENSION OF TIME TO COMPLY WITH SECTION 345(B) OF THE BANKRUPTCY CODE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 8). 186 Id. at 8. 187 Id. at 9. 188 Id. 189 Id. 190 INTERIM ORDER SIGNED ON 9/23/2010 GRANTING (I) AUTHORITY TO (A) CONTINUE TO OPERATE THE
DEBTORS CASH MANAGEMENT SYSTEM, (B) HONOR CERTAIN PREPETITION OBLIGATIONS ON ACCOUNT
OF SERVICE CHARGES RELATED THERETO, AND (C) MAINTAIN EXISTING BANK ACCOUNTS AND BUSINESS FORMS AND (II) AN EXTENSION OF TIME TO COMPLY WITH 11 U.S.C. SECTION 345(B), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 58). 191 FINAL ORDER SIGNED ON 10/20/2010 GRANTING (I) AUTHORITY TO (A) CONTINUE TO OPERATE THE
DEBTORS CASH MANAGEMENT SYSTEM, (B) HONOR CERTAIN PREPETITION OBLIGATIONS ON ACCOUNT
OF SERVICE CHARGES RELATED THERETO, AND (C) MAINTAIN EXISTING BANK ACCOUNTS AND BUSINESS FORMS AND (II) AN EXTENSION OF TIME TO COMPLY WITH 11 U.S.C. SECTION 345(B), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 391). 192 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§105(A), 363(B), AND 503(B)
AND FED. R. BANKR. P. 4001, 6003, AND 6004 FOR (I) AUTHORITY TO (A) CONTINUE THE DEBTORS'
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) TO DIRECT FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 12). 193 Id. at 7-12. 194 Such programs include “various property, casualty, workers’ compensation, and management liability related insurance coverage for liabilities relating to, among other things, general commercial claims, property damage, workers’ compensation, automobile damage, general foreign liability, directors’ and compensation claims.195 This motion was granted on an interim basis on the filing date196 and the court permanently granted the motion on October 21, 2010,197 allowing Blockbuster’s banks to receive, honor, process, and pay these claims, to the extent funds were available.198 A failure to pay insurance premiums would vest the right of carriers to terminate programs vital to carrying on Blockbuster’s business.199 Blockbuster also sought permission to continue honoring certain employee obligations via first-day motion.200 Effectively, Blockbuster felt it needed to continue business as usual, to officers’ liability, fiduciary liability, crime, excess umbrella, and various other product and property related and general liabilities.” Id. at 7; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). 195 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§105(A), 363(B), AND 503(B)
AND FED. R. BANKR. P. 4001, 6003, AND 6004 FOR (I) AUTHORITY TO (A) CONTINUE THE DEBTORS'
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) TO DIRECT FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) at 11-12. (No. 12). 196 INTERIM ORDER SIGNED ON 9/23/2010 (I) AUTHORIZING DEBTORS TO (A) CONTINUE THEIR
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) DIRECTING FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 58). 197 FINAL ORDER SIGNED ON 10/20/2010 (I) AUTHORIZING DEBTORS TO (A) CONTINUE THEIR
INSURANCE PROGRAMS AND (B) PAY ALL OBLIGATIONS IN RESPECT THEREOF, AND (II) DIRECTING
FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH INSURANCE OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 394). 198 Id. 199 Not only would Blockbuster be exposed to risk of a virtually unlimited proportion, it was also required by several state and federal laws to maintain several of these programs. Because Blockbuster sought to emerge from Chapter11 as a going concern, it was necessary to maintain these payments. AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). 200 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), AND 507 AND
FED. R. BANKR. P. 6003 AND 6004 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) FOR
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re
Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) (No. 9). These obligations included compensation, garnishment, supplemental workforce, independent contractor, reimbursement, payroll tax, incentive, and employee benefit obligations, in addition to severance and retention plans. Id.; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). every possible extent, concerning employee compensation to be viable. A freeze on compensation would severely limit its ability to emerge from Chapter 11 as a going concern, as it could result in a flight of talent from the workforce.201 Talent flight is a common problem in bankruptcy, recently evidenced in the Borders’ Chapter 11.202 In addition, Blockbuster would need to meet general staffing needs to account for natural attrition.203 On a more personal level, Blockbuster employees relied on these contracts to pay bills.204 The court, understanding this analysis, approved this motion on an interim basis on September 23205 and permanently on October 21, 2010.206 While death is not guaranteed, corporations must face the other inevitability of “life”— taxes. Not meeting these responsibilities could have disastrous effects on a business.
Accordingly, Blockbuster filed for the ability to pay “valid and undisputed taxes,” (as though they would willingly pay taxes they disputed and deemed “invalid” outside of bankruptcy) that it incurred through its business operations.207 A failure to pay taxes could result in liens, frustrating the deleveraging purpose of bankruptcy. 201See, e.g. Jeff Amy, Deposed Arby's owner says it's not his fault that workers weren't paid, PRESSREGISTER (Oct. 14, 2010) http://blog.al.com/live/2010/10/deposed_arbys_owner_says_its_n.html. 202 Up to 47 corporate employees, including two high level executives left during Borders’ Chapter11 case, causing serious staffing issues. Jason Boog, Borders Has Lost 47 Corporate Employees Since Bankruptcy, GALLEYCAT (Apr. 14, 2011) http://www.mediabistro.com/galleycat/borders-has-lost-47http://www.mediabistro.com/galleycat/borders-has-lost-47-corporate-employees-since-bankruptcy_b27761corporate-employees-since-bankruptcy_b27761. 203 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), AND 507 AND FED. R. BANKR. P. 6003 AND 6004 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) FOR
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re
Blockbuster, Inc. at 13-14. (No. 9). 204 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 38. 205 INTERIM ORDER SIGNED ON 9/23/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) DIRECTING
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 52). 206 FINAL ORDER SIGNED ON 10/20/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN EMPLOYEE
OBLIGATIONS AND MAINTAIN AND CONTINUE EMPLOYEE BENEFITS AND PROGRAMS AND (II) DIRECTING
BANKS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 392). 207 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), 507(A)(8), AND 541 AND FED. R. BANKR. P. 6003 AND 6004 REQUESTING AUTHORITY TO PAY PREPETITION TAXES AND ASSESSMENTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 10)
Such taxes include sales, use, franchise, income, real and personal property, and annual report taxes, in Another important aspect of taxes, for both mega-corporations like Blockbuster and individuals with a modest net worth, is the ability to realize the benefits of losses and credits. Blockbuster filed a motion to implement procedures to protect the potential value of its net operating tax loss carryforward amounts, net unrealized built-in losses in its assets, and certain other tax and business credits.208 Blockbuster was concerned with transactions that could pose a serious risk under change of ownership tests, which could destroy the company’s tax attributes.209 These tax attributes, according to Blockbuster, were valuable assets.210 Additionally, Blockbuster attempted to carry on in the ordinary course of business through Chapter 11 was requesting the authority to continue selected customer programs.211 To Blockbuster, part of remaining competitive in the market hinged on honoring certain programs developed to “ensure customer satisfaction, promote rental and sales growth, meet competitive pressures, develop and sustain customer loyalty, improve profitability, and generate goodwill.”212 Competitors had already taken a significant portion of Blockbuster’s market share forcing it into bankruptcy,213 so an inability to honor customer programs could provide a stumbling block in the reorganization efforts. A significant portion of Blockbuster’s prepetition competitive advantage was its stellar relationship with key studios.214 Blockbuster positioned itself to receive a number of exclusive addition to business license assessments, along with any penalties and interest associated with these taxes. Id. 208 Additionally, the motion proposed restrictions on certain transfers. The procedures proposed in the motion served to notify stockholders of an injunction prohibiting acquiring ownership of such stock above a certain threshold while imposing restrictions to ensure Blockbuster received the full benefits of the automatic stay. AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 39-40. 209 Id. at 40. 210 Id. 211 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A) AND 503(B)(1) FOR AUTHORIZATION TO HONOR CERTAIN PREPETITION CUSTOMER PROGRAMS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 14). 212 Id. at 7; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 41. 213 Ruth Sara Lee, Corporate Reorganization as Corporate Reinvention: Borders and Blockbuster in Chapter11, HARVARD BUSINESS LAW REVIEW, http://www.hblr.org/2011/03/corporate-reorganizationhttp://www.hblr.org/2011/03/corporate-reorganization-as-corporate-reinvention-borders-and-blockbuster-in-chapter-11/as-corporate-reinvention-borders-and-blockbuster-in-chapter-11/. 214 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. (No. 4). rights.215 To maintain this advantage and, on an even more basic level, to procure product for its customers, Blockbuster filed a motion authorizing the payment of both prepetition and postpetition obligations.216 Success in the movie and video game rental business hinges on a constant stream of product; if Blockbuster lost access to new video games, it “essentially would be out of business.”217 The importance of this motion is hard to overstate, as Blockbuster had little control over the product it received from the studios.218 In the same motion, Blockbuster requested that it be allowed to pay the secured studios’ legal expenses as an administrative expense, to help Blockbuster maintain its relations with the studios.219 The court granted this motion on an interim basis on September 27, 2010.220 Following some objections in response contesting this action, the court eventually granted Blockbuster’s motion on October 27, 2010.221 Similarly, to maintain its competitive advantage, Blockbuster needed a cost-effective manner to transport the product from the studios to Blockbuster and, ultimately, from 215 Id. 216 MOTION TO AUTHORIZE /DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105, 363(B)(1), AND 503(B)
AND FED R. BANKR. P. 6003 AND 6004 REQUESTING (I) AUTHORITY TO PAY CERTAIN PREPETITION
CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 16). 217 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 42. Blockbuster claimed that under the Canadian Lien Agreement, a failure to pay these claims would cause a default likely resulting in a likely shutdown of the Canadian operations. 218 Id. at 43. 219 MOTION TO AUTHORIZE /DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105, 363(B)(1), AND 503(B)
AND FED R. BANKR. P. 6003 AND 6004 REQUESTING (I) AUTHORITY TO PAY CERTAIN PREPETITION
CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010) at 22. (No. 16). 220 INTERIM ORDER SIGNED ON 9/27/2010 PURSUANT TO 11 U.S.C. SECTIONS 105, 363(B)(1), AND 503(B) AND FED. R. BANKR. P. 6003 AND 6004 REQUESTING (I) AUTHORITY TO PAY CERTAIN PREPETITION CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 114). 221 FINAL ORDER SIGNED ON 10/27/2010 GRANTING (I) AUTHORITY TO PAY CERTAIN PREPETITION
CLAIMS OF MOVIE STUDIOS AND GAME PROVIDERS AND (II) ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR ALL UNDISPUTED OBLIGATIONS ARISING POSTPETITION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 469). Blockbuster to the consumer.222 With the rise of by-mail subscriptions, maintaining relationships with common carriers took on increased importance. One of Blockbuster’s competitive advantages was a 28-day non-compete window after a movie’s release.223 While discussing the 28-day advantage in a 2010 interview, CEO Jim Keyes stated that a “majority of our business— as much as 80%—has been in new releases.”224 A delay in shipping could effectively destroy this advantage, one of the few Blockbuster maintained at the time it filed for Chapter 11 protection. Rather than attempt to set up new contracts, Blockbuster filed a motion to allow it to maintain its existing common carriers and fulfill prepetition debts,225 which the court granted the same day on an interim basis.226 Like many of the other first-day motions, the court approved the motion on October 21, 2010.227 Blockbuster also filed a first-day motion for authority to honor certain prepetition obligations to selected vendors, suppliers, and service providers.228 Blockbuster needed to maintain receiving product from these vendors to maintain its inventory in stores, protecting it revenue streams and its value as a going concern.229 The court approved this motion on an interim basis on September 27, 2010230 and permanently on October 21, 2010.231 222 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A) AND 363
REQUESTING (I) AUTHORITY TO PAY PREPETITION CLAIMS OF COMMON CARRIERS, AND (II) DIRECTION OF BANKS AND OTHER FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC
PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 13). 223 See id.; AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 44-45; Carr, supra note 117. 224 Carr, supra note 117. 225 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A) AND 363
REQUESTING (I) AUTHORITY TO PAY PREPETITION CLAIMS OF COMMON CARRIERS, AND (II) DIRECTION OF BANKS AND OTHER FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC
PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 13). 226 INTERIM ORDER SIGNED ON 9/23/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN PREPETITION
CLAIMS OF COMMON CARRIERS AND OTHER LIEN CLAIMANTS, AND (II) DIRECTING BANKS AND OTHER
FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 56). 227 FINAL ORDER SIGNED ON 10/20/2010 (I) AUTHORIZING THE DEBTORS TO PAY CERTAIN PREPETITION
CLAIMS OF COMMON CARRIERS AND OTHER LIEN CLAIMANTS, AND (II) DIRECTING BANKS AND OTHER
FINANCIAL INSTITUTIONS TO HONOR RELATED CHECKS AND ELECTRONIC PAYMENT REQUESTS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 395). 228 MOTION TO AUTHORIZE / DEBTORS' MOTION PURSUANT TO 11 U.S.C. §§ 105(A), 363(B), AND 503(B)
REQUESTING AUTHORITY TO HONOR CERTAIN UNDISPUTED PREPETITION OBLIGATIONS OF CERTAIN ESSENTIAL VENDORS, SUPPLIERS, AND SERVICE PROVIDERS, In re Blockbuster, Inc. Case No.1:10-bk14977 (Bankr. S.D.N.Y. 2010). (No. 15). 229 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 45-46. The final first-day motion filed by Blockbuster requested entry of an order confirming the pre-negotiated terms of the DIP financing.232 Six parties filed an objection to this motion.233 This motion is explored in more detail in the following section. Reading the first-day motions, one gets the picture of a company convinced it could succeed, or at least appearing so. The motions reflect a commitment to the prepetition plan. However, Blockbuster would soon realize its flaws. e. DIP Financing As discussed above, Blockbuster’s decision to file for Chapter 11 protection was highly prepared and negotiated. Blockbuster explored several options for obtaining DIP financing.234 When searching for a DIP lender, debtors frequently look to existing creditors, as these creditors

230 INTERIM ORDER SIGNED ON 9/27/2010 AUTHORIZING THE DEBTORS TO PAY CERTAIN UNDISPUTED PREPETITION OBLIGATIONS OF CERTAIN ESSENTIAL VENDORS, SUPPLIERS, AND SERVICE PROVIDERS, In re Blockbuster, Inc. Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 106). 231 FINAL ORDER SIGNED ON 10/20/2010 AUTHORIZING THE DEBTORS TO PAY CERTAIN UNDISPUTED PREPETITION OBLIGATIONS OF CERTAIN ESSENTIAL VENDORS, SUPPLIERS, AND SERVICE PROVIDERS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (NO. 396). 232 MOTION TO APPROVE DEBTOR IN POSSESSION FINANCING / DEBTORS' MOTION FOR ENTRY OF AN
ORDER, ON AN INTERIM AND FINAL BASIS, (I) AUTHORIZING THE DEBTORS TO OBTAIN POSTPETITION
SUPERPRIORITY FINANCING PURSUANT TO 11 U.S.C. §§ 105, 361, 362, 364(C), 364(D)(1), AND 364(E), (II)
AUTHORIZING DEBTORS' USE OF CASH COLLATERAL PURSUANT TO 11 U.S.C. § 363, (III) GRANTING
LIENS AND SUPERPRIORITY CLAIMS TO DIP LENDERS PURSUANT TO 11 U.S.C. § 364, (IV) PROVIDING
ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364, AND (V) SCHEDULING A
FINAL HEARING PURSUANT TO BANKRUPTCY RULES 2002, 4001(B), 4001 (C), AND 6004, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 17). 233 See OBJECTION TO MOTION TO APPROVE DIP FINANCING, In re Blockbuster Inc., Case No.1:10-bk14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION TO INTERIM ORDER AND ENTRY OF FINAL
ORDER RE: DIP FINANCING, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION LIMITED OBJECTION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION FOR ENTRY OF AN ORDER, ON AN INTERIM AND FINAL BASIS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010); OBJECTION TO MOTION FOR ENTRY OF AN ORDER, ON AN INTERIM AND FINAL BASIS, In re Blockbuster, Inc., Case No.1:10-bk-14977
(Bankr. S.D.N.Y. 2010); OPPOSITION TO DIP MOTION, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). 234 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr.
S.D.N.Y. 2010) at 20; Christopher Norton, Blockbuster In The Market For $150M DIP Loan, LAW360, http://www.law360.com/bankruptcy/articles/174715/blockbuster-in-the-market-for-150m-dip-loan. seek to prevent a further deterioration of their interests.235 Blockbuster explored this option, looking to obtain its DIP financing largely from its senior bondholders. In the weeks prior to the filing, it was reported that Blockbuster sought in the area of $150 million in DIP financing.236
Blockbuster itself claimed to have negotiated with “two separate large, financially capable” parties regarding DIP financing.237 Eventually, Blockbuster settled on a plan with its existing bondholders worth $125 million.238 The terms of the reorganization exchanged the company’s 11¾ percent senior secured notes for equity in the reorganized Blockbuster.239 Upon exiting Chapter 11, the $125 million DIP loan would convert to an exit loan facility upon consummation of the plan and a new exit revolving credit facility of up to $50 million.240 The court initially allowed Blockbuster access to $20 million.241 On October 27, 2010, the court approved the Debtor’s DIP financing agreement (“DIP Facility”), allowing the Senior Secured Creditors to give Blockbuster up to $125 million in principal for post-petition financing.242 In return for the DIP loans, the Senior Secured 235 BRYAN CAVE, Bankruptcy, Restructuring and Creditors’ Rights: Devtor-in-Possession Lenders, http://www.bryancave.com/debtor-in-possession-lenders-practices. 236 Norton, supra note 234. 237 AFFIDAVIT OF JEFFERY J. STEGNEGA, In re Blockbuster, Inc. at 23. 238 PLAN SUPPORT AGREEMENT, at http://google.brand.edgarhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/PSA.pdfonline.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=8038996-471395http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/PSA.pdf494995&SessionID=i5lcFC33MvGSNd7. 239 Id.; Blockbuster Corporate, News Release: To Implement Recapitalization, Company Initiates "PreArranged" Chapter11 Proceedings Blockbuster Stores and Operations Conducting Business in the Ordinary Course Secures $125 Million DIP Financing Commitment, http://investor.blockbuster.com/phoenix.zhtml?c=99383&p=irol-newsArticle&id=1474126. 240 PLAN SUPPORT AGREEMENT, supra note 238. 241 BRIDGE ORDER (I)AUTHORIZING POSTPETITION SUPERPRIORITY SECURED FINANCING
(II)AUTHORIZING POSTPETITION USE OF CASH COLLATERAL (III)GRANTING ADEQUATE PROTECTION
AND (IV)SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULES 4001(B) AND 4001(C), In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 85). 242 FINAL ORDER (I) AUTHORIZING POSTPETITION SUPERPRIORITY SECURED FINANCING PURSUANT TO
11 U.S.C. §§ 105(A), 361, 362, 364(C)(1), 364(C)(2), 364(C)(3), 364(D)(1) AND 364(E), (II) AUTHORIZING
POSTPETITION USE OF CASH COLLATERAL PURUSANT TO 11 U.S.C. § 363, AND (III) GRANTING ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Feb. 21, 2011) at 1-2. (No. 470). Noteholders received adequate protection from the court and held a lien with administrative priority and superpriority on the Revolving DIP loan. Furthermore, all debtors associated with Blockbuster agreed to waive and release all claims against the Senior Secured Noteholders. The court also held the Senior Secured Obligations, the prepetition claims against Blockbuster, to constitute legal, valid, and binding obligations of the Debtors. An important part of the DIP Facility was the roll-up provision. A roll-up provision is when postpetition financing pays, in whole or in part, prepetition secured debt. Here, the Senior Secured Notes, the prepetition claims by the Senior Secured Noteholders, constituted
“Roll-Up Notes.” As a result, the prepetition secured claims owed to the Senior Secured
Noteholders were secured by the DIP liens on the DIP collateral. Additionally, the Senior
Secured Notes were given superpriority claims on top of their continuing claims and liens as Senior Secured Notes.249 Thus, the prepetition debt owed to the Senior Secured Noteholders was given the same priority as the postpetition debt owed to the Senior Secured Noteholders.250 This type of manipulation of the securities is known as “cross-collateralization” and allows lenders to obtain additional security for both their postpetition loans and prepetition claims.251 How the Senior Secured Noteholders handled the prepetition security and postpetition loans is common in Chapter proceedings. DIP Lenders tend to be the Secured Creditors of the prepetition claims; accordingly, the DIP Lenders use the DIP financing agreement to preserve their collateral and seniority. Another important provision of the DIP Facility was the carve-out expenses. The DIP Facility maintained that a carve-out of the proceeds must go to the payment of court fees and expenses incurred by the trustee.255 More importantly, a carve-out of the proceeds must go to the payment of fees owed to any professionals or professional firms retained by the Debtors.256 This provision is also commonly found in DIP Financing agreements, ensuring that the debtor’s lawyers will be paid from the bankruptcy proceedings.257 Such was the case for Blockbuster. Thus, through the combination of cross-collateralization, roll-up notes, and carve-outs for professional fees, the Senior Secured Creditors and the debtor’s counsel, Weil Gotshal, were able to use the Chapter proceedings to their advantage over unsecured creditors. The DIP Facility spelled out seven circumstances that could terminate the Debtor’s authority to use the proceeds of the DIP financing or prepetition collateral. One such circumstance was an “Event of Default” under the DIP loan documents. In Section 8 of the DIP Facility, the agreement listed a multitude of events that would constitute “Default.” Other circumstances included: (i) an outstanding payment for post-petition final judgment in excess of $250,000, (ii) the debtor’s failure to provide updates about financing, and (iii) a conversion from Chapter 11 to a Chapter 7 case. Overall, the DIP Financing agreement between the Debtors and the Senior Secured Noteholders was an example of how senior creditors and Bankruptcy professionals could expertly use the Bankruptcy Code to control Chapter 11 cases. The provisions of the DIP Facility ensured that the largest Chapter 11 bankruptcy would be driven by a select few. f. The Unsecured Creditors Committee As a cursory glace at Blockbuster’s filings demonstrates, and common sense suggests, Blockbuster had an almost indeterminate number of unsecured creditors and an estimated $486 million in unsecured claims. The goal of an unsecured creditors committee is to provide a fiduciary acting to preserve the maximum value possible for unsecured creditors of a debtor.
On October 1, 2010, the United States Trustee appointed nine members to the Official
Committee of Unsecured Creditors. The nine were The Bank of New York Mellon Trust
Company, N.A., Scott Siegel, David A. Segal, Universal Studios Home Entertainment LLC,
Integrated Process Technologies, AT&T Services, Inc., Weingarten Realty, Developers Diversified Realty Corp., and Centro Properties Group. On October 6, 2010, the unsecured creditors committee announced that Cooley LLP would represent it as legal counsel. Cooley had one of the largest bankruptcy practices in the country at the time, making its selection unsurprising. g. Administrative Expenses – Professional Fees

Administrative expenses are given priority under the Bankruptcy Code.266 Section 503 of the Code defines administrative expenses.267 One of the major carve outs for administrative expenses is: reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.268 Blockbuster retained several leading law and accounting firms269 in the course of this case. As one would expect, these organizations cost a significant amount of money. Alvarez & Marshall served as chief restructuring officer in Blockbuster’s Chapter 11.270 Throughout its representation of Blockbuster, Alvarez & Marshal filed eight quarterly fee statements seeking reimbursement.271 The total amount billed by Alvarez & Marshal for fees and expenses was $6,274,423.272 266 See 11 U.S.C. § 507. 267 See 11 U.S.C. § 503. 268 11 U.S.C. § 503(b)(4). 269 Three of the “Big Four” accounting firms handled various portions of Blockbuster’s bankruptcy. 270 See ORDER SIGNED ON 10/27/2010 AUTHORIZING THE DEBTORS TO (I) RETAIN ALVAREZ & MARSAL
NORTH AMERICA, LLC TO PROVIDE THE DEBTORS A CHIEF RESTRUCTURING OFFICER AND CERTAIN
ADDITIONAL PERSONNEL AND (II) DESIGNATE JEFFREY J. STEGENGA AS CHIEF RESTRUCTURING OFFICER FOR THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 468). 271 See APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION / FIRST QUARTERLY FEE STATEMENT,
In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Apr. 29, 2011) (NO. 1867); STATEMENT / SECOND QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Jul. 14, 2011) (NO. 2162); STATEMENT / THIRD QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997
(S.D.N.Y. Dec. 22, 2011) (NO. 2714); STATEMENT / FOURTH QUARTERLY FEE STATEMENT, In re
Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Dec. 22, 2011) (NO. 2715); STATEMENT / FIFTH QUARTERLY
FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Apr. 30, 2012) (NO. 2924);
STATEMENT / SIXTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Jul. 31, 2012) (NO. 2950); STATEMENT /SEVENTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Oct. 12, 2012) (NO. 2979); STATEMENT / EIGHTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Jan. 24, 2013) (NO. 2987). 272 See APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION / FIRST QUARTERLY FEE STATEMENT,
In re Blockbuster, Inc. (NO. 1867); STATEMENT / SECOND QUARTERLY FEE STATEMENT, In re As discussed earlier, Weil Gotshal represented Blockbuster as lead counsel. In the firm’s first application for fees, it attempted to charge $3,078,770.25 in fees and $102,072.66 in expenses.273 The court reduced the fees to $2,463,016.20, but awarded the expenses in full. In its second application, Weil Gotshal requested $3,846,128.25 in fees and $133,318.61 in expenses. The third application sought fees of $955,533.25 and expenses of $45,998.10. These applications drew an objection from the US Trustee. Shortly after, the court awarded fees of $3,028,853.65 and $716,651.44, respectively. Expenses of $131,278.35 and $45,383.78 were also granted. Blockbuster, Inc. (NO. 2162); STATEMENT / THIRD QUARTERLY FEE STATEMENT, In re Blockbuster, Inc.
(No. 2714); STATEMENT / FOURTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2715);
STATEMENT / FIFTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2924); STATEMENT /
SIXTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2950); STATEMENT /SEVENTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2979); STATEMENT / EIGHTH QUARTERLY FEE STATEMENT, In re Blockbuster, Inc. (NO. 2987). 273 FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR WEIL, GOTSHAL & MANGES, LLP, DEBTOR'S ATTORNEY, PERIOD: 9/23/2010 TO 1/31/2011, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Mar. 15, 2011). (No. 1323). Other law firms were retained as special counsel to handle various aspects of the case from litigation to intellectual property.280 One of these firms, Ray & Glick, billed $291,250.00 in fees for its services from the filing through the end of January 2011, of which $233,000.00 was awarded.281 For its work from February 2011 through June of that year, Ray & Glick charged $876,750.00.282 The court granted $743,150.00. Also retained as special counsel was the Chaiken Legal Group. For its work, the court approved $189,220.00 and $297,599.00. Additionally, Bloodworth Carroll received $315,266.00 for its legal work on behalf of Blockbuster. Vinson & Elkins served as special
280 ORDER SIGNED ON 11/23/2010 AUTHORIZING DEBTORS TO EMPLOY AND RETAIN RAY & GLICK, LTD. AS SPECIAL COUNSEL, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 615). 281 See FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR RAY & GLICK, LTD.,
SPECIAL COUNSEL, PERIOD: 9/23/2010 TO 1/31/2011, In re Blockbuster Inc. (992); ORDER SIGNED ON
6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL
SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc. (No. 2038). 282 SECOND APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR RAY & GLICK, LTD., SPECIAL COUNSEL, PERIOD: 2/1/2011 TO 6/30/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2326). counsel for certain litigation and corporate governance matters.288 For this work, they were paid $119,050.00 in fees and compensated $2,634.60 for expenses.289 As mentioned earlier, Blockbuster employed Rothschild, Inc. as financial special counsel and investment banker.290 The court approved fees of $437,333.34 and expenses of $49,844.41 from Rothschild’s first application for compensation.291 From its second and third application, the court awarded $2,731,879.27 in fees and $22,201.86 in expenses.292 In addition to law firms, other professionals are needed to guide a company through Chapter 11. Blockbuster retained Deloitte as a tax advisor and Deloitte FAS for providing a valuation.293 Deloitte Tax filed two fee applications, requesting a total of $582,765.00 in fees and $966.12 in expenses.294 Another accounting firm, Ernst & Young, served as Blockbuster’s

288 ORDER SIGNED ON 10/5/2011 AUTHORIZING DEBTORS' APPLICATION TO EMPLOY AND RETAIN VINSON
& ELKINS, LLP AS SPECIAL COUNSEL ON CERTAIN LITIGATION AND CORPORATE GOVERNANCE MATTERS PURSUANT TO SECTIONS 327(E) AND 330 OF THE BANKRUPTCY CODE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2455). 289 ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906). 290 ORDER SIGNED ON 11/2/2010 AUTHORIZING THE RETENTION AND EMPLOYMENT OF ROTHSCHILD INC. AS FINANCIAL ADVISOR AND INVESTMENT BANKER, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 511). 291 ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM
COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In Blockbuster, Inc. (No. 2038) 292 ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906). 293 ORDER SIGNED ON 11/9/2010 AUTHORIZING THE RETENTION AND EMPLOYMENT OF DELOITTE TAX
LLP AS TAX ADVISOR NUNC PRO TUNC TO THE COMMENCEMENT DATE, In re Blockbuster, Inc., Case
No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 582); ORDER SIGNED ON 2/8/2011 AUTHORIZING THE RETENTION AND EMPLOYMENT OF DELOITTE FINANCIAL ADVISORY SERVICES, LLP AS VALUATION SERVICES PROVIDER NUNC PRO TUNC TO NOVEMBER 10, 2010, In re Blockbuster, Inc., Case No.1:10bk-14977 (Bankr. S.D.N.Y. 2010). (No. 986). 294 See FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR DELOITTE TAX LLP,
OTHER PROFESSIONAL, PERIOD: 9/23/2010 TO 1/31/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1333) (requesting a fee of $412,112.50 and expenses of $966.12); SECOND
APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR DELOITTE TAX LLP, OTHER
PROFESSIONAL, PERIOD: 2/1/2011 TO 4/30/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. internal auditors.295 In its first application for compensation, Ernst & Young asked for $216,150.85 in fees and nominal expenses.296 The second application requested $235,054.51 in fees.297 Between the two applications, the court granted a total of $360,964.29 in fees.298 A third accounting firm, PricewaterhouseCoopers served as an independent auditor.299 Its operations were expanded to include the role of accounting advisors on February 28, 2012.300 For its work, the court awarded PricewaterhouseCoopers $1,395,478.92 in fees and $23,575.50 in expenses.301 S.D.N.Y. 2010). (No. 2380) (requesting a fee of $170,652.50 and no expenses); ORDER SIGNED ON
6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM SEPTEMBER 23, 2010
THROUGH JANUARY 31, 2011, In re Blockbuster, Inc. (No. 2038); ORDER SIGNED ON 4/4/2012 GRANTING
APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30,
2011, In re Blockbuster, Inc. (No. 2906). 295 ORDER SIGNED ON 4/4/2010 PURSUANT TO 11 U.S.C. §§ 327, 328(A), AND 330, FED. R. BANKR. P. 2014(A) AND 2016, AND LOCAL BANKRUPTCY RULES 2014-1 AND 2016-1 AUTHORIZING THE RETENTION AND EMPLOYMENT OF ERNST & YOUNG, LLP, In re Blockbuster, Inc., Case No.1:10-bk14977 (Bankr. S.D.N.Y. 2010). (No. 1578). 296 FIRST APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR ERNST & YOUNG LLP, AUDITOR, PERIOD: 12/9/2010 TO 1/31/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1869). The application requested only $55.00 in expenses. 297 SECOND APPLICATION FOR INTERIM PROFESSIONAL COMPENSATION FOR ERNST & YOUNG LLP, AUDITOR, PERIOD: 2/1/2011 TO 5/31/2011, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2359). 298 ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM
FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906) (granting
$235,054.51 in fees); ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF
INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc., (No. 2038) (granting $172,920.68 in fees and $55.00 in expenses). 299 ORDER SIGNED ON 2/8/2011 AUTHORIZING THE RETENTION AND EMPLOYMENT OF
PRICEWATERHOUSECOOPERS, LLP AS INDEPENDENT AUDITORS TO THE DEBTORS NUNC PRO TUNC TO THE COMMENCEMENT DATE, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 985). 300 ORDER SIGNED ON 2/28/2012 AUTHORIZING THE DEBTORS TO EXPAND THE SCOPE OF THEIR RETENTION OF PRICEWATERHOUSECOOPERS, LLP AS ACCOUNTING ADVISORS, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 2853). 301 See ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc. (2038);
ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION Consultants for the Committee of Unsecured Creditors also received substantial payment. Its legal counsel, Cooley, received over two million dollars in fees and almost seventy thousand dollars in expenses.302 Working as financial advisor on behalf of the Committee of Unsecured Creditors, FTI Consulting, Inc. received fees of $707,333.00 and expenses of $25,164.70.303

Karotkin filed a motion on behalf of Blockbuster to establish a deadline and procedures for administrative claims on May 19, 2011.304 A day later, the court set a deadline of June 15, 2011.305 IV. The § 363 Sale a. Road to the § 363 Sale As previously mentioned, Blockbuster’s decision to commence its Chapter 11 bankruptcy proceeding stemmed from several months of negotiations.306 When filing for bankruptcy, FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906). 302 See ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM
COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster, Inc.(No. 2038) (granting $1,475,597.20 in fees and $30,834.37 in expenses); ORDER SIGNED ON 4/4/2012 GRANTING
APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED
AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster, Inc. (No. 2906) (granting $636,462.50 in fees, $37,163.05 in expenses for the second compensation application and $56,420.50 in fees, $338.25 in expenses for the third compensation application). 303 See ORDER SIGNED ON 6/28/2011 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM
COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES
INCURRED FROM SEPTEMBER 23, 2010 THROUGH JANUARY 31, 2011, In re Blockbuster Inc. (2038); ORDER SIGNED ON 4/4/2012 GRANTING APPLICATIONS FOR ALLOWANCE OF INTERIM COMPENSATION FOR PROFESSIONAL SERVICES RENDERED AND REIMBURSEMENT OF EXPENSES INCURRED FROM FEBRUARY 1, 2011 THROUGH NOVEMBER 30, 2011, In re Blockbuster Inc. (No. 2906). 304 STATEMENT / DEBTORS' EX PARTE MOTION, PURSUANT TO 11 U.S.C. § 503(A), FED. R. BANKR. P. 3003(C)(3) AND LOCAL RULE 3003-1, TO ESTABLISH A DEADLINE AND PROCEDURES FOR FILING
CERTAIN ADMINISTRATIVE CLAIMS AND APPROVE THE FORM AND MANNER OF NOTICE THEREOF, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1914). 305 ORDER SIGNED ON 5/20/2011 ESTABLISHING A DEADLINE AND PROCEDURES FOR FILING CERTAIN
ADMINISTRATIVE CLAIMS AND APPROVING THE FORM AND MANNER OF NOTICE THEREOF, In re Blockbuster, Inc., Case No.1:10-bk-14977 (Bankr. S.D.N.Y. 2010). (No. 1918). Blockbuster originally intended to confirm a Chapter 11 plan of reorganization with its creditors.307 In order to reach confirmation of a Chapter 11 plan, Blockbuster entered into a Plan Support Agreement (“PSA”) with the Senior Secured Noteholders.308 The PSA called for the conversion of the Senior Secured Notes into equity to help provide Blockbuster the DIP financing necessary to continue its ordinary course of business during restructuring.309 The court eventually approved the DIP Facility after extensive negotiations with the Creditors’ Committee.310 Thus, due to the liquidity runway of the DIP Facility and support of key constituencies, Blockbuster originally hoped to confirm a plan of reorganization within the time fame set forth in the PSA.311 However, in the end, Blockbuster failed to accomplish the objectives set out in the PSA, depriving it of any chance to reach an agreement with creditors to confirm a plan of reorganization.312 First, Blockbuster suffered poor holiday sales in the last quarter of 2010.313 As a result, Blockbuster continued to experience deteriorating business operations.314 Second, Blockbuster could not reach a consensus with DIP Lenders regarding a long-term business plan.315 Third, perhaps most importantly, Blockbuster defaulted on its DIP Facility, constituting a “Termination Event” and a “Roll-Up Event” under both the PSA and the DIP facility.316 306 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN
ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. Feb. 21, 2011) at 3,¶ 3. (No. 947). 307 Id. 308 Id. 309 Id. at 4, ¶ 4 310 Id. 311 Id. 312 Id. at 4, ¶ 5. 313 Id. 314 Id. 315 Id. Accordingly, the Senior Secured Noteholders terminated Blockbuster’s DIP financing.317
Consequently, after consulting with the Steering Committee, Blockbuster determined that the Plan was no longer feasible.318 With its original plan in shambles, Blockbuster was forced in a different direction. The choice of action Blockbuster pursued involved a sale of the company’s assets.319 Blockbuster agreed with the Steering Committee to pursue a sale of substantially all of the company’s assets on an expedited basis under § 363 of the Bankruptcy Code.320 Both Blockbuster and the Steering
Committee believed this approach would maximize the value of Blockbuster’s estates.321 Recognizing that the DIP Lenders were only willing to provide financing for a limited period of time, Blockbuster determined to select one of two proposals from among particular members of the Steering Committee who had expressed an interest in serving as a stalking horse bidder.322 A stalking horse bid is the initial bid on a bankrupt company’s assets from an interested buyer, who is chosen by the debtor, generally in concert with the committee of unsecured creditors.323 Blockbuster required these two proposals be furnished by January 28, 2011 so that the sale process could advance promptly.324 316 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 317 Id. 318 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 4,¶ 5. (No. 947). 319 Id. 320 Id. 321 Id. at 5, ¶ 6. 322 Id. 323 Definition of ‘Stalking Horse Bid’, INVESTOPEDIA (April 25, 2013 11:15 AM), http://www.investopedia.com/terms/s/stalkinghorsebid.asp 324 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D) After thoroughly evaluating both proposals, Blockbuster chose Cobalt Video Holdco, LLC (“Cobalt Video”) as its stalking horse bidder.325 Cobalt Video, led by Carl Icahn, existed solely to acquire Blockbuster’s assets.326 Cobalt Video was formed by funds managed by Monarch Alternative Capital LP, Owl Creek Asset Management LP, Stonehill Capital Management LLC and Varde partners, Inc., all Senior Secured Note holders of Blockbuster.327 The four entities comprising Cobalt Video collectively held more than half of Blockbuster’s outstanding 11.75% Senior Secure Notes.328 After reaching a Purchase Agreement with Cobalt Video, as a stalking horse bidder, Blockbuster filed a motion to authorize an auction process for the Company.329 b. The Motion On February 21, 2011, the Debtors filed a motion for sale of the property pursuant to 11 U.S.C. § 363(b).330 Blockbuster divided the motion into two basic requests.331 First,
Blockbuster moved, pursuant to 11 U.S.C. §§ 105, 362, 363, 364, 365 and 503, for the court to ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 4,¶ 5. (No. 947). 325 Blockbuster Initials Process to Sell Company, Enters into “Stalking Horse” Purchase Agreement with Investor Group, BUSINESSWIRE, (Feb. 21, 2011, 3:47 PM), http://www.businesswire.com/news/home/20110221006024/en/Blockbuster-Initiates-Process-Sellhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/businesswireBlockbusterInitialsProcesstoSellCompany.pdfCompany-Enters-%E2%80%9CStalking.

326 Id. 327 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 328 Id. 329 Id. 330 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 1. (No. 947). 331 Id.

approve: (i) bid procedures in connection with the § 363 sale; (ii) stalking horse expense reimbursement; (iii) sale notice for the auction; (iv) assumption procedures for the assignment of executory contracts and unexpired leases; (v) prioritization of the sale-related administrative expenses, and (vi) injunction (“Administrative Stay” ) to enjoin any collection efforts for administrative expenses occurring during the pre-sale period. Second, Blockbuster moved the court to approve the sale of its assets free and clear of all liens, claims, and encumbrances to the successful bidder. Blockbuster’s motion to request the court’s approval of the § 363 sale along with the sale procedures was nothing out of the ordinary. However, Blockbuster’s request for the court to enjoin collection efforts on any administrative expenses occurring between the commencement date and February 24, 2011 garnered much attention from other creditors. c. Sale Terms Under the terms of the proposed Purchase Agreement, the Cobalt Video agreed to pay either $265 million or $290 million, contingent upon an event, referred as the “Studio Condition” in the Purchase Agreement. For the Studio Condition to occur, two things must happen. First, at least five of the six major studios needed to continue their support of Blockbuster’s digital business and provide Blockbuster stores with physical copies of movies in sufficient amounts. Second, all of the studios that were secured creditors refrained from taking any administrative action to foreclose on the assets to secure payments under the Collateral Trust Agreement prior to the closing of the sale. If all these conditions were met, then the Studio Condition applied, setting the sale price at $265 million.339
339

Additionally, the Purchase Agreement contained price adjustments for the amounts of
Blockbuster’s cash and inventory at the closing of the sale and a proposed decrease up to $5 million for reimbursement of the purchaser’s expenses.340 The Purchase Agreement lacked any provision reimbursing Cobalt Video for any expenses in the event it was not the winning bidder.341 However, if Cobalt Video terminated pursuant to Section 4.4 of the Purchase Agreement, it was entitled to an expense reimbursement.342 This was Cobalt Video’s only protection in the Purchase Agreement.343 The Purchase Agreement also gave the Cobalt Video another option, the Agency Alternative, which allowed it, under certain circumstances,344 to compel a conversion to a case under Chapter 7 of the Bankruptcy Code.345 In return for cash consideration, the Cobalt Video was to acquire all assets, except for Excluded Assets,346 defined in the proposed Purchase Agreement, or the proceeds of the disposition of the store liquidations if it elected the Agency Alternative.347 The assets exchanged

340 Id. 341 Id. 342 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 25, ¶ 19. (No. 947). 343 Id. 344 Section 8.8(b) of Proposed Purchase Agreement, spell out the circumstances for the Purchaser to convert the case to a Chapter7 case. The circumstances pertain the Purchaser’s ability to assume property leases. If the Purchaser cannot obtain the right to assume unexpired leases, then Purchaser may elect agency alternative, which leads to store liquidations. 345 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 346 The Proposed Purchase Agreement spelled out specific assets that would not acquired by the purchaser, which include defined Excluded Contracts, equity interests in the Sellers, any claim, right or interest of any Seller in or to any refund, rebate, abatement or other recovery for Taxes ending on or before the Closing Date, all rights and claims of the Sellers under the Transaction documents, all Debtor Benefits plans; and all restricted cash relating to cash collateralized letters of credit and/or Excluded liabilities. (link) in the Purchase Agreement included all of the outstanding ownership interests in each of the foreign subsidiaries of Blockbuster, all Blockbuster’s cash and cash equivalents, all
Blockbuster’s accounts and notes receivable, all deposits and deferred charges of Blockbuster, all tangible personal property related to Blockbuster’s business operations, franchise agreements, intellectual property, and all goodwill associated with the company.348 The sale of the assets was to be free and clear of all liens, claims, encumbrances, and other interests except for those permitted encumbrances and assumed liabilities.349 The assumed liabilities in the proposed Purchase Agreement comprised the liabilities from the assumed contracts, unpaid wages to employees, employee benefits and tax expenses. However, the Purchase Agreement limited liabilities to an aggregate amount of $1.6 million.350 The proposed Purchase Agreement also defined the allocation of proceeds coming from the auction sale.351 “Carve-Out Expenses” were given first priority.352 The amounts due to the DIP Agent or Senior Indenture Trustee received second priority.353 After satisfying the “Carve-
Out Expenses” and amounts due to the DIP Agent, the proceeds went to satisfy the “Estimated Wind Down Expenses,” the sellers’ reasonable good faith estimate of expenses expected to incur with the closing of the bankruptcy estate.354 Fourth priority was a twenty million dollar deposit 347 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 3,¶ 3. (No. 947). 348 Id. at 14-15. 349 Id. at 26. 350 PROPOSED ASSET PURCHASE AND SALE AGREEMENT, Section 2.3: Assumption of Liabilities. 351 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 13-14. (No. 947). 352 Id. 353 Id. 354 into the Purchase Price Adjustment Escrow. Fifth, the proceeds covered an amount due under the DIP Credit Agreement. The sixth priority was the Administrative Priority Expenses paid directly to the sellers. Seventh, the proceeds went to cover the amount due to the Roll-Up Noteholders under the DIP Facility. Last, any remaining proceeds went to the sellers. After facing various objections from major studios and other creditors, the Debtors later amended the allocation of proceeds defined in the proposed Purchased Agreement in order to receive court approval of the sale. In addition, the Purchase Agreement laid out specific obligations with respect to the stores. First, Blockbuster needed to seek from all parties having leased properties an extension of at least 90 days for the purchaser to determine which leases to assume. Second, Blockbuster needed to commence liquidation of 609 particular stores. Along with commencing liquidation, Blockbuster needed to consult the purchaser as to how to conduct these liquidations and provide estimation of aggregate expenses. Third, for all leased properties not designated as a purchaser Assumed Contract, the purchaser had to either designate such leased property as any purchaser Assumed Contract or have the seller retain such leased property as an excluded asset. Fourth, the Purchase Agreement laid out a specific set of orders for Blockbuster to follow if the purchaser elected the Agency Alternative. Finally, Blockbuster also had other standard obligations, such as conducting the business in its ordinary course before close and not to use any trademark property upon close.366 366 Along with its standard features, the proposed Purchase Agreement contained several unique aspects not found in a typical § 363 asset sale.367 First, Blockbuster was only authorized to continue outstanding gift cards for 45 days from February 21, 2011.368 Second, as mentioned earlier, Cobalt Video had the right to convert the case to a Chapter 7 liquidation proceeding under special circumstances.369 Third, the agreement provided the Purchaser with an option to
“direct the estates liquidation of their inventory under an agency agreement.”370 Cobalt Video had no obligation to continue operating any portion of Blockbuster’s business after close.371 Thus, the proposed Purchase Agreement opened the door for Cobalt Video to close all Blockbuster’s “brick and mortar” stores that had proven to be dead weight.372 d. Blockbuster’s Business Justification for the § 363 Sale Because Blockbuster’s sale of assets was outside the ordinary course of the business, Blockbuster needed to provide the court a sound business justification for the proposed sale. Once Blockbuster provided the court its justification for the sale, the court had to determine whether (i) Blockbuster had provided the interested parties with adequate and reasonable notice, (ii) the sale was fair and reasonable, and (iii) the purchaser proceeded in good faith.373 Here, Blockbuster stressed how expediting the sale process was critical to preserving and maximizing the company’s value.374 Blockbuster added that an asset sale under § 363 was the

367 Blockbuster defaults on DIP Loan and Changes Course, Seeks Approval of Procedures to Sell All Its Assets, CHAPTER 11 CASES (Feb. 21, 2011), http://chapter11cases.com/blockbuster-defaults-on-dip-loanhttp://chapter11cases.com/blockbuster-defaults-on-dip-loan-and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/and-changes-course-seeks-approval-of-procedures-to-sell-all-its-assets/. 368 Id. 369 Id. 370 Id. 371 Id. 372 Id. 373 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 38, ¶ 33. (No. 947). 374 at 38, ¶ 34. only alternative due to the company’s failing business model and liquidity constraints. Furthermore, Blockbuster emphasized that reorganization no longer provided a viable option because the DIP Lenders declined to provide any more financing. In other words, Blockbuster had no other choice. Blockbuster also maintained that the notice was reasonable because it would serve interested parties promptly and notice would be published in newspapers of general circulation. In order to prove the fairness of the sale price, Blockbuster asserted that implementing Cobalt Video’s stalking horse bid as a minimum bid would guarantee a reasonable sale price. Moreover, the Agency Alternative, which gave the successful bidder the option to convert to a Chapter 7 case, provided the court another option in the event of a deficient sale price. In the motion, Blockbuster assured to the court that the DIP Lenders would consent to the sale; thus the purchaser would be free and clear of any and all liens, claims, encumbrances, and other interests, satisfying the conditions set forth in § 363(f). Blockbuster also maintained that the asset sale met the good faith purchaser requirement under section 363(m), as the successful bidder would be a product of an arm’s length, good-faith negotiation. Furthermore, as a condition for the sale, the proposed Purchase Agreement required that the court find the successful bidder to be a good-faith purchaser based upon the record made at the sale hearing. As mentioned earlier, Cobalt Video only received protection through the Expense Reimbursement provision of the Purchase Agreement. The Expense Reimbursement was a contingent payment in the event that Cobalt Video terminated the Purchase Agreement under

certain circumstances. Blockbuster justified the Expense Reimbursement provision as necessary to induce Cobalt Video to purchase the assets. Without the Expense
Reimbursement, Blockbuster argued that Cobalt Video would not commit to purchasing the assets, which would be fatal to the estate. Accordingly, Blockbuster sought to make the Expense Reimbursement a superpriority claim in the proposed Purchase Agreement to induce the stalking horse bid. Thus, by alleging that Cobalt Video’s bid ensured a fair sale price, Blockbuster asserted that the prioritizing of the Expenses Reimbursement was necessary as well. e. Assumption and Assignment In its motion to sell, Blockbuster sought to assume and assign certain contracts
(“Designated Contracts”) to the successful bidder. The Purchase Agreement generally defined
Designated Contracts as “executory contracts and unexpired leases that the Successful Bidder has designated it wants to assume.” If a court finds that a debtor exercised sound business judgment in determining whether to assume an executory contract or unexpired lease, then the court should approve the assumption under § 365 of the Bankruptcy Code. Additionally, § 365(b)(1) requires adequate assurance that the assignee had the ability to promptly cure the defaults of the assigned contracts. Here, Blockbuster maintained that the combination of the procedures defined by the Plan Agreement and the sale hearing provided the necessary assurance for the court to approve the assumption and assignment of contracts. Specifically, the sale hearing provided the court and other interested parties the opportunity to evaluate the ability of the Successful Bidder. If the successful bidder demonstrated sufficient financial health and resources during the hearing, then the court and other interested parties were assured that the successful bidder met the obligations of the assumed contracts. Blockbuster needed the court to approve these procedures because the assumption and assignment of the contracts would expedite the sale. f. Administrative Relief Requested Along with seeking approval of the proposed Purchase Agreement and the sale procedures, Blockbuster sought administrative relief from the court. Specifically, it moved the court to prioritize all administrative expenses connected with § 363 sale and enjoin any collection efforts with respect to administrative expenses that occurred between the petition date of September 23, 2010 and February 24, 2011. Blockbuster first referred to § 364(c)(1) of the Bankruptcy Code as the legal basis for its relief. In particular, this section empowers a court to give priority to a particular debt or credit over other administrative expenses when a debtor in possession is unable to procure unsecured credit. Additionally, § 105(a) of the Bankruptcy Code allows a court to issue any order, process, or judgment that is necessary to carry out the provisions under Chapter 11, including § 364(c)(1). In persuading the court to grant administrative relief, Blockbuster maintained that the § 363 sale was the only viable option, and therefore, the court should move in a direction that best serves the sale process. In explaining how the administrative relief best served the § 363 sale, Blockbuster alleged that such relief provides assurance to parties who supply goods and services to it, which maintained the value of the company for the sale. In particular, Blockbuster quoted that such relief was “essential to ensure creditors—such as movie studios, game providers, maintenance and janitorial service providers, landlords, utilities, and employees—are not further prejudiced on account of their extension of unsecured credit during the Sale Process Period.” Thus, the administrative relief allowed Blockbuster to continue paying employee salaries, professional fees, medical and workers’ compensation coverage premiums, certain customer obligations, and other essential costs and expenses during the sale process. g. Creditors Object to the Proposed Purchase Agreement After filing its motion to sell its assets, Blockbuster faced objections from over 40 creditors, including major Hollywood movie studios and unsecured creditors. Even the United States Trustee filed an objection to the proposed purchase agreement. The common theme among the objections was that the sale agreement was highly unfavorable and discriminated among the administrative expenses. Accordingly, some of the creditors, including the United States Trustee, moved the court to convert the case to a Chapter 7 case. In particular, counsel representing U.S. Trustee Tracy Hope Davis, described the
Blockbuster’s efforts as a plan to “effectively impose a ‘virtual Chapter 7 within the Chapter 11 case[] that… will allow [the Senior Secured Noteholders] to improperly discriminate among the administrative expenses while retaining control over their efforts to maximize their recovery and minimize their expenses.” Moreover, the U.S. Trustee’s counsel maintained that Blockbuster and secured lenders appeared to be the only real beneficiaries of the proposed sale agreement.

The numbers appear to validate the U.S. Trustee’s assertions. The stalking horse bid ranged from $265 million to $290 million, yet the secured lenders held a combined secured claim of about $630 million.413 Hence, any competing bid would be very unlikely to pay off the Secured Lenders.414 In supporting the request for the case to convert to Chapter 7, the U.S. Trustee’s counsel highlighted how Blockbuster abandoned any meaningful reorganization activity, instead reducing the estate through the incurring of administrative expenses.415 The Bankruptcy Code, under 11 U.S.C. § 1112(b), gives a court the power to convert a Chapter 11 proceeding to a Chapter 7 case if the movant establishes cause.416 Here, the U.S. Trustee tried to establish cause under § 1112(b) by referring to the Senior Secured Noteholder’s efforts in diminishing the estate.417 Walt Disney Company (“Disney”) raised a similar argument in its objection, maintaining that the Senior Secured Noteholders had dictated sale terms beneficial to themselves, while running up administrative expenses that were deteriorating the Debtor’s estate.418 Additionally, Disney criticized the proposed bid procedures, which it claimed were configured to enhance recoveries for the Senior Secured Noteholders.419 Disney moved the court to modify the agreement to give administrative claims from creditors outside the Senior Secured Noteholders more priority.420

413 Id. 414 Id. 415 Id. at 12, ¶ 34. 416 Id. at 12, ¶ 32. 417 Id. 418 OBJECTION OF THE WALT DISNEY COMPANY TO DEBTORS’ MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001, 6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN
ORDER APPROVING (A) BID PROCEDURES, (B) STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE
OF SALE, AUCTION, AND SALE HEARING, (D) ASSUMPTION PROCEDURES AND RELATED NOTICES, (E)
INCURRENCE OF SALE-RELATED ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, No. 10-14997 (S.D.N.Y. Feb. 28, 2011) at 2. (No. 1001). 419 at 3. 420 at 4.
Disney was just one of many creditors holding substantial administrative claims against Blockbuster. However, Blockbuster’s request to bifurcate the administrative claims would prevent creditors, such as Disney, from obtaining payment of their claims. Thus, Disney asserted that the proposed sale created “a large group of priority creditors who will have first claim on the few scraps left after the sale.” This left the court to decide whether it was “appropriate for bankruptcy courts to facilitate a sale that benefits nobody except the senior lenders.” In essence, several creditors outside the Senior Secured Noteholders and the United States Trustee criticized the proposed Purchase Agreement for “hijacking” the Chapter 11 case. A § 363 sale enables secured creditors to avoid the “lengthy process of negotiating, proposing confirming, and consummating a plan of reorganization—not to mention the potential for more pervasive scrutiny of transaction at multiple junctures by the court, creditors, the United States Trustee, and other parties present.” Because all transferred assets in a § 363 sale are free and clear of all interests and claims, the sale turns into a “federal unified foreclosure process orchestrated by secured creditors who are assisted by insiders of the debtor and the insolvency community.” Here, the Senior Secured Noteholders attempted to avoid the lengthy process of confirming a Chapter 11 plan by proposing a sale that would basically only benefit themselves. The Senior Secured Noteholders could not “hijack” the case without help from Blockbuster’s counsel, Weil Gotshal. At the risk of sounding cynical, Weil Gotshal also would receive guaranteed payment from the § 363 sale through the Carve-out Expenses, which were given first priority in the allocation of proceeds.428 Unsurprisingly, over 40 creditors objected to such this proposal.429 In response to these objections, the Senior Noteholders asserted that their cash, and their cash alone, had kept Blockbuster alive.430 All the objections led to negotiations taking place on March 10, 2011.431 From these negotiations, the parties amended the allocation of proceeds, giving more money upfront to trade creditors and large studios.432 h. Court’s Approval of Motion for Sale of Property Following this series of events, on March 17, 2011, the court granted Blockbuster’s motion to sell the property.433 Specifically, the court first approved the bid procedures and the Expense Reimbursement.434 It noted that the Expense Reimbursement was necessary to preserve the estate and, in light of the size and nature of the sale, was reasonable.435 As a result, the Expense Reimbursement survived the termination of the stalking horse bid and constituted a superpriority administrative claim against the estate pursuant to § 364(1) of the Bankruptcy Code.436 The court also approved the assumption and assignment of the Designated Contracts.437 428 DEBTOR’S MOTION, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, AND FED. R. BANKR. P. 2002, 4001,
6004, 6006, 9008, AND 9014, FOR ENTRY OF: (I) AN ORDER APPROVING (A) BID PROCEDURES, (B)
STALKING HORSE EXPENSE REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION, AND SALE HEARING, (D)
ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED
ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS, In re Blockbuster, Inc. at 13-14. (No. 947). 429 Ahmed, supra note 407. 430 Lubben, supra note 423. 431 Ahmed, supra note 407. 432 Id. 433 ORDER, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, 365 AND 503 FED. B. BANKR. P. 2002, 4001, 6004,
6006, 9008, 9014, AND 9019 APPROVING (A) BID PROCEDURES, (B) STALKING HORSE EXPENSE
REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION AND SALE HEARING, (D) ASSUMPTION PROCEDURES AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED ADMINISTRATIVE PRIORITY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY, In re Blockbuster, Inc., Case No. 10-14997 (S.D.N.Y. Mar. 17, 2011) at 4. (No. 1336). 434 Id. at 4, 6-7. 435 at 3. 436 at 7. Additionally, the court set the auction to take place on April 4, 2011 at 10:00 a.m., at the United
States Bankruptcy Court for the Southern District of New York. Lastly, the court set March 31, 2011 as a deadline for all objections to the sale and scheduled a sale hearing the day after the auction to approve the successful bidders. Although the court approved the bid procedures and Expense Reimbursement, the original order for the allocation of proceeds had changed due to the objections from creditors. As mentioned earlier, movie studios argued that the terms of the sale were highly unfavorable to creditors outside the Senior Secured Noteholders. On March 10, 2011, the studios and bondholders reached agreement altering the original allocations of proceeds. As a result, the Purchase Agreement granted the studios and other creditors more money upfront for what they were owed in addition to receiving a share of any offer exceeding the $290 million bid. Specifically, the Purchase Agreement listed particular studios that received 50% of its aggregate liabilities owed. These studios included Twentieth Century Fox Home Entertainment LLC, Sony Pictures Home Entertainment Inc., Warner Home Video, a Division of
Warner Bros. Home Entertainment Inc., Paramount Home Entertainment Inc., Universal Studios
Home Entertainment LLC, The Walt Disney Company, and Summit Entertainment LLC.
Furthermore, the Purchase Agreement capped the wind down expenses at $12.5 million.
Additionally, unsecured lenders could receive up to $7.5 million of the estimated $40 million owed to them.447 In the end, the court approved a Purchase Agreement that added four more priority stages to the original proposal, creating a total of twelve priority stages regarding the distribution of proceeds.448 The court also approved the administrative relief requested by Blockbuster.449 Consequently, it did not have to make any payment with respect to any administrative costs or expenses occurring from the commencement date of Chapter 11 through February 24, 2011.450 Moreover, no holder of a pre-sale period administrative claim could take any action until June 21, 2011 to collect such claim.451 By approving the bid procedures and auction date and issuing administrative relief, the court set the stage for the ultimate sale of Blockbuster’s assets and bring an end to the bankruptcy proceedings.

i. Dish Declared Winning Bidder after Auction In accordance with the court order, Blockbuster conducted the auction from April 4, 2011 to April 6, 2011.452 In the end, Dish Network Corp. (“Dish”) was declared the successful bidder with a $320 million bid.453 After price adjustments, acquiring Blockbuster’s assets cost Dish roughly $228 million in cash.454 Creditors of Blockbuster received about $178.8 million from

447 Ahmed, supra note 407. 448 ORDER, PURSUANT TO 11 U.S.C. §§ 105, 363, 364, 365 AND 503 FED. B. BANKR. P. 2002, 4001, 6004,
6006, 9008, 9014, AND 9019 APPROVING (A) BID PROCEDURES, (B) STALKING HORSE EXPENSE
REIMBURSEMENT, (C) NOTICE OF SALE, AUCTION AND SALE HEARING, (D) ASSUMPTION PROCEDURES
AND RELATED NOTICES, (E) INCURRENCE OF SALE-RELATED ADMINISTRATIVE PRIOIRTY CLAIMS, AND (F) IMPOSITION OF AN ADMINISTRATIVE STAY, In re Blockbuster, Inc. at 10, ¶ 16. (No. 1336). 449 Id. at 13-17. 450 Id. at 13. 451 Id. 452 DEBTOR’S EMERGENCY MOTION, PURSUANT TO 11 U.S.C. §§ 105 AND 363 AND FED. R. BANKR. P.
2002, 4001, 6004, AND 9014, FOR ENTRY OF A SUPPLEMENTAL ORDER APPROVING AMENDED AND RESTATED ASSET PURCHASE AND SALE AGREEMENT BY AND AMONG BLOCKBUSTER, INC., THE DEBTOR SUBSIDIARIES PARTY THERETO, AND DISH NETWORK CORP., In re Blockbuster, Inc., No. 10-14997 (S.D.N.Y. April 21, 2011) at 3, ¶ 5. (No. 1692). 453 Id. 454 Hals, Tom & Baker, Liana, Dish expands its scope with Blockbuster win, REUTERS (April 6, 2011 5:
39 PM) http://www.reuters.com/article/2011/04/06/us-blockbuster-dishnetworkhttp://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/Hallsreutersdishtoexpandscope.pdfidUSTRE7351VA20110406.
Dish’s bid, with the remainder covering the expenses of the auction and other bankruptcy fees. Dish defeated the stalking horse bid, Cobalt Video. The next day, April 7, 2011, the court held a hearing to consider the sale motion and the outcome of the auction. During the sale hearing, Blockbuster produced the original Purchase Agreement, which Dish agreed to purchase subject to court approval. (What does this mean?) Dish targeted a closing date of April 21, 2011. Although the original Purchase Agreement allowed certain executory or unexpired real property leases, known as the Designated Contracts, to be assumed and assigned to the Purchaser, Blockbuster did not seek the assumption and assignment of any contracts to Dish at the sale hearing. It explained its failure to assign contracts by noting the expedited timeframe and the multitude of objections filed as to proposed cure amounts and adequate assurance of future performance. Immediately thereafter, Blockbuster consulted with the Creditors’ Committee and counsel for the objecting counterparties. Following these negotiations, Blockbuster agreed to enter into a revised sale order with Dish. The court examined this revised sale order at a hearing on April 14, 2011. At this hearing, the court approved the sale order, which ratified the original Purchase Agreement and authorized the parties to consummate the sale. The court order contained many findings of fact that were significant in closing the sale.464 First, it found that the auction was conducted in good faith, as the parties received sufficient notice and a reasonable opportunity to object. Second, the court found the Purchase Agreement and any related agreement to be in good faith and from arm’s-length position. Third, it found that neither the Dish nor its affiliates were an “insider” of any of the Blockbuster companies pursuant to § 101(31) of the Bankruptcy Code. Therefore, under this analysis, the court found Dish to be a good faith purchaser. As a good faith purchaser, Dish was entitled to all of the benefits and protections of § 363(m) of the Bankruptcy Code. Additionally, the court found that Blockbuster possessed full corporate authority to execute the Purchase Agreement and that consideration for the sale was reasonable. Furthermore, Blockbuster demonstrated both sound business purposes and compelling circumstances to justify the fact that the transaction was outside the ordinary course of business. Most importantly, the court held that the transfer of assets vested Dish with “all right, title, and interest of the Debtors to the Assets free and clear of all Liens,” and satisfied the standards set forth in § 363(f) of the Bankruptcy code. Even though the court approved the sale order, it still required Dish to provide the schedule of executory contracts and unexpired leases that it would assume and assign by no later than April 18, 2011. The court chose this date to accommodate the target closing date of April
464 ORDER, PURUSANT TO 11 U.S.C. §§ 105(A), 363, AND 365 AND FED. R. BANKR. P. , 6004, 6006
AND 9014 AUTHORIZING AND APPROVING (A) THE SALE OF DEBTORS’ ASSETS FREE AND CLEAR OF INTERESTS AND (B) PROCEDURES FOR THE ASSUMPTION AND ASSIGNMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES TO THE PURCHASER, In re Blockbuster, No. 10-14997 (S.D.N.Y. Apr. 14, 2011). at 3. (No. 1602). 21, 2011. Shortly after the hearing on April 14, 2011, Dish informed Blockbuster that it did not have sufficient time to finalize its decision to designate the contracts, totaling an approximate 1,500 contracts. Consequently, Dish requested an amendment to the original Purchase Agreement that would extend the time to designate the assumed contracts through an additional post-closing period of 90 days. After negotiating with Dish, Blockbuster modified the assumption procedures set forth in sections 2.5 and 8.8 of the Purchase Agreement. Specifically, these modifications allowed Dish to assume executory agreements and lease agreements 90 days following the closing date. In return for this extended time, Dish covered all expenses and obligations relating to the pending contracts. Furthermore, Dish covered as much as $4.9 million in professional fees and expenses and $3.5 million in employee benefits in exchange for the extended 90 days. On April 21, 2011, the targeted closing date, Blockbuster filed a motion to extend Dish’s time to designate which executory contracts and unexpired leases it wishes to maintain as part of the go-forward Blockbuster business. The request for extended time was documented in sections 2.5 and 8.8 of the Modified Purchase Agreement. Blockbuster emphasized Dish’s pledge to cover all obligations from pending contracts to prove that no counterparty would be prejudiced by the modification.

The Senior Secured Noteholders objected to this motion. They argued that one revision, in particular, waived a $3 million penalty for a delay in completing the sale. Lions Gate Films, Inc. also asserted that Dish and Blockbuster must honor a revenue-sharing agreement. A few days later, on April 26, 2011, the court granted Blockbuster’s motion by approving the modified Purchase Agreement. As a result, the asset purchase agreement between Dish and Blockbuster officially closed, with Dish maintaining the ability to determine which contracts to assume after the closing date. j. Why did Dish acquire Blockbuster? Initially, Dish pursued the acquisition so that it could utilize the Blockbuster brand and physical locations for cross-sale opportunities. Soon after the auction closed, Tom Cullen, Executive Vice President of Sales for Dish, remarked that “[w]ith [Blockbuster’s] more than 1,700 store locations, a highly recognizable brand and multiple methods of delivery, Blockbuster will complement our existing video offerings while presenting cross-marketing and service extension opportunities for Dish Network.” Thus, evidence exists that Dish believed the acquisition gave it the ability to implement free or discounted Blockbuster rentals, adding value to its paid television subscribers. However, a large incentive existed for Dish in acquiring Blockbuster’s streaming rights to a number of video titles. An acquisition of these rights could be used to expand Dish’s own streaming rights. With $3 billion of cash on hand, Dish could easily afford to purchase Blockbuster. Thus, the Blockbuster acquisition made Dish a more viable competitor in streaming videos online at a reasonable expense. The acquisition also made sense in light of Dish’s acquisition of satellite provider DBSD North America. However, Dish did not act quickly to make these synergies payoff. Even after acquiring more streaming rights, Dish faced stiff competition from old Blockbuster foes Hulu and Netflix. V. What’s Next for Blockbuster? Almost a year after Blockbuster declared bankruptcy, Dish announced Blockbuster Movie Pass to compete with services like Netflix and Hulu. In Blockbuster Movie Pass, Dish offered customers access to by mail, streaming, and television access in one bundle. This package appeared similar to the one Blockbuster planned to offer, with the addition of television service. The service originally cost $10 a month, but was free for customers of Dish’s $39.99 monthly package. Dish’s Blockbuster package sought to consolidate services to offer one product. Dish projected that it could offer more shows and movies than competitors Comcast, DirectTV, Netflix, and Qwickster. These shows could be accessed via live television or streaming media. Additionally, customers were offered the ability to exchange DVDs and games at Blockbuster locations. However, betting on a platform including brick-and-mortar stores would once again prove costly. The Blockbuster Movie Pass program failed, with Dish abandoning it in October 2012. At this time, Dish scrapped plans to use Blockbuster as a nationwide streaming or mail service. The program evolved into a similar program, Blockbuster @Home. While Dish spokesman John Hall claimed that the company is looking to leverage its existing stores with television and streaming services, it continues to “evaluate each store on a case-by-case basis for its profitability and future potential." Since acquiring Blockbuster in 2011, Dish has closed more than 2/3 of 1,700 stores it inherited. These closures resulted in the layoff of almost 40% of Blockbuster’s work force. Analysts doubt Dish’s interest in utilizing the brick-and-mortar stores. According to Charlie Moffat of Sanford C. Bernstein, “[i]t seems like whatever [Dish Chairman Charlie Ergen] had in mind for Blockbuster originally, it's not that now, and it doesn't seem like it's getting a whole lot of corporate attention anymore.” Perhaps some of the reason for the skepticism involves the limited risk Dish faced in acquiring Blockbuster. Upon its acquisition by Dish, Blockbuster had around $100 million in cash. A complete sale of the 1,700 stores was projected to net $300 million.512 This combined amount could have netted Dish a profit, without using the brand for anything, according to Dish CEO Charlie Ergen. With this information in mind, it is hard to predict the future of the Blockbuster brand. Dish could continue to move forward in utilizing Blockbuster as a streaming service or let the brand die altogether. As Ergen states, “[w]orst case, we’ll take our money after having wasted some time [on Blockbuster], not much money, and life goes on.”

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