Blockbuster: Pass reorganization, head directly to liquidation?

In court filings yesterday and today, several parties to Blockbuster's bankruptcy plan filed objections. According to the Los Angeles Times, the objectors include "Walt Disney Studios, Universal Studios, landlords, unsecured creditors, other parties and the office of the U.S. Trustee, a Justice Department unit that oversees bankruptcy proceedings." The problem is that the plan filed on February 21st for the sale of the company to four major secured creditors for $290 million would give the buyers the right to determine who receives the proceeds of the sale. Unsecured creditors, such as the movie studios and landlords that own Blockbuster's stores, would get little or nothing.

It's not a surprise that the unsecured creditors objected to the sale, but when the U.S. Trustee also objected, it made it much more likely that the court will take the matter very seriously. According to the Wall Street Journal, the unsecured creditors would prefer that the court convert the proceedings to a Chapter 7 liquidation, rather than allow the sale to go ahead as proposed. As a practical matter, it's very difficult to see how Blockbuster could survive without the support of the movie studios and distributors. It's their movies and television shows that Blockbuster rents, and if they refuse to supply product to the reorganized Blockbuster, it would cease to be a viable business.

Blockbuster could still modify the sale proposal to satisfy its unsecured creditors and the U.S. Trustee, but it's looking increasingly likely that Blockbuster will end up in liquidation.