Redbox Owner to Be Liquidated Following Alleged Mismanagement

SAN RAFAEL, CA - AUGUST 14: A RedBox video rental kiosk sits in front of a gas station August 14, 2009 in San Rafael, California. Movie studios are making an attempt to limit new release movies to the fast growing DVD rental kiosk company RedBox in protest of their extremely low rental prices. (Photo by Justin Sullivan/Getty Images) (Justin Sullivan/Photographer: Justin Sullivan/Ge)

(Bloomberg) -- The bankrupt owner of Redbox Entertainment Inc. will be liquidated, a judge ruled Wednesday, after lawyers for the company and lenders accused its former chief executive officer of mismanaging the business and failing to pay workers or fund their health benefits.

Judge Thomas Horan said during a Delaware court hearing that Redbox’s publicly traded owner, Chicken Soup for the Soul Entertainment Inc., will be shut down by an independent trustee after an earlier effort by the company to borrow fresh funds to pay employees failed. About 1,000 workers will be laid off.

The judge ruled after bankruptcy lawyers for the company, which runs tens of thousands of DVD rental kiosks, said money deducted from employee paychecks to cover health benefits were not used to cover those expenses. The allegation concerns actions taken before Chicken Soup filed Chapter 11 in June and don’t involve the company’s bankruptcy advisers who were retained to try and salvage the business, Horan said.

Alleged misdeeds described in court Wednesday have not been substantiated in an evidentiary hearing, Horan said. However, claims that money earmarked for employee benefits was misappropriated are “incredibly disturbing,” he added.

“I find it sickening, frankly,” Horan said.

Managers of bankrupt companies often get latitude to continue operating the business while they attempt to restructure in Chapter 11. But lenders and judges can force a company to liquidate under the supervision of a court-appointed trustee if a business is badly run or creditors allege misconduct. 

Lender HPS Investment Partners has previously accused former Chicken Soup CEO and controlling shareholder William J. Rouhana Jr. of mismanaging the business. Rouhana’s lawyer has said her client disputes the allegations against him.

Chicken Soup for the Soul Entertainment is a unit of Chicken Soup for the Soul LLC, publisher of the namesake books. The parent company is not part of the bankruptcy.

The bankrupt unit said that when it filed Chapter 11 that it intended to sell off some business lines and restructure others. Those plans were soon scuttled after HPS accused Rouhana of failing to pay workers or fund their health insurance.

Chicken Soup’s lenders attempted to work out an emergency loan to cover employees’ back pay. But now that the company is shutting down, Chicken Soup lawyer Richard Pachulski said employees aren’t going to be paid for work from June 29 through the present. Horan said he didn’t want Chicken Soup employees to work “a moment longer.”

Pachulski, a seasoned bankruptcy lawyer, said the scale of the mismanagement “is a train wreck like nothing I’ve ever seen.”

The case is Chicken Soup for the Soul Entertainment Inc., 24-11442, US Bankruptcy Court for the District of Delaware.

--With assistance from Steven Church.

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