Redbox is shutting down, corporate parent is being liquidated

Check out this post for an updated and expanded version of this story.

This is it for Redbox: The judge overseeing the bankruptcy case of Redbox’s corporate parent Chicken Soup for the Soul Entertainment granted the debtors request to convert it from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, effectively paving the way for shutting down the company and liquidating its assets.

Chicken Soup for the Soul Entertainment’s CEO Bart Schwartz, who had only joined the company two weeks ago, stepped down this morning for unrelated reasons, according to the attorney representing the debtors in the case.

Companies use Chapter 11 bankruptcy cases to reorganize, allowing them to continue to operate while they rid themselves of debt, while a Chapter 7 bankruptcy generally results in a trustee selling off company assets to pay creditors, and winding down the company.

“There is no means to continue to pay employees, pay any bills, otherwise finance this case. It is hopelessly insolvent,” United States bankruptcy judge Thomas Horan determined during a hearing Wednesday, adding: “Given the fact that there may also be at least the possibility of misappropriation of funds that were held in trust for employees, there is more than ample reason why this case should be converted. So I am going to grant the motion.”

I’ve been reporting about Redbox’s demise for months; to follow my work, sign up for my newsletter:

Attorney Richard Pachulski, who had asked the court for the conversion of the case, said that debtors had believed until yesterday that the company could be saved. “I think there is value here,” he said. However, HPS, the lender holding most of Chicken Soup’s debt, wasn’t willing to take the risk of loaning any more money to the company for its continued operations.

Even additional cash injections likely wouldn’t have saved Redbox, with Pachulski telling the court that the entity’s payroll was higher than its current earnings. “We were going to have to shut down the Redbox entity and terminate the employees,” he said. The plan was to retain only between 100 and 150 out of over 1000 employees, primarily in other parts of the company.

Chicken Soup for the Soul Entertainment had faced a major cash crunch in recent months that left the company unable to pay bills from content partners, store chains hosting Redbox kiosks, and even the company Redbox had leased its car fleet from. The company’s cash citation worsened in June when it failed to make payroll, and wasn’t able to obtain health insurance for its employees anymore.

Check out my feature-length story for The Verge on Redbox’s final weeks here.

Chicken Soup was able to pay back some of those owed wages this week after obtaining a so-called debtor-in-possession loan from HPS, but Pachulski told the court that the loan wasn’t even enough to cover everyone’s health insurance. The company had also failed to make payroll taxes for the past 9 months, and didn’t pay for its employee’s health insurance for 2.5 months prior to filing for bankruptcy.

However, it continued to deduct employee health insurance contributions from paychecks, and allegedly kept 401k contributions as well. “If that’s the case, I find it sickening, frankly, that money was taken from the paychecks from these people, and not put it where it belonged,” judge Horan said Wednesday. “It’s incredibly disturbing.”

“The massive mismanagement … this is beyond the pale of anything I have seen,” agreed  Pachulski. “I think what has been done here is criminal, to be very frank.”

Image of the Redbox DVD courtesy of (CC-BY) Flickr user m01229.