The parent company of Redbox is shuttering as its former chief executive fields accusations that he mismanaged the business and failed to pay workers, whose health care benefits have been denied.
A Delaware bankruptcy judge on Wednesday said he’d appoint a trustee to probe whether money meant to pay employees were misappropriated. Chicken Soup for the Soul Entertainment’s bankruptcy, which started as a Chapter 11 case, will be converted to a liquidation of its assets under Chapter 7 as its lenders refuse to continue to finance the company any longer amid accusations of mismanagement and “bad faith” conduct from former chief executive William Rouhana, who controls roughly 80 percent of company shares and is alleged to have misused funds.
“1,000 people are about to lose their jobs,” said Judge Thomas Horan, “and they’re not even going to be paid for work that they did.”
Lawyers for the company said money deducted from workers’ paychecks meant to cover their health care benefits may have been directed elsewhere.
“I find it sickening frankly,” responded Horan, who noted the allegations haven’t been proven, according to audio of the hearing. An investigation of the company led by a trustee will follow.
Rouhana has denied the accusations.
Chicken Soup for the Soul Entertainment’s businesses will be sold off, including its 24,000 DVD rental kiosks and its streaming platform, said its lawyer, Richard Pachulski. The liquidation marks a disastrous end to its purchase of Redbox in 2022, for which it incurred an estimated $360 million in debt. Shortly before filing for bankruptcy, controlling shareholders Rouhana fired all of the company’s directors and terminated a group tasked with monetizing the business’ assets, allegedly to entrench his power, according to top lender HPS Investment Partners.
When a company files for bankruptcy, all of its assets are placed into an estate. A court-appointed trustee manages those assets to ensure that their value is maximized for creditors. This prevents the bankruptcy entity from selling assets and paying creditors at their discretion or not at all.
Chicken Soup for the Soul Entertainment initially pursued a Chapter 11 bankruptcy, which would’ve allowed it to continue managing its business while it presents a plan to reorganize the company. This was met with opposition by HPS.
In court filings, HPS argued financial mismanagement to the point a liquidation must take place to recoup creditors and pay employees, who lost medical benefits last month when the company missed payroll. It said there’s a “credible basis to hold Mr. Rouhana personally liable for misuse” of funds and missed employee wages.
In 2023, Chicken Soup for the Soul Entertainment reported roughly $636 million in net losses, with nearly $53 million in losses in the first quarter of 2024. Its outstanding debt likely far exceeds the value of its current assets, even before accounting for the money it sought for reorganization.
“There is no means to continue to pay employees — to pay any bills,” Horan said.
After acquiring Redbox last year, Rouhana said the company is poised to see a bigger return on its investment due to the return of theatrical titles.
“It’s like the floodgates have opened,” he said.
The company cut costs, deferred executive bonuses to tie them to expectations for free cash flow and licensed $8 million of content. As part of its strategy to revitalize the business, it planned to cut down on its content spending in 2023, targeting $19 million in content costs in 2023, and sell certain assets that are not key to its strategy in order to cut down on its debt load. Shares plunged last year by more than 30 percent after it announced widening losses in the fourth quarter.