Blockbuster Bankruptcy Suit Asks: What Did Carl Icahn Know and When Did He Know It?

Blockbuster's slouching toward bankruptcy was easily one of the biggest local business stories of the year; from giant to joke, how the mighty had fallen. But since its Chapter 11 filing early on the morning of September 23, there'd been little to report during its reorganization, save for a notice last week that the video-rental chain would be shuttering some 200 more brick-and-mortars between the end of this year and the closing of the first quarter of 2011. (Among those now gone for good: the Inwood-Lovers Lane location, which closed up shortly before Christmas, and an Arlington outpost.)

But in the hours before Christmas Eve, there was one filing of note posted to the recap website: Lyme Regis Partners, LLC v. Carl Icahn, et al., which you'll find in full on the other side. Long story short: The creditor wants to know why Icahn, who'd resigned his position on the Blockbuster board in January, and his affiliates began dumping those equity shares back in March, only to begin snapping up its debt in the months following the sell-off. Says the suit, when the downtown-based Blockbuster filed for Chapter 11 at the end of September, "it was disclosed that material, insider financial information was previously shared with certain Secured Note holders under confidentiality agreements. Plaintiff is informed and believes that Mr. Icahn and/or his Affiliates were among the Secured Note holders that received such information."

As Bloomberg News noted late last week Lyme Regis and other creditors in the case have already asked the court to review who knew what and when, insisting that "a probe of the liens of senior noteholders is needed." But when the judge said no to that, the creditor (which holds close to $600,000 in Blockbuster's unsecured notes) filed the adversary suit, which alleges that Icahn and his subsidiaries "had the luxury of purchasing a potentially controlling amount of debt while relying on their: (1) insider and intimate knowledge of Debtor's operations, personnel landscape, and political inner workings; and (2) continued influence over the Debtor's fiduciaries, that Defendants knew to be willing and able to facilitate the bankruptcy and [debtor-in-possession] financing." An intriguing read -- especially for those interested in the history of Icahn and Blockbuster CEO Jim Keyes's love affair.

Lyme Regis Partners v Carl Icahn