The filing comes less than two years after CSSE acquired Redbox in a $375 million deal financed almost entirely by $360 million in additional debt. At the time, management characterized the acquisition as a strategic move to expand the business’ media footprint. Unsurprisingly, the questionable bet on a post-pandemic resurgence in DVD rentals failed to materialize, leaving CSSE struggling to service its mounting debt obligations.

This month’s proceedings have quickly devolved into an acrimonious dispute between CSSE and its lenders.

HPS Investment Partners, acting as agent for the lender group, has accused the company's leadership of "gross mismanagement and self-dealing" and last week asked the court to appoint a Chapter 11 trustee to oversee the company's operations through its restructuring — an unusual step typically reserved for cases of severe mismanagement or fraud.

Arguing that this is exactly what is occurring, HPS added that the idea of "entrusting the future of the Company to the very individual who thrust it into despair is akin to hiring an arsonist to put out the raging fire she began."

The individual in question is CSSE chairman William Rouhana, whose financial relationship with the company may have been as disastrous for shareholders (excluding Rouhana’s own 80 percent stake) as a DVD rental acquisition. Through management and licensing agreements, entities controlled by Rouhana received 10 percent of CSSE's gross revenues, regardless of the company's overall financial performance—an $18.4 million payout in 2023, even as the business booked a net loss of $636.6 million.

HPS alleges that Rouhana continued to extract substantial payments for himself even as the company spiraled towards insolvency: a total of $9 million in management and license fees in the first quarter, along with a series of cash dividends.

This was despite the company’s inability to pay its own employees. According to filings, two weeks before entering into Chapter 11, CSSE failed to make payroll for more than 1,000 employees and missed payments that resulted in the termination of their medical benefits.

HPS also shared details of what it called a pattern of “dishonesty and gamesmanship” in recent months.

The company’s initial default was triggered after an incident in which CSSE allegedly attempted to make an interest payment by delivering a check to an abandoned office building in Greenwich, Connecticut, which HPS had vacated years earlier.

Shortly after, the company failed to deliver required financial statements to lenders, and, in March, again missed a required interest payment — though in this instance, as HPS noted in its filing, CSSE went "without first purporting to make the payment by dropping a check in an abandoned building."

HPS also accused CSSE of falsifications in its public filings, claiming that CSSE “actively misled the public.” They point to the company’s September-end quarterly earnings report, in which CSSE noted that it was in “active discussions to modify the terms of its existing loan agreement.”

No discussions took place, says HPS, who maintains CSSE had demanded a debt-to-equity conversion in a letter sent to HPS, which promptly rejected the proposal. CSSE subsequently notified HPS that bankruptcy was imminent and received a debtor-in-possession financing term sheet from the lender—19 days before the September earnings report was issued.

In the weeks before CSSE’s filing, chairman Rouhana fired all other directors on the company’s board, including independent directors approved by HPS. On the eve of the filing, Rouhana then installed an entirely new board and CEO in violation of the company’s credit agreement and corporate governance, according to HPS.

The newly-helmed CSSE filed a series of first day motions which HPS called “not only half-baked, but shocking in their lies, inaccuracies, and lack of merit.” This included a DIP motion that sought to prime the collateral securing $500 million in outstanding first lien debt with a new facility of up to $100 million, brought with claims that an equity cushion existed of at least 20 percent (despite CSSE’s book value deficit of $550 million and the prior year’s $637 million net loss).

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On Wednesday, recently-appointed debtor’s counsel Richard Pachulski notified the court that, since mid-May, CSSE had been deducting health insurance premiums from its employee’s paychecks but had not been paying those premiums to insurance provider Anthem.

The account that once held these premiums had been largely emptied. “This was criminal,” said Pachulski, adding that it was also “highly doubtful” that CSSE was properly depositing 401(k) withholdings into employee accounts.

Judge Thomas Horan called the alleged misappropriation “incredibly disturbing” and said he would appoint a trustee to investigate potential wrongdoing.

Rouhana has obtained separate personal counsel.

Citing the situation, HPS declined to provide additional DIP financing this week after CSSE exhausted its initial $8 million facility. In response, Horan granted a motion to transition proceedings from a Chapter 11 reorganization to a Chapter 7 liquidation.

CSSE, whose parent entity self-describes as a “socially conscious company that combines storytelling with making the world a better place,” will now lay off around 1,000 employees who will go without pay for any work done since June 29th.