(Bloomberg) -- Lawyers for HPS Investment Partners LLC said in federal court Tuesday that the former head of bankrupt Redbox Entertainment Inc. can’t be trusted and his handpicked board of directors should be replaced, after the DVD rental company failed to pay workers, fund their health insurance and diverted months worth of payroll taxes.

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HPS, acting on behalf of lenders owed $500 million, had installed some new directors to the board of Redbox before its publicly traded parent, Chicken Soup for the Soul Entertainment Inc., last month fired all board members except controlling shareholder William J. Rouhana Jr., according to court filings. 

Chicken Soup filed bankruptcy Friday without telling its lenders or informing the court about a dispute over who should be running the company, HPS’s lawyers said. HPS has filed papers accusing Rouhana of mismanagement and seeking to reinstate the fired directors.

The legal brouhaha conflicts somewhat with the public persona of Cos Cob, Connecticut-based Chicken Soup, which was founded in 1993 and named for a series of inspirational books it publishes. US Bankruptcy Judge Thomas Horan, who is overseeing the case, said on Tuesday that the allegations took him by surprise.

“I was pretty shocked yesterday morning when I started reading the filings that were coming in” from HPS and other lenders, Horan said during a court hearing in Wilmington, Delaware. Although the case at first looked routine, “it turned out to be anything but.”

Rouhana is no longer Chicken Soup’s chief executive and no longer controls the company, Michael P. Cooley, a bankruptcy lawyer for the company, told Horan during the hearing. Although Chicken Soup didn’t disclose certain details about the lender dispute, the company did make clear that it faced big financial troubles, including a failure to pay wages in June, Cooley said. 

Cash Needs

The company needs the court’s permission to immediately borrow cash to pay back wages and other employee costs, as well as stabilize operations so it can reorganize, Cooley said.

Horan warned the company that its current loan request was likely to fail and asked both sides to talk about an alternative. HPS has agreed to fund Chicken Soup’s wages under certain conditions, HPS lawyer Dennis F. Dunne said in court.

The judge scheduled another hearing for Tuesday afternoon to consider approving any loan compromise the two sides may reach.

The media company listed assets and liabilities of at least $500 million each in its Chapter 11 bankruptcy petition. The filing allows Chicken Soup to keep operating while it works on a plan to repay creditors. 

Chicken Soup struggled to keep up with its financial obligations after buying DVD rental company Redbox in 2022, court papers show. It took on about $360 million of debt in connection with the deal, a sum that would only be manageable if it could capitalize on movie releases bouncing back from pandemic-era lows, Rouhana said in a sworn bankruptcy court statement.

Although the movie business rebounded somewhat, Redbox needed additional cash to buy and distribute new content, Rouhana said. But the company’s lenders vetoed a new loan facility, starving the business of funds, according to Rouhana.

That left parent Chicken Soup “unable to pay for all the movies that were offered by their providers, and operating results failed to meet management’s expectations, particularly in Redbox’s kiosk rentals, resulting in insufficient cash flows and working capital to operate the business efficiently,” Rouhana said. 

Asset Sales

The company plans to use its bankruptcy to sell off some business units and restructure others, according to court papers. It lined up $20 million of new debt to fund the Chapter 11 process. 

Chicken Soup still operates about 24,000 Redbox DVD rental kiosks across the US. It also runs Crackle, a no-cost streaming service that relies on advertisements to make money. The company’s content library spans 28,000 films and 40,000 episodes of television, according to court papers. It became a publicly traded company in 2017. 

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

--With assistance from Jonathan Randles.

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