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Blockbuster Creditors Lack Grounds to Sue Icahn, Lawyer Says

March 17 (Bloomberg) -- Billionaire Carl Icahn and other pre-bankruptcy lenders to Blockbuster Inc. didn’t do anything to justify a lawsuit by general unsecured creditors, a lawyer for the creditors said in court.

U.S. Bankruptcy Judge Burton Lifland in New York today heard an update on an investigation by a committee of Blockbuster’s unsecured creditors. The judge separately dismissed a lawsuit brought by creditor Lyme Regis Partners LLC that claimed Icahn had inside information as he invested in the movie-rental chain.

“We found nothing in record or testimony that would allow the committee to vacate liens of prepetition lenders,” creditors’ attorney Richard S. Kanowitz told Lifland. If creditors could challenge the pre-bankruptcy lenders’ rights, or liens, to company assets, they might be able to claim more of the assets.

Blockbuster, once the world’s largest movie-rental chain, has a $290 million offer from a group of senior creditors. The company plans to auction itself to test for higher offers. Lifland said March 10 that Icahn can bid, overruling objections from Lyme Regis.

Lifland said he denied Lyme Regis’s lawsuit against Icahn because the investment firm, which holds 9 percent senior notes in Blockbuster, had suffered no specific harm. The lawsuit was “porous” and lacked information to back up claims that Icahn engaged in improper conduct, Lifland said.

Dismissal Sought

Icahn, chairman of New York-based holding company Icahn Enterprises LP, on Jan. 27 asked Lifland to dismiss the lawsuit. Lyme Regis claimed the billionaire used inside information to convert his equity stake in Blockbuster to debt, in a bid to take control of the company after it reorganizes.

Icahn funded Blockbuster’s bankruptcy, along with Monarch Alternative Capital LP and other lenders who made the offer to buy the company.

The Dallas-based company filed for Chapter 11 bankruptcy on Sept. 23. Blockbuster, with about 3,000 stores in the U.S., said in the filing that sales shrank in recent years while Netflix Inc. grew by renting movies online and through the mail, and Coinstar Inc. put Redbox DVD vending machines in supermarkets and drugstores.

The case is In re Blockbuster, 10-14997, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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