CEC Entertainment, the parent company of kid-friendly and iconic "dinnertainment" restaurant and arcade chain—Chuck E. Cheese—sought and received Bankruptcy Court approval for three very unique settlement agreements, earlier this year, under which it will pay $2.3 million to three vendors to destroy roughly seven BILLION prize tickets – i.e., enough tickets to fill approximately 65 forty-foot cargo shipping containers.1 The backlog was caused by Chuck E. Cheese placing orders for tickets at pre-COVID utilization rates, the resulting pandemic and rapid fallout in sales, and, most generally, Chuck E. Cheese's efforts to transition from physical tickets to contactless transactions, like "e-Tickets."2
While approving the settlements, the bankruptcy judge (Judge Marvin Isgur from the Southern District of Texas) was not shy in his misgivings about the costs of such direction going so far as to direct the debtors' CEO to relay to the vendors that "there's going to be hell to pay" and "[the vendors are] going to have a pretty angry guy here in Houston" if any of the seven billion tickets are not destroyed or, worse, if any of the tickets leak out into the general public.3 Nonetheless, Judge Isgur ultimately found each settlement to be a "fair and reasonable compromise" in light of the fact that the tickets' aggregate redemption value, if they were to somehow leak out to the general public, could top $9 million based on their redemption value for prizes at the debtors' and franchisee venues.
CEC Entertainment filed for chapter 11 protection in June 2020—citing an unmanageable capital structure and the impact of COVID-19 as the primary catalysts—with the hopes of restructuring its balance sheet and negotiating its existing lease terms with landlords. The Texas-based company has more than 600 Chuck E. Cheese locations across 47 states—many of which were forced to shut down, at least temporarily, during the course of the pandemic.
1 See Order Authorizing Debtors to Enter into Settlement Agreements for the Destruction of Prize Tickets [ECF No. 900].
2 See Debtors' Motion for Authority to Enter into Settlement Agreements for the Destruction of Prize Tickets [ECF No. 848].
3 See Hr'g Tr. Sept. 21, 2020 at 109-111.
Originally Published by Mayer Brown, November 2020
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