A wave of closures and payment difficulties with vendors and lenders led to a Chapter 11 bankruptcy filing in 2000 and a purchase of its U.S. and Canadian stores by Movie Gallery the next year.

Potter and Bedard, who met in law school and shared a love of movies,[1] opened the first store the year before on Rice Street in Little Canada, living in the basement.

[3] However, an attempt to take distribution in-house was not well-received by the film studios and generated cash flow problems: the company's net worth turned negative, creditors and the Internal Revenue Service sought money, and the Minnesota Department of Commerce restricted the company's ability to sell additional franchises in the state.

[5] The IPO gave Video Update the equity it needed to appeal to developers leasing space in new shopping centers[2] and to begin expanding by acquisition; it was followed by two additional public offerings and a sale of warrants before December 1996.

In October 1996, Video Update began negotiating for its largest acquisition: Moovies, a 269-store chain based in Greenville, South Carolina.

Moovies, the fastest-growing company based in South Carolina at the time, had also expanded rapidly; it grew from eight stores in 1992 to 272 by 1997 and had only recently gone public itself.

[15] Potter hoped that the combination of Video Update and Moovies would be large enough to induce the movie studios to enter into revenue-sharing agreements with the chain, much as they had with Blockbuster.

[16] The transaction took place amid a challenging market for video rentals in 1997; good weather and indications of shifting viewer habits were cited,[17] as was a lack of major hit movies.

[20] This decision caused merger talks to extend to March 1998, which Jim McCartney of the St. Paul Pioneer Press called a "harmful distraction" to both companies.

[24] The next year, a jury found that Video Update's buyout of the contract of the former Moovies chief operating officer was fraudulent and awarded him $1.3 million.

Allen Industries—a sign manufacturer in Greensboro, North Carolina, which had been hired to change out signage on many of the stores acquired from Moovies—sued Video Update, which contended the company did shoddy work and refused to pay.

Potter secured agreement from 14 of the 15 lenders involved to amend the terms of the loan, but one lender—Fleet Bank—held out, apparently skeptical of the video rental industry's prospects.

[33] In bankruptcy, senior management made a proposal for their retention, to which the lenders—particularly Banque Paribas—objected, claiming it unjustly enriched top executives, something the company had been known for in the past.

[37] After the purchase, in releasing Video Update's final financial statements, Movie Gallery warned that the company lacked "certain internal accounting and management controls" in the lead-up to and during its bankruptcy.