IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK MANHATTAN DIVISION IN THE MATTER OF: CASE NO DEBTOR CHAPTER 11

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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK MANHATTAN DIVISION IN THE MATTER OF: CASE NO BLOCKBUSTER INC. DEBTOR CHAPTER 11 JOINT OBJECTION TO MOTION REQUESTING AN ORDER AUTHORIZING THE DEBTORS TO CONTINUE TO CONDUCT STORE CLOSING SALES AND BULK INVENTORY SALES, APPROVING PROCEDURES WITH RESPECT TO ORDINARY COURSE STORE CLOSING SALES, AND GRANTING ANCILLARY AND RELATED RELIEF TO THE HONORABLE BANKRUPTCY JUDGE: NOW COME County of Anderson, City of Pleasanton, County of Bastrop, Tax Appraisal District of Bell County, County of Brazos, Wylie Independent School District, County of Comal, County of Denton, County of Erath, Pine Tree Independent School District, County of Guadalupe, County of Hardin, County of Harrison, Harrison Central Appraisal District, County of Hays, County of Henderson, La Vega Independent School District, City of Waco, Waco Independent School District, City of Mansfield, County of Williamson, ( County of Anderson, et al, ) as well as Alamo Heights, Aransas County, Bee County, Bexar County, Brown CAD, Cameron County, City of Clute, Consolidated Tax Collector, City of Coppell, Coppell ISD, Corsicana ISD, Cypress-Fairbanks ISD, Dallas County, City of Desoto, Desoto ISD Del Rio, Ector CAD, Ed Couch-Elsa ISD, Edinburg, Edinburg-CISD, El Paso, Ellis County, Elsa, Fort Bend County, Frio CAD, City of Frisco, Gainesville ISD, Galveston County, Grayson County, Gregg County, Harlingen, Harligen CISD, Harris Co Mud #43, Harris County, Hays CISD, Hood CAD, Hopkins County, Hunt County, Irving ISD, Jefferson County, Jim Wells CAD, Judson ISD, Katy ISD, Kaufman County, Kleberg County, Lamar CAD, Liberty County, Matagorda County, McAllen, McLennan County, City of Memphis (TN), Mission CISD, Montgomery County, Northeast TX Comm Coll Dist (Titus), Nueces County, Orange County, Parker CAD, Pearland, Pharr- San Juan- Alamo ISD, Pleasanton ISD, City of Richardson, Rio Grande City ISD, Rockwall CAD, Rockwall

2 County, Round Rock ISD, Rusk County, San Marcos CISD, San Patricio County, Sharyland ISD, Smith County, South Texas College, South Texas ISD, Starr County, City of Stephenville, Stephenville ISD, City of Sulphur Springs, Sulphur Springs ISD, Tarrant County, Texas City ISD, Val Verde County, Victoria County, Webb CISD, Weslaco, Weslaco ISD, Wise CAD, Wise County, and City of Wylie, ( Alamo Heights, et al, ) hereinafter jointly referred to as The Texas Ad Valorem Tax Authorities, and file their Joint Objection to the Motion Requesting an Order Authorizing the Debtors to Continue to Conduct Store Closing Sales and Bulk Inventory Sales, Approving Procedures with Respect to Ordinary Course Store Closing Sales, and Granting Ancillary and Related Relief and would show the Court the following: I. The Texas Ad Valorem Tax Authorities are political subdivisions of the State of Texas. They hold claims for ad valorem taxes assessed against the business personal property and any owned real estate of the Debtors for the 2010 tax year, and, as of January 1, 2011, for the 2011 tax year. II. As of January 1, 2010, liability arose, and as of January 1, 2011, liability will arise and a senior lien attached to the property of the Debtors for the taxes of the Texas Ad Valorem Tax Authorities. The laws of the State of Texas; Property Tax Code, Section 32.05(b); give the tax liens securing these property taxes superior claim over any other claim or lien against this property. This state priority for tax liens is retained in the Bankruptcy Code giving this claim a superior position over all other claims against this property, and this position has been retained through the process of the Debtors obtaining DIP Financing. Stanford v. Butler, 826 F.2d 353 (5th Cir. 1987), 11 USC 506; Universal Seismic Associates, Inc., 288 F.3d 205 (5th Cir. 2002); In Re Winn's Stores, Inc.; 177 B.R. 253 (Bktcy W.D. Tex 1995).

3 III. These Texas Ad Valorem Tax Authorities specifically object to the free and clear sale of their collateral apart from the establishment of a segregated account funded from the proceeds of the sale of their collateral. 1. The proceeds from the sale of the collateral of these Texas Ad Valorem Tax Authorities constitute the cash collateral of these Texas Ad Valorem Tax Authorities, and they object to the use of their collateral or the proceeds of the sale of their collateral to pay any other creditors of this estate. 2. Pursuant to 11 U.S.C. 363(c)(4), absent consent by the Texas Ad Valorem Tax Authorities or an order of the Court permitting use of its cash collateral, the Debtors shall segregate and account for any cash collateral in their possession. 3. The Debtors have not filed a motion seeking to use the cash collateral of these Texas Ad Valorem Tax Authorities, nor has there been notice or a hearing on the use of these Texas Ad Valorem Tax Authorities cash collateral. 4. Accordingly, absent their consent, these taxes must either be paid prior to distribution of any proceeds of the sale of their collateral, or a segregated account must be established from any sale proceeds to comply with the requirements of 11 USC 363(c)(4). IV. Furthermore, pursuant to the terms of the Final DIP Order, paragraph 17, Priority of Distributions any payment to any other party authorized by the Final DIP Order is expressly after provision for senior liens provided for in this Final Order (including Ad Valorem Liens). These Texas Ad Valorem Tax Authorities hereby object to any distribution being made to any other secured creditors apart form he establishment of a segregated account to which their liens are attached, such account being funded from the cash proceeds of the sale of their collateral.

4 V. WHEREFORE, the Texas Ad Valorem Tax Authorities pray that the Court order the Debtors to include such provisions in the Order approving this Motion as would require that proceeds of the sale of the collateral of these Texas Ad Valorem Tax Authorities be segregated and their liens be attached thereto with the priority they otherwise hold pursuant to non-bankruptcy law, prior to the distribution of any further proceeds of the sale of their collateral to any other party, and further request other and such relief as is just and proper. Dated: December 30, 2010 Respectfully submitted, /s/ Michael Reed Michael Reed Tex. Bar No McCREARY, VESELKA, BRAGG & ALLEN, P.C. P. O. Box 1269 Round Rock, Texas (512) phone (512) fax Attorneys for County of Anderson, et al, and /s/ Elizabeth Weller Elizabeth Weller Tex. Bar No LINEBARGER GOGGAN BLAIR & SAMPSON, LLP 2323 Bryan St. #1600 Dallas, TX (469) phone (469) fax Attorneys for Alamo Heights, et al,

5 CERTIFICATE OF SERVICE I hereby certify that I have placed a copy of the above Objection to the to the Debtors Sale Motion to the following parties by facsimile and overnight mail and to those parties listed on the Court s Notice of Electronic Filing by Electronic Notification on December 30, By Overnight Mail: /s/michael Reed Michael Reed Chambers of the Honorable Burton R. Lifland Courtroom 623 One Bowling Green, New York, New York 10004, Debtors c/o Blockbuster Inc., 1201 Elm Street, Dallas, Texas Attn: Rod McDonald, Esq. By Facsimile: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY Attention: Stephen Karotkin, Fax: (212) Sidley Austin LLP 787 Seventh Avenue New York, NY Attention: James P. Seery, and Paul S. Caruso, Fax: (212) Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, NY , Attention: Peter Neckles, and Alexandra Margolis Fax: (212) United States Trustee s Office Southern District of New York 33 Whitehall Street, 21st Floor New York, New York Fax: (212) Weil, Gotshal & Manges LLP 200 Crescent Court, Suite 300, Dallas, Texas Attn: Martin A. Sosland, Fax: (214) Sheppard Mullin Richter & Hampton LLP 333 South Hope Street, 43rd Floor Los Angeles, CA Attention: David McCarty and Kyle Mathews Fax: (310) Emmet, Marvin & Martin, LLP 120 Broadway, 32nd Floor New York, NY Attention: Edward P. Zujowski, Fax: (212) Cooley LLP, 1114 Avenue of the Americas, New York, New York Attn: Jay R. Indyke, Esq., Richard Kanowitz, Esq., and Jeffrey L. Cohen, Esq. Fax: (212)