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ST. PAUL-Video Update has filed a reorganization plan in which competitor Movie Gallery will obtain all of the equity in the St. Paul-based video rental firm. The deal that’s been cut calls for forgiveness of a $5-million debtor-in-possession financing it extended in May.

The firm had 600 stores when it filed for protection from creditors last September. Since then, about 250 stores have closed, according to company officials. Video Update now has about 350 stores, most in the Upper Midwest, Northwest, Southeast and Canada. The plan also provides for a restructuring of Video Update’s senior secured debt, of which South Carolina-based Movie Gallery holds 92%. It also establishes an unspecified cash payment for the satisfaction and release of all general unsecured claims. Movie Gallery also will provide Video Update with working capital financing following the plan’s confirmation. On Sept. 11, the Delaware Bankruptcy Court will take testimony on the plan.

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