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CMX Gets Coronavirus Merger Suit Paused Over Chapter 11 Filing

April 29, 2020, 2:13 PM

CMX Cinemas got a Houston federal judge to pause a lawsuit claiming it’s using the coronavirus “as a pretext for walking away from” a deal to acquire a movie theater chain, a few days after it filed for Chapter 11 in a move the chain’s owner blasted as a bad-faith stunt.

Judge Andrew S. Hanen stayed the case indefinitely, noting in an order docketed Tuesday that a bankruptcy petition automatically suspends other suits involving the filer.

CMX parent Cinemex Holdings initiated Chapter 11 proceedings April 25 in the U.S. Bankruptcy Court for the Southern District of Florida, then sought the same day to halt a lawsuit by Houston businessman Omar Khan asking the U.S. District Court for the Southern District of Texas to keep their deal on track. A hearing had been set for April 27.

‘Delay Tactics,’ ‘Posturing’

Hanen’s ruling came a day after Khan—owner of the 11-location Star Cinema Grill chain that Cinemex was set to buy—assailed that move, even as he acknowledged he saw no way around the automatic stay.

“Once it was clear that CMX’s delay tactics, ever-changing legal counsel, and posturing would not achieve its goal of pushing back the evidentiary hearing, CMX decided to use the U.S. bankruptcy laws as a last resort,” he wrote April 27. “The timing of CMX’s bankruptcy itself is questionable, at best.”

Financials CMX disclosed during due diligence didn’t show any other creditor claims or major court cases, according to Khan. Other major theater chains in worse shape haven’t declared bankruptcy, his filing claimed.

His suit, now on hold, seeks to stop Cinemex from reneging on its planned acquisition of Star Cinema Grill for an undisclosed price. The sale would reportedly have made CMX—backed by Mexico’s third-richest man, the billionaire industrialist German Larrea—the seventh-largest U.S. theater chain.

Wave of Similar Suits

The case is part of a wave of similar suits filed since the the coronavirus began scrambling deals worldwide.

Some of others involve the $5.8 billion acquisition of a luxury hotel chain; the purchase of Victoria’s Secret; a business unit sale from Bed Bath & Beyond to 1-800-Flowers; a franchise buyout by CorePower Yoga; and a private equity transaction involving the world’s top cake decorations wholesaler.

Khan has argued that the pandemic was already well-publicized when the agreement was signed March 10, and that the parties explicitly negotiated over the possibility of theater closures.

CMX has countered that although the coronavirus generally was a known risk, the parties couldn’t have anticipated its “unprecedented” scale or economic impact. The deal’s basic purpose has been frustrated, and Cinemex shouldn’t be forced to buy an indefinitely closed business, it claims.

The arguments echo those being made in the other similar suits.

The outcome in each case will likely hinge in part on whether the merger’s “material adverse event” clause excludes “general” business downturns—even those based on unforeseen calamities—and whether the reneging party can show the deal has been disproportionately affected by the pandemic, relative to the broader economy.

Cinemex is represented in the merger suit by Quinn Emanuel Urquhart & Sullivan LLP and in bankruptcy court by Bast Amron LLP. Khan is represented by Beck Redden LLP and Honigman LLP.

The cases are Khan v. Cinemex USA Real Estate Holdings Inc., S.D. Tex., No. 20-cv-1128, response filed 4/27/20 and In re Cinemex USA Real Estate Holdings Inc., Bankr. S.D. Fla., No. 12-bk-14695, 4/25/20.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com

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