During a hearing in Cineworld’s Chapter 11 case, Judge Marvin Isgur of the US Bankruptcy Court for the Southern District of Texas denied a motion that Cineplex filed on 9 September, in which the Canadian cinema operator sought to modify the automatic bankruptcy stay that paused litigation against Cineworld.

The request to modify the stay grew out of a dispute in which Cineworld in December 2021 came out on the losing end of a Canadian lawsuit brought by Cineplex. The two parties had been signed onto a merger agreement, but Cineworld backed out in June amid a challenging environment for cinema operators during the coronavirus pandemic. A court in Ontario eventually determined that Cineworld owed Cineplex CAD 1.24bn in breach of contract damages—a judgment worth the equivalent of approximately USD 955m when Cineworld filed its Chapter 11 petition on 7 September.

Ken Ziman of Paul Weiss Rifkind Wharton & Garrison, representing Cineplex, argued during today’s hearing that Cineworld’s appeal of the judgment was already well on its way to completion when the Chapter 11 filing paused litigation. The two sides, said Ziman, have submitted all of their written legal briefs and are scheduled to present oral arguments at a Canadian appellate court on 12 October and 13 October, with a ruling from the court expected within a short time frame, possibly as little as one month after the arguments.

Ziman argued further that, with Cineworld looking to move its Chapter 11 case swiftly toward consideration of a reorganization plan, finality on the size of Cineplex’s ultimate claim could be beneficial to that plan process. He said, “Knowing whether there’s a billion dollars in additional claims is going to be of relevance” to the parties working to craft a restructuring plan for Cineworld.

In opposition, Cineworld counsel Joshua Sussberg of Kirkland & Ellis said the time and expense the company would have to put in to prepare itself for appellate arguments in Canada would detract from its efforts to move through the bankruptcy process. “We want our management team focused right here, right now” on charting a path toward a Chapter 11 plan and emerging from bankruptcy, said Sussberg.

During his argument, Sussberg also referenced a recent news report suggesting that Cineplex has approached Cineworld lenders in an effort to revive a merger agreement, potentially leading to a combination of Cineplex and Cineworld’s US-based Regal Cinemas business. Sussberg said Cineplex may want to “lock in the claim” it has in Canadian courts to gain an advantage in its dealmaking attempts. 

Judge Isgur sided with Cineworld, saying that he believed lifting the automatic bankruptcy stay and allowing the Cineplex appeal to proceed would distract Cineworld’s management from the Chapter 11 process. The judge also noted that the underlying principal behind the imposition of an automatic stay is to give a Chapter 11 debtor like Cineworld a “breathing spell”—lifting that stay less than a month into Cineworld’s bankruptcy case would undermine that overarching goal, said Judge Isgur.

“It is simply too early to lift the stay,” the judge said.

Cineworld launched its Chapter 11 case on 7 September, reporting USD 10bn to USD 50bn in liabilities against USD 1bn to USD 10bn in assets. The company had USD 5.1bn in funded debt and blamed a confluence of factors for its financial troubles, but largely cited the economic impact the COVID-19 pandemic has had on the movie industry for its descent into bankruptcy. 

An ad hoc group of Cineworld’s legacy lenders has provided debtor-in-possession (DIP) financing for the company’s Chapter 11 case. Initially, the company proposed a USD 1.935bn DIP, which would have included a roughly USD 1bn refinancing of prepetition priming loan debt. But the initial proposal gave pause to Judge Isgur, and toward the end of a first day hearing that ran late into the night, Cineworld and its lenders proposed a new agreement that the judge ultimately approved.

That interim approval gave Cineworld access to USD 1.785bn in DIP financing, consisting of USD 514m in working capital loans, USD 1bn put into escrow and earmarked for the priming loan refinancing deal, and USD 271m to buy out the obligations under Cineworld’s rest-of-world loan facility, which funds several foreign-country Cineworld affiliates that are not part of the Chapter 11 process.