If you had switched off the news over the weekend (we don’t blame you), you probably missed the fact that the CMX, the eighth largest cinema chain in the United States, filed for Chapter 11 bankruptcy this past Friday. Given the perilous state of the global economy, and the U.S. exhibition sector in particular, this might not come as a surprise, perhaps even be the first of many Chapter 11 filings we will see by cinema chains. Case closed. But as Columbo famously used to say, there’s “just one more thing.” The timing. Not simply why now, but why on a Friday, even late on a Friday?

CMX, which is the U.S. subsidiary of the Mexican cinema giant Cinemex, was very clear in the statement that it issued as to why it chose this course of action. In the full  statement emailed out by CMX, after explaining the company has filed for Chapter 11 bankruptcy protection, the second and third paragraphs state:

We did so as a result of the economic crisis precipitated by the coronavirus pandemic. This filing will help ensure the long-term viability of our business, including our ability to protect our employees.

We are in a state of complete uncertainty as to when we can re-open our theaters and when our customers will feel safe and secure in returning to them given that there is presently no vaccine against the virus. We cannot forecast when — if ever — customer numbers will return to pre-crisis levels.

The statement then goes into detail about how much the COVID-19 shut down is costing them . It then lays out who needs to change for CMX to survive, i.e. whose fault it is if they and the cinema industry can’t come back to normal:

The studios, landlords and theater companies must take this as an opportunity to place the industry on a sound, long-term financial footing. To do so, there needs to be a rebalancing of the current economic arrangements, which disproportionately benefit the studios and landlords at the expense of the theater companies. The industry will not survive absent such an economic rebalancing.

It sounds like CMX is saying that Hollywood studios and landlords have not been equitable in their commercial dealings and that if the cinema industry goes under such parties will be to blame. CMX then says the company did everything they could to stay in business these past few years, including opening bars and restaurants, “but even more diversification will not save the industry absent a rebalancing.” Are you listening, Disney and mall owners?

There is no denying that cinemas all over the world are suffering, not just CMX.  Some, like Cineworld have warned that they might not survive prolonged cinema closures. Meanwhile, financial analysts have been predicting AMC would go bankrupt for weeks now.  But that was back in March and while cinemas won’t open in April (not even in Georgia), there’s been more of a glimmer of hope recently. Cinemark said that it might re-open its cinemas in July, as it raised USD $250 million in debt. In the past week AMC Theatres managed to raise no less than USD $500 million, with its shares seeing a recovery according to Deadline: “AMC had gained more than 5%; National Cinemedia, which sells in-theater advertising, is seeing gains of more than 4%; and Cinemark is changing hands up 1.3%.” Then came the CMX Chapter 11 news just as the week was closing.

CMX is the eighth-largest cinema chain in North America. CMX had previously become one of the ten largest chains in the U.S. through the acquisition of other chains such as Cobb Theatres and they were about to become the seventh largest (sixth largest in U.S.) with the acquisition of the Star Cinema Grill (SCG), which has sites in Texas and Illinois.  Then CMX decided to pull out of the deal, which led to a lawsuit from the SCG owner:

Omar Khan, owner of the Sugar Land-based chain, sued Cinemex for backing out of an agreement to purchase the dine-in theaters after Cinemex’s lawyer cited “the current situation relating to the Coronavirus pandemic” as reason it was not required to close on the transaction, according to documents filed in United States District Court for the Southern District of Texas.

You don’t need to know all the details of case No. 20-cv-1178 in the Southern District Court for the United States, as you can get a flavour of what the lawyers were arguing based on the headlines from Bloomberg Law such as “CMX Cinemas Accused of Using Pandemic as Pretext to Break Deal”, and Law360 (a LexisNexis company) stating “Cinema Owner Says Mexican Co. Used COVID-19 To Slip Sale,” as well as testimonies such as this:

“Far from being unforeseen, the potential impact of the coronavirus was a significant factor discussed by the parties during their negotiation of the agreement,” Khan said. “There is no doubt that Cinemex entered into the agreement with its eyes wide open to the pandemic and its potential effects.”

Cinemex was even able to “negotiate a 10% discount from its initial nonbinding offer,” by citing the pandemic. In its defense, Cinemax filed papers stating, “Whatever the parties thought about the prospect of a pandemic, they plainly did not envision an indefinite, government-enforced shutdown of the theaters that are the very subject of this sale.”

While several trade papers mentioned the (aborted) SCG acquisition, they don’t connect the Chapter 11 filing with it. To do so would require finding the clues buried in the latest Bloomberg Law reporting of the case Khan v. Cinemex USA Real Estate Holdings Inc., motion to dismiss filed 4/23/20. The motion filed by the defendant (Cinemex) was to dismiss, but the presideing judge Hon. Andrew S. Hanen did not grant it. This means there was a hearing set for Monday, 27 April, to hear the case for injunctive relief for making CMX close on the deal.

So Cinemex/CMX first lost the attempt last week to delay or completely avoid the Monday hearing. Then CMX files for bankruptcy late Friday night, blaming studios and landlords, while demanding studios should only get “a maximum of 40 percent of theater companies’ revenues,” as well as better terms from mall landlords. In a Chapter 11 it is hard to see how CMX could be compelled to go through with the SCG acquisition.

Bankruptcy may also have the added benefit of allowing CMX to get out of long-term leases on low performing and unprofitable locations, some of which the company likely picked up with its acquisition of Cobb.

The industry-specific issue with The Curious Bankruptcy Filing of CMX in the Night-Time is that when one of the ten largest cinema chains in the United States files for bankruptcy it will inevitably feed in to the perennial “cinema is dying” narrative – though this time the culprit is COVID-19 rather than VHS or Netflix – and few will connect it to Civil Action No. 20-cv-1178, other than as something else that was going on at the same time. Otherwise, at a time when other large U.S. cinema chains are managing to raise debt to avoid Chapter 11, it would seem suspicious that CMX chose late Friday evening to file for Chapter 11.

J. Sperling Reich contributed reporting to this post.