Metropolitan Theatres Corporation: A Century-Old Cinema Chain Seeks New Life Through Subchapter V Bankruptcy

Metropolitan Theatres Corporation: A Century-Old Cinema Chain Seeks New Life Through Subchapter V Bankruptcy

On February 29, 2024, Metropolitan Theatres Corporation (MTC), a venerable family-owned cinema chain with a 100-year legacy, filed for bankruptcy protection under subchapter V of chapter 11 in the United States Bankruptcy Court for the Central District of California. This significant move marks a crucial turning point for MTC as it seeks to restructure its operations and debt amidst ongoing industry challenges.

A Legacy in Cinema

Founded in 1923 by Joseph H. Corwin, MTC has long been a fixture in the American movie theatre landscape. Over the past century, the company has grown and evolved, adapting to the changing times while maintaining its commitment to delivering high-quality movie experiences. Today, MTC is led by David Corwin, a fourth-generation family member who continues to steer the company through a rapidly changing entertainment landscape.

MTC operates 16 theatres with 87 screens across California, Colorado, and Utah. Its portfolio includes both historic properties, like the iconic Arlington Theatre in Santa Barbara, California, and state-of-the-art multiplexes equipped with modern amenities such as IMAX screens. This mix of old and new reflects MTC's ability to honor its rich history while embracing technological advancements.

The Road to Bankruptcy

Like many in the theatre industry, MTC faced unprecedented challenges due to the COVID-19 pandemic. In March 2020, the company was forced to temporarily close all its theatres to comply with government mandates aimed at curbing the spread of the virus. This sudden closure led to immediate financial strain, prompting MTC to implement layoffs, furloughs, and salary reductions in a bid to weather the storm.

While MTC was able to reopen its theatres by December 31, 2021, the industry as a whole has struggled to recover. Several factors have contributed to MTC's ongoing financial difficulties:

Reduced Film Content and Box Office Performance: The number of new film releases has not returned to pre-pandemic levels, and box office performance remains subdued. The 2023 writers' and actors' strikes further exacerbated this issue, leading to fewer film releases and production delays.

Evolving Theatrical Release Windows: The traditional model of exclusive theatrical releases has been challenged by the rise of streaming platforms, which offer films to audiences at home sooner than ever before. This shift has reduced the window of time during which theatres can capitalize on new releases.

Competition from Streaming Platforms: The growing popularity of streaming services like Netflix, Disney+, and Amazon Prime has drawn audiences away from cinemas, impacting ticket sales and overall revenue.

Supply Chain Delays and Inflationary Pressures: Theatres have faced supply chain disruptions that delayed the availability of essential goods and services. Additionally, rising inflation has increased the cost of operations, further squeezing profit margins.

Labor Shortages and Wage Rate Pressures: The theatre industry, like many others, has struggled with labor shortages and rising wage demands, making it challenging to staff theatres adequately while maintaining financial stability.

Despite receiving government assistance through Paycheck Protection Program (PPP) loans and Shuttered Venue Operator Grants (SVOG), MTC continued to struggle with liquidity issues and above-market lease obligations. As of the petition date, MTC reported approximately $26.6 million in assets and $25.2 million in liabilities.

Why Subchapter V?

The choice of subchapter V offers several significant advantages for a company like MTC:

Streamlined Process: Subchapter V cases generally move more quickly than traditional Chapter 11 cases, potentially reducing the overall cost of the bankruptcy process. This is particularly beneficial for MTC, which faces ongoing liquidity challenges and cannot afford prolonged court proceedings.

No Creditors' Committee: In a typical chapter 11 case, a creditors' committee is formed, and the debtor is responsible for paying the committee's professional fees. Subchapter V eliminates this requirement, allowing MTC to avoid additional administrative expenses.

Debtor-Exclusive Plan Filing: Only the debtor, in this case, MTC, is allowed to file a reorganization plan under subchapter V. This provision gives MTC greater control over the restructuring process, allowing it to propose a plan that aligns with its strategic goals.

Easier Plan Confirmation: Under subchapter V, the absolute priority rule, which normally requires that creditors be paid in full before equity holders can retain their interests, does not apply. This flexibility makes it easier for existing equity holders, like the Corwin family, to retain ownership of the company post-bankruptcy.

Administrative Expense Flexibility: Subchapter V allows for the payment of administrative expenses over the life of the reorganization plan rather than requiring these expenses to be paid upfront. This eases immediate cash flow pressures, enabling MTC to focus on stabilizing its operations.

For MTC, these advantages are particularly relevant. The company's secured debt includes $497,934 owed to the Small Business Administration (SBA) under an Economic Injury Disaster Loan (EIDL) and a significant focus on renegotiating or rejecting above-market leases. MTC is also a guarantor on a performing secured loan of approximately $5.2 million to its affiliate, Arlington Theatre Property LLC, held by American Riviera Bank. The efficient path to reorganization offered by subchapter V is crucial for MTC's survival.

MTC's Goals in Bankruptcy

Through the bankruptcy process, MTC aims to achieve several critical objectives:

Streamline Operations: MTC plans to renegotiate or reject above-market leases that have become unsustainable in the current economic environment. By reducing lease obligations, the company hopes to free up cash flow and reduce its operational burden.

Continue Operating Without Interruption: Despite the financial challenges, MTC is committed to keeping its theatres open and operating during the bankruptcy process. This continuity is essential for maintaining customer loyalty and preserving the company's market position.

Preserve Its Workforce: MTC employs 252 individuals, including 12 full-time and 240 part-time employees. Preserving these jobs is a priority for the company, and the bankruptcy process is designed to ensure that employees continue to be paid and retain their benefits.

Maintain Relationships with Vendors and Customers: MTC's relationships with its vendors and customers are vital to its ongoing success. The company intends to honor its commitments to these stakeholders to the greatest extent possible, recognizing that their support is crucial during and after the restructuring process.

Restructure Debt: MTC's financial obligations include $2,196,933 owed to its affiliate Arlington Theatre Property LLC and various other liabilities. The company plans to restructure its debt to achieve a more sustainable financial footing, positioning itself for long-term viability.

First Day Motions

To facilitate its goals during the bankruptcy process, MTC filed several "first day" motions aimed at ensuring smooth operations. These motions include requests to:

Maintain Cash Management System: MTC sought court approval to continue using its existing cash management system, which includes maintaining current bank accounts and business forms. This motion is critical for ensuring that the company can manage its finances efficiently during the restructuring.

Pay Employee Wages: The company requested authorization to pay prepetition wages and continue its employee benefits programs. This motion underscores MTC's commitment to its workforce, ensuring that employees are not adversely affected by the bankruptcy filing.

Continue Customer Programs: MTC also sought approval to continue customer loyalty programs, such as gift cards, ensuring that customer relationships remain intact during the restructuring process.

Use Cash Collateral: To maintain liquidity, MTC requested permission to use cash collateral. This is essential for funding daily operations and paying for essential services without disruption.

Obtain Debtor-in-Possession (DIP) Financing: MTC negotiated a DIP financing facility of up to $3.5 million from its largest shareholders. This financing is crucial for providing the company with the necessary liquidity to operate during the bankruptcy and complete its restructuring efforts.

Looking Ahead

As MTC navigates the bankruptcy process, its century-long legacy and deep roots in the communities it serves may prove to be valuable assets. The company's ability to adapt to changing market conditions while preserving its core business will be crucial to its success during and after the restructuring.

The outcome of MTC's case will be closely watched by others in the theatre industry, as it may provide a blueprint for how small to mid-sized cinema chains can utilize subchapter V to restructure and survive in an evolving entertainment landscape. This evolution includes a shift towards premium experiences in theatres to compete with the convenience of streaming services. MTC's commitment to preserving its historic properties, such as the Arlington Theatre, while also investing in modern multiplexes, reflects its strategy to offer a unique value proposition to moviegoers.

As this case progresses, it will offer valuable insights into the effectiveness of subchapter V for traditional businesses facing modern challenges. For Metropolitan Theatres Corporation, this bankruptcy filing represents not just a financial restructuring, but an opportunity to write the next chapter in its 100-year history while continuing to operate and serve its communities throughout the process.

With its focus on strategic lease negotiations, maintaining operations, and preserving relationships with employees, vendors, and customers, MTC is positioning itself to emerge from bankruptcy as a leaner, more financially stable company. The lessons learned from this process could have broader implications for the cinema industry, particularly for smaller chains facing similar challenges.

Conclusion

Metropolitan Theatres Corporation's journey through subchapter V bankruptcy highlights the challenges faced by traditional cinema chains in today's entertainment landscape. While the road ahead is uncertain, MTC's commitment to innovation, its strong community ties, and its strategic use of bankruptcy protection offer a path forward. As MTC works to restructure its operations and debt, the company's experience may serve as a case study for other businesses navigating similar financial pressures.

The success of MTC's restructuring efforts will ultimately depend on its ability to balance the preservation of its historic legacy with the demands of a rapidly changing industry. As the case continues to unfold, industry observers will be keen to see how MTC's strategies play out and whether the company can successfully adapt to the challenges it faces.