By Rose Krebs

Law360 (March 23, 2020, 7:56 PM EDT) -- Citing the coronavirus' impact on the movie theater industry, Regal Cinemas Inc. told the Delaware bankruptcy court Monday that luxury movie theater seating manufacturer VIP Cinema Holdings Inc.'s Chapter 11 debt-for-equity plan is not feasible as VIP has not shown it can satisfy conditions of the restructuring plan.

In an objection to confirmation of VIP's Chapter 11 plan, the movie theater chain, which said it holds prepetition unsecured claims against the debtors, asserted that there is "no reasonable likelihood that the reorganization proposed by the plan will be successful."

The plan was proposed "before the current economic and public health crisis developed" and certain "economic and business risks ... have come to fruition" rendering the plan unconfirmable, Regal contended.

"On February 18, 2020, the day the debtors filed their plan and disclosure statement, the Dow Jones Industrial Average was at 29,232.19, coronavirus seemed like a supply problem in China and hardly anyone had heard of 'social distancing,'" the objection said. "Times have certainly changed."

In VIP's plan disclosure statement, the company and its affiliates have admitted that "if they do 'not achieve their business plan and financial restructuring strategy ... [they] may be unable to restructure their funded debt or be forced to sell all or parts of their business, develop and implement further restructuring plans not contemplated in this disclosure statement, or become subject to further insolvency proceedings," Regal said.

In order to get its plan approved, VIP must show that "confirmation is not likely to be followed by the liquidation, or the need for further financial reorganization," the objection said. The impact the coronavirus is having on movie theaters around the globe has put that factor greatly in doubt, Regal asserted.

"Due to the recent and unfortunate outbreak of a novel coronavirus and resulting spread of COVID-19, many movie theaters have gone dark," Regal said. "While Regal hopes circumstances will return to normal in the very near future, the fact remains that our nation is under a declared emergency with no definite end date."

Regal Cinemas Inc., which is a subsidiary of "the world's second largest cinema group," operates 7,210 screens at 550 theaters in the U.S., American Samoa, Guam and Saipan, according to the objection.

Regal has purchased roughly 676,000 recliners and accessories from VIP for about $40 million, the objection said. Some of those products were defective, Regal said, and the theater chain has asserted claims that VIP fraudulently induced and made negligent representations to get it to buy them.

VIP and four affiliates hit Chapter 11 last month, citing a downturn by large movie theater companies in renovating theaters or building new ones as a reason for the bankruptcy filing. The debtor entities are a wholly owned subsidiary of HIG Cinema Holdings Inc., which along with a foreign subsidiary has not filed its own bankruptcy, according to a first-day declaration.

The luxury seating manufacturer hit Chapter 11 with an agreement in place with the majority of its lenders for a proposed debt-for-equity swap to wipe out much of its roughly $210 million in debt. Under the plan, $178 million of VIP's long-term indebtedness is set to be wiped out, the declaration said.

VIP's debt includes $144.4 million owed on a $165 million first-lien term loan, $20 million owed on a secured revolving credit facility and $45 million owed on a junior secured term loan.

Under the plan, holders of first-lien claims are set to "receive their pro rata share of (a) $60 million of reorganized preferred stock and (b) 10% of the reorganized common stock prior to dilution from the management incentive plan," according to court filings.

As VIP's liquidity woes worsened, the company was also hit with a lawsuit in August filed by Regal in Tennessee Chancery Court alleging that the movie theater chain is owed damages to the tune of as much as roughly $8 million for having to repair or replace VIP products, the declaration said.

VIP denies the suit's allegations and has filed a motion to dismiss, but a trial is slated for 2021. If VIP's motion to dismiss is not granted, the "debtors expect that the cost and expense of defending against the Regal action could be millions of dollars," the declaration said.

VIP's liquidity strain resulted in the company entering default on a first-lien credit agreement in August with a forbearance agreement reached with lenders as negotiations continued on a potential out-of-court restructuring, according to the declaration.

After out-of-court restructuring plans fell apart, the debtors were eventually able to reach a restructuring support agreement with the majority of VIP's senior and second-lien lenders for a prepackaged Chapter 11 plan, according to court filings.

Regal argued Monday that the plan is "premised upon expected loans and equity investments that, pursuant to the restructuring support agreement, are not required to be made except upon certain conditions."

"Those conditions include that there have been no events causing material adverse effects to the debtors and that the debtors have at least $1,500,000 of available, unrestricted cash," the objection said. "The current economic and public health conditions very likely have a material adverse effect on the debtors."

It is unknown if VIP will have that amount of cash on hand or be able to meet provisions of the RSA, Regal argued.

"Under the circumstances that have developed since the plan and disclosure statement were filed, the debtors cannot meet their burden of proof, and the court must deny confirmation," Regal asserted.

Regal also took issue with provisions in the plan it argued could eliminate its right to seek setoff or recoupment rights tied to its prepetition claim against VIP related to the litigation.

"Consistent with its contractual rights and Section 553 of the Bankruptcy Code, Regal is entitled, at a minimum, to set off its pre-petition claims against VIP against any pre petition claims VIP may assert against Regal," the objection said. "Additionally, Regal has recoupment rights for its claims against VIP to offset any claims VIP may assert against Regal."

Regal said VIP has yet to answer the lawsuit or indicate if it will file counterclaims against Regal.

"Regal objects to the plan, at a minimum, to ensure its setoff and recoupment rights are not prejudiced," the objection said. "Regal further objects to any discharge of the debt owed to it by VIP."

Regal also argued the plan "discriminates unfairly and is not fair and equitable with respect to each class of claims" in that it treats Regal's claim differently than other similarly situated claims.

VIP is set to seek approval for its Chapter 11 plan later this week, and the company has said it hopes to emerge from bankruptcy by mid-April, according to court filings.

Counsel for VIP and Regal did not immediately respond to requests for comment Monday.

VIP is represented by Erin R. Fay, Daniel N. Brogan and Gregory J. Flasser of Bayard PA, and Gregg M. Galardi and Cristine Pirro Schwarzman of Ropes & Gray LLP.

Regal Cinemas Inc. is represented by Brett D. Fallon of Morris James LLP and Austin L. McMullen of Bradley Arant Boult Cummings LLP.

The case is In Re: VIP Cinema Holdings et al., case number 1:20-bk-10345, in the U.S. Bankruptcy Court for the District of Delaware.

--Editing by Abbie Sarfo.

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