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AMC can’t recover tax refunds over 2008 Mexico theater sale

January 9, 2014

By Jonathan Stempel

NEW YORK (Reuters) – A U.S. judge has rejected a bid by movie theater chain AMC Entertainment Inc to recover about 100.9 million Mexican pesos in tax refunds and credits from a company that bought a unit operating in Mexico.

U.S. District Judge Samuel Conti said it would have been unreasonable and costly to force the buyer, Entretenimiento GM de Mexico SA, to pursue refunds and credits that AMC itself had failed to pursue. AMC had gotten what it bargained for in the $315 million sale of the unit, Cinemex SA, he wrote.

“AMC sat on Cinemex’s favorable income tax balances for several years, suggesting that AMC also considered those balances too small to justify the expense of a refund application,” Conti wrote in a January 6 decision. “AMC cannot now credibly contend that Entretenimiento engaged in bad faith by declining to apply for refunds that AMC could not be bothered with when it owned Cinemex.”

Conti normally sits in San Francisco but issued his 42-page decision in the U.S. District Court in Manhattan, following a four-day bench trial in October.

AMC, which is based in Kansas City, Missouri, is publicly traded, following an initial public offering last month. As of September 30, it had stakes in 343 theaters with 4,950 screens.

It told prospective investors in its IPO registration papers that a “prolonged period” might be needed to resolve the litigation, and that it had written off sums related to the tax benefits as uncollectible.

The plaintiffs, including AMC assignees, are represented by Bernard Rhodes, a partner at Lathrop & Gage. Entretenimiento GM is represented by Kathleen Massey, a partner at Dechert.

AMC sold Cinemex in December 2008. At the time, Cinemex operated 44 theaters with 493 screens, mainly in the Mexico City area.

In a lawsuit in April 2010, AMC said Entretenimiento breached the sales contract by failing to pay sums related to “favorable balances” that resulted from prior tax overpayments.

AMC alleged that it deserved payments for four types of taxes: income tax, the Mexican business flat tax known as Impuesto Empresarial a Tasa Unica (IETU), a value-added tax, and employee subsidy tax credits.

COUNTERCLAIM

While not disputing the amounts, Entretenimiento GM contested its liability to pay them. It also said AMC should pay it 10.6 million pesos (about $800,000) related to the IETU.

In his decision, Conti said the contract required Entretenimiento GM to make “reasonable efforts” to obtain refunds and tax credits on AMC’s behalf.

But he said the defendant also had “some discretion” as to when and how to apply the favorable tax balances, and need not go to “unreasonable lengths” to obtain them.

The judge concluded that Entretenimiento GM acted reasonably in not applying for tax refunds because balances were too small to justify the expense of pursuing several refund applications.

“If AMC was truly concerned about obtaining a refund in connection with Cinemex’s 2005 to 2007 income tax returns, it could have caused Cinemex to apply for refunds prior to the December (2008) closing,” Conti wrote.

Conti also found that the favorable balance on the IETU, which was generated by dozens of intercompany transfers, occurred after the morning on which the closing took place, not before, and that therefore Entretenimiento GM was owed 10.6 million pesos on its counterclaim.

He said this conclusion was supported by the companies’ post-closing conduct, saying that AMC had not questioned the timing of the closing until a few months before trial.

He awarded Entretenimiento GM a total of less than 7.7 million pesos (less than $600,000), reflecting the 10.6 million pesos, less small offsets in AMC’s favor.

Lawyers for the parties were not immediately available to comment on Tuesday.

The case is LCE Mexican Holdings Inc et al v. Entretenimiento GM de Mexico SA, U.S. District Court for the Southern District of New York, No. 10-03610.

For AMC: Bernard Rhodes of Lathrop & Gage.

For Entretenimiento GM: Kathleen Massey of Dechert.