Monday, May 18, 2020

Bankruptcy Courts Allow Business Debtors to Defer Rent in Response to COVID-19

By Bill Siegel

In re Pier I Imports Inc., 20-30805 (Bankr. E.D. Va. May 10, 2020)

At least one bankruptcy court has crafted a remedy not otherwise addressed prior to the Coronavirus outbreak.  For instance, the bankruptcy court overseeing the Pier 1 Imports bankruptcy case allowed Pier 1 to temporarily defer rent owed to its landlords through May 31, 2020.

 

Coronavirus Interrupts Reorganization Plan

For some background information, Pier 1 filed bankruptcy on February 17, 2020, with the expectation of confirming a plan of reorganization in 60 days. It obviously did not expect the disruption in its supply chain from China nor did it expect to have to close all of its stores. When revenue dried up, it filed a motion on March 31 to defer paying anything that was not deemed essential.  On April 6, the judge granted the relief on a temporary basis and held another hearing on April 28 for the purpose of deciding if and for how long Pier 1 could continue deferring paying rent since its stores remained closed and it did not have the necessary revenue to pay rent.  The judge agreed to extend the deferral through May 31. 

In his Opinion, the bankruptcy judge noted that Section 365(d)(3) of the Bankruptcy Code, which deals with the assumption and rejection of executory contracts, i.e. leases, does require the Debtor to pay rent in accordance with the lease, which arguably requires timely payment of rent.  The judge further noted, however, that Section 365(d)(3) does not necessarily contain a “remedy to effect payment.”  Therefore, consistent with his prior opinion in In re Circuit City Stores Inc., 447 B.R. 475, 511 (Bankr. E.D. Va. 2009), the judge ruled that the effect of not paying rent is the granting of an administrative claim, which in turn requires such claim to be paid in full upon the effective date of a confirmed plan of reorganization. 

 

Deferral in Limited Circumstances

Noting that Pier 1 stores are presently closed because of Covid-19, the judge allowed Pier 1 to delay paying rent until June but required that all defaults  be cured by mid-July.  Even though Section 365(d)(3) arguably requires “timely” payment of rent, the bankruptcy judge found that there really was “no feasible alternative” under present circumstances for Pier 1 to reorganize under Chapter 11.  Noting further that the only objectors were a small group of landlords, the court said that it was “necessary  for them to make concessions to benefit all.”  Though the judge allowed the rent deferral, he ordered Pier 1 to maintain current payments for insurance, utilities, and security, and found that such payments constituted adequate protection under Sections 361 and 363 of the Bankruptcy Code.  Moreover, he found that Pier 1 had provided sufficient proof of adequate assurance to cure the deferrals by July in order to protect the landlords “against any perceived diminution in value.”

The take way from the Pier 1 and Circuit City decisions is that there may be limited circumstances giving a Chapter 11 debtor the option to defer paying rent during the course of a reorganization provided it is able to provide adequate protection to avoid a diminution of value and provide adequate assurance of future performance.  The COVID-19 pandemic is one of those limited circumstances.  This opinion may be limited by its facts and should not be cited to imply that debtors do not have to pay rent.  It should be further pointed out that Pier 1 never made such a request.  Nor did the court decide that performance was excused by “impossibility, impracticability, or frustration of purpose as Pier 1 did not raise these issues.  Nevertheless, if a debtor can show that exceptional circumstances exist entitling it to defer rent provided it can establish it has the means to cure any such deferral within a reasonable time, the Pier 1 and Circuit City opinions may be helpful when seeking such relief.


 

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