Bankruptcy Court Rules Bankruptcy Code Does Not Allow Extended Rent Holidays for Retail Debtors | Pillsbury Winthrop Shaw Pittman LLP

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Chuck E. Cheese Restaurants, operated by CEC Entertainment Inc. (CEC), is primarily a pizza-fueled birthday party venue and arcade for young children. Public health measures implemented by state and local authorities in response to closed arcades due to COVID-19, and other limited or prohibited large indoor gatherings for dining and socializing. The ability to play games is so inextricably linked to the Chuck E. Cheese experience that CEC senior management decided to shut down many sites, believing the business model would be damaged by allowing children to dine with games that could not be played in the background. . This ultimately led to CEC’s Chapter 11 “freefall” filing for bankruptcy in June 2020.

With little or no revenue in many places, CEC and other retail debtors have struggled during COVID-19 to comply with the requirement of Section 365(d)(3) of the Bankruptcy Code that a commercial debtor tenant timely discharges all of its lease obligations pending assumption or release of the lease. This provision also allows such debtors to request, for cause, a 60-day “rent holiday” after the date of filing for bankruptcy before requiring them to begin paying rent after the petition, and the courts have had little difficulty in concluding that the COVID-19 pandemic constitutes a cause justifying a 60-day rent deferral. However, given the lasting impact of the pandemic and related government orders that have negatively impacted operations, revenues and the ability to pay rent, some retail debtors have considered legal strategies to obtain, despite objections from landlords, more than 60 days of rent relief.

Deferral of rent under Section 365(d)(3) of the Bankruptcy Code
Prior to COVID-19, bankruptcy courts rarely granted a 60-day extension under section 365(d)(3). In one of the few cases where this relief was granted, the bankruptcy court noted that “attempts to negotiate [a] the settlement constitutes “cause” to extend the performance period for an additional sixty (60) days. » In re DWE Screw Prods., Inc., 157 BR 326, 329 (Bankr. ND Ohio 1993). But even before, and after, DWErequests for 60-day extensions have generally been denied. See, for example, In re T-Rex Partners, LLC, 2008 Banker. LEXIS 5162, *10-12 (Bankr. D. Nev. 2008) (request for 60-day extension denied for lack of reason based on (i) mere presence of second ground lease or the lessor’s legal inability to carry on business or (ii) the debtor’s immediate need to obtain insurance coverage after the expiration of the insurance); In re Pac-West Telecomm, Inc.377 BR 119, 126 (Bankr. D. Del. 2007) (filing for bankruptcy is not a “cause” under s. 365(d)(3); rather, a “specific cause” or a “ applicable legal precedent” is necessary to obtain relief under section 365(d)(3)); In re S&F Concession, Inc.55 BR 689, 691 (Bankr. ED Pa. 1985) (acknowledging debtor previously denied 60-day extension).

Since COVID-19, however, debtors have requested and easily obtained 60-day extensions.1 An additional strategy pushed by some debtor tenants was to reserve the right to seek further extensions of rent leave, beyond the 60 days provided by Section 365(d)(3).2 In Pier1 Imports, the debtor did more than reserve the right to seek additional rent relief, he affirmatively asked the bankruptcy court to defer payment of rent beyond the first 60 days. Despite objections from several landlords, the court granted this request to defer payment of rent for an additional 30 days.

CEC court rejects debtors’ request for rent vacation
A few days after filing for bankruptcy, CEC requested and obtained, despite the objections of many landlords, a first rent holiday of 60 days. Months later, the CEC filed a second petition in which it sought to delay or further reduce rent due to the coronavirus pandemic and related government restrictions until the restrictions are lifted. This motion originally sought to excuse CEC’s obligation to pay rent at 141 locations in 12 states and was opposed by several of the debtor’s landlords. Undoubtedly fearing that the debtor will prevail and a “bad law” will be created, giving retail debtors super rent leave (i.e. beyond the 60 days prescribed by law) , many owner objections have been resolved. Still, several landlords continued to oppose super rent leave and were ultimately vindicated.

In its second rent reduction petition, the CEC urged the bankruptcy court to exercise its equitable powers under Section 105(a) to excuse its rent obligations beyond the first 60 days of the case. Section 105 of the Bankruptcy Code authorizes a court to “issue any order, proceeding or judgment that is necessary or proper to enforce the provisions of” the Bankruptcy Code. The CEC argued that this large fair subsidy authorizes the bankruptcy court to allow it to defer its rent payments beyond the 60-day period provided for in section 365(d)(3). The CEC has argued that it should not be required to pay rent for properties from which it receives “no or significantly limited benefit” due to the pandemic and related government orders.

Somewhat unceremoniously, the bankruptcy court rejected the CEC’s arguments, holding that Section 365(d)(3) “expressly prohibits delays beyond sixty days” after the filing of the petition and “does not does not give the court authority to vary lease obligations beyond this sixty-day window. To see Section 365(d)(3) (“but the time for performance shall not be extended beyond that [initial] 60 day period. “).

Notably, the CEC court did not order the debtor to start paying the rent on 61st Nor did it address what would happen if the debtor failed to comply with 365(d)(3), stating that its “equitable credentials will be tested at the appeal stage.” On the other hand, the bankruptcy court of Regarding Pier 1 Imports, Inc., 615 BR 196 (Bankr. ED Va. 2020) held that although section 365(d)(3) does not provide a remedy for the debtor’s failure to pay rent on time, other Bankruptcy code provisions give the owner an administrative fee claim for such breach which must be paid on the effective date of the plan under section 1129(a)(9)(A). In neither case did the bankruptcy court remedy the non-payment of rent due within the first 60 days of the case by ordering immediate payment of that rent.

Lessons learned
Overall, the decision to CEC is a win for owners, although it’s unclear what tangible benefit this provides. CEC is the first published decision in which a bankruptcy court has determined that a court cannot use its equitable powers under section 105(a) to circumvent the express language of section 365(d)(3) and deferring a debtor tenant’s obligations under a lease beyond the first 60 days of the matter. CEC recognizes that while the Bankruptcy Code provides various tools to help the debtor reorganize, it simultaneously protects landlords from involuntarily extending credit to their tenants through rent deferrals.

But, while acknowledging the 60-day limit on “rental leave” granted by Section 365(d)(3), the CEC The court did not order the payment of rent after this period expired, nor discussed the remedies available to landlords in the event of non-payment of rent. In this regard, we do not think that CEC changes the landscape as we believe the courts will continue to grant 60-day rent leave motions, but generally will not extend this rent reduction further. We expect future cases to deal with landlord remedies for unpaid rent after the petition and anticipate that courts may adopt the recently enacted rule for small business cases to award landlords a claim for administrative costs which must be paid on the effective date of the plan.

1 See, for example, In re JC Penney Co., Inc. et alno. 20-20182 (DRJ) (Bankr. SD Tex. May 28, 2020) (Dkt. no. 338); In re CraftWorks Parent, LLCNo. 20-10475 (BLS) (Bankr. D. Del. May 20, 2020) (Dkt. No. 174); In re Chinos Holdings, Inc.No. 20-32181 (KLP) (Bankr. ED Va. May 4, 2020); In re True Religion Apparel, Inc.No. 20-10941 (CSS) (Bankr. D. Del. April 13, 2020); Regarding Pier 1 Imports, Inc.No. 20-30805 (KRH) (Bankr. ED Va. Mar. 31, 2020) (Dkt. No. 438).

2 See, for example, In re Brooks Brothers Grp., Inc. et al.No. 20-117855 (CSS) (Bankr. D. Del. July 16, 2020) (Dkt. No. 162); In re CEC Entertainment, Inc.no. 20-33163 (MI) (Bankr. SD Tex. 30 June 2020) (Dkt. no. 162); JC Penneyno. 20-20182 (DRJ) (Bankr. SD Tex. May 28, 2020) (Dkt. no. 338); Chinos HoldingsNo. 20-32181 (KLP) (Bankr. ED Va. May 4, 2020); true religionNo. 20-10941 (CSS) (Bankr. D. Del. April 13, 2020); Pier 1 ImportsNo. 20-30805 (KRH) (Bankr. ED Va. March 31, 2020) (Dkt. Nos. 438 and 562).

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