Bankruptcy: Deferring Rent In Response To COVID-19

Deferring Rental Obligations 

Retail bankruptcies are piling up as a result of empty malls and shopping centers due to COVID-19 restrictions and social distancing policies. Recent retail chapter 11 filings include Neiman Marcus, J.C. Penney, J. Crew, Modell’s Sporting Goods, and Stage Stores (which had previously purchased some of the Gordmans’ stores out of chapter 11). Each of these retailers carry heavy real estate rental obligations, which debtors are attempting to modify as part of the reorganization process. Chapter 11 can be a wonderful tool by which to reject leases, but with COVID-19 stopping in person retail traffic and with no idea when malls and shopping centers will fully reopen many debtors have sought to defer rental obligations all together.

Generally, a debtor must remain current on post-petition lease obligations pending an assumption/rejection of the lease under Bankruptcy Code Section 365(a).Recently, however, Bankruptcy Judge Kevin R. Huennekens explained the statutory basis for his decision in the Pier I Imports case to allow the debtors to defer rental payments temporarily for April and May as a result of the coronavirus pandemic even though Section 365(d)(3) of the Bankruptcy Code requires “timely” rental payment. [1]

No Feasible Alternative

In his opinion, Judge Huennekens said there is “no feasible alternative,” and the objecting landlords were “merely one group among many that must make concessions in order to benefit all.” By deferring rental payments until May 31, Judge Huennekens noted the debtors “cannot operate as a going concern and produce the revenue necessary to pay rent because they have been ordered to close their business.” 

Specifically, Judge Huennekens interpreted Section 365(d)(3) to mean that the debtors have “an obligation to pay rent in accordance with the terms of the underlying leases.” However, the section does not contain “a remedy to effect payment.”

Looking at this own authority in In re Circuit City Stores Inc., 447 B.R. 475, 511 (Bankr. E.D. Va. 2009), his honor said that a landlord merely has an administrative expense claim if rent is not paid and are entitled to superpriority.   Specifically,  administrative claims must be paid in cash on the effective date of the plan under Section 1129(a)(9)(A), whereas, if he were to compel payment now, Judge Huennekens found he would be elevating the debtors’ post-petition rental payments to superpriority status, which relief the landlords were not entitled to.

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

Debtors’ and creditors’ rights, obligations, and potential liabilities under the Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out of court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.