No Relaxation for Delaying Debtor Rent Obligations Beyond 60-Day Statutory Period
The U.S. Bankruptcy Court for the Southern District of Texas recently granted abatement motions in the hospitality and retail industries in the post-COVID 19 environment. In the matter of CEC Entertainment, Inc., et al., 20-33163, 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020)The Bankruptcy Court denied motion to abate rent payments at the stores affected by post pandemic government regulations. .
Chuck E. Cheese (CEC) is a national chain of Chuck E. Cheese which offers mixture of arcade games, entertainment, and dining in a safe sociable environment. It is operating the business all over the country. Amidst COVID-19, CEC had to limit its business cross the country. This action further led to financial hardship faced by CEC. Not only this, new governmental guidelines which were aimed to curb the pandemic, ended up with CEC filing petitions for the Chapter 11 relief on June 24, 2020. Thereafter, CEC filed the abatement motion on August 3, 2020, looking for a relief to abate rent of 141 CEC avenues located across twelve states. Multiple lessors objected to this motion initially. Later, a few of them consensually resolved their matter prior to a hearing. After the court’s ruling, objection by the lessors of three states’ (namely North Carolina, Washington and California) remain unresolvedpornxxxfuck.netpornxxxfuck.
The Bankruptcy court denied CEC’s abatement motion. Dismissing CEC’s contention, the Court held that though the Bankruptcy Code permits courts to delay execution of rent commitments for sixty days after the request date under §365(d)(3), it does not give any power to change rent commitments past the sixty-day period.
The court put emphasis on Section 365(d)(3) of the Bankruptcy Code which states a debtor must “timely perform all the obligations of the debtor arising from and after the order for relief under any unexpired lease of nonresidential real property until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title [11 U.S.C. § 365(d)(3)]. The section also states that “the court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period.” [ [11 U.S.C. § 365(d)(3)]. In light of the text and the intent of §365(d)(3), the Court held that the requirement to “timely perform” lease obligations under §365(d)(3) is unambiguous, and accordingly it “cannot override that statutory mandate” or equitably alter CEC’s state law rent obligations. [See Law v. Siegel, 571 U.S. 415, 421 (2014)]. Particularly, the court disagreed with the decision of the Bankruptcy Court for the Eastern District of Virginia, which held that Section 365(d)(3) “does not compel a debtor to timely pay rent in accordance with a lease.” [In re Pier 1 Imports, Inc., 615 B.R. 196, 198 (Bankr. E.D. Va. 2020)] The court also quoted the case of Pier 1, in which the court held that because Section 365(d)(3) lacks a remedy to compel payment when a debtor fails to perform its obligations, the lessor only has an administrative expense claim. [Id] Consequently, the court rejected the argument that the lessors were entitled to payment at the time of the debtors’ motion.
The Court also looked into CEC’s another argument of force majeure clauses. The clause states that the court should excuse its leases due to happening of the global pandemic and that the government regulations are force majeure events. A force majeure clause is a “contractual clause that excuses performance of contractual obligations—either wholly or for the duration of the force majeure—upon the occurrence of a covered event which is beyond the control of either party to the contract.” [In re Flying Cow Ranch HC, LLC, 2018 WL 7500475, at 2 (Bankr. S.D. Fla. June 22, 2018)]. The Court noted that the force majeure clauses in all but one of the objectors’ leases specifically stated that they do not apply to an “inability to pay any sum of money” or a failure to perform any obligation “due to the lack of money,” “Tenant’s obligation to pay, when due and payable, the rents,” or “prompt payment of any rental or other charge required of Tenant.”
There are number of businesses who keep on faltering from the impacts of the COVID-19 pandemic and related government limitations. This decision will guide the debtors for how a bankruptcy court will treat a debt holder’s solicitation for lease help through Section 365(d)(3).