In the reorganization of retailer Pier I Imports Inc., Bankruptcy Judge Kevin R. Huennekens explained the statutory basis for his decision to “defer” rent temporarily during the coronavirus pandemic.
With the stores closed, Judge Huennekens is allowing the debtors to skip rent for April and May, although Section 365(d)(3) ostensibly requires “timely” payment. Unless the judge extends the moratorium, the debtors will begin paying rent in June and have promised to cure arrears by the middle of July.
In his May 10 opinion, Judge Huennekens said there is “no feasible alternative.” Among all the creditors, the only objection came from a group of landlords. The judge said they “are merely one group among many that must make concessions in order to benefit all.”
The Disruption of the Business
Pier I filed a chapter 11 petition on February 17 and expected to confirm a plan in 60 days. At the time, the debtors were expecting only temporary disruptions in the supply of inventory from China. As it turned out, of course, the debtors were later compelled to shutter all stores. Revenue “dried up overnight,” Judge Huennekens said.
The debtors filed a motion on March 31 asking Judge Huennekens for permission to defer everything except essential payments. The judge granted the relief on a temporary basis on April 6 and held another hearing on April 28.
Judge Huennekens extended the moratorium until May 31 by order dated May 5. He filed his May 10 opinion to explain the legal basis for the relief. Of significance for landlords, the debtors must continue to pay for insurance, utilities, and security systems.
Some landlords objected to rent deferral, but Judge Huennekens said that “each of the substantive objections raised by the Lessors fails.”
Judge Huennekens was careful to say he “did not find that the Debtors do not have to pay rent,” nor did he decide that performance was excused by “impossibility, impracticability, or frustration of purpose.
Section 365(d)(3) Doesn’t Compel Payment
Turning to the Bankruptcy Code, 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,” Judge Huennekens said, referring to his own authority in In re Circuit City Stores Inc., 447 B.R. 475, 511 (Bankr. E.D. Va. 2009).
Instead, Circuit City said that a landlord has an administrative expense claim if rent is not paid, “not a claim entitled to superpriority.” Id. In turn, administrative claims must be paid in cash on the effective date of the plan under Section 1129(a)(9)(A).
If he were to compel payment now, Judge Huennekens said he would be elevating payment of rent to superpriority status. “The Lessors are not entitled to such relief,” he said.
The landlords nevertheless might be entitled to adequate protection under Sections 361 and 363. If the landlords had a right to adequate protection (and the opinion doesn’t seem to say they did), Judge Huennekens said that current payments for insurance, utilities and security coupled with “assurance of cure payments in July is sufficient to protect the Lessors against any perceived diminution in value.”
Extending rent deferral at least until May 31, Judge Huennekens said that 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.”
In the reorganization of retailer Pier I Imports Inc., Bankruptcy Judge Kevin R. Huennekens explained the statutory basis for his decision to “defer” rent temporarily during the coronavirus pandemic.
With the stores closed, Judge Huennekens is allowing the debtors to skip rent for April and May, although Section 365(d)(3) ostensibly requires “timely” payment. Unless the judge extends the moratorium, the debtors will begin paying rent in June and have promised to cure arrears by the middle of July.
In his May 10 opinion, Judge Huennekens said there is “no feasible alternative.” Among all the creditors, the only objection came from a group of landlords. The judge said they “are merely one group among many that must make concessions in order to benefit all.”
The Disruption of the Business
Pier I filed a chapter 11 petition on February 17 and expected to confirm a plan in 60 days. At the time, the debtors were expecting only temporary disruptions in the supply of inventory from China. As it turned out, of course, the debtors were later compelled to shutter all stores. Revenue “dried up overnight,” Judge Huennekens said.
The debtors filed a motion on March 31 asking Judge Huennekens for permission to defer everything except essential payments. The judge granted the relief on a temporary basis on April 6 and held another hearing on April 28.