A Bankruptcy Court May Temporarily Suspend Rent Obligation

By: Matthew Kipnis

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Under section 365(d)(3) of title 11 of the United States Code (the “Bankruptcy Code”), a trustee or debtor in possession must generally pay rent in accordance with the terms of an unexpired lease. In In re Pier 1 Imports, Inc., the United States Bankruptcy Court for the Eastern District of Virginia held that it is was within the scope of the court’s authority to delay a debtor-retailer’s obligation to pay accrued but unpaid rent in light of the Covid-19 pandemic.[i] The court also held that debtor’s continued payment of related non-rent expenses as well as with the debtor’s assurance of reimbursement of the rent in the future was sufficient to protect lessors from any possible perceived loss in value.[ii] On February 17, 2020, debtor Pier 1 Imports, Inc. (“Pier 1”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.[iii] Pier 1 initially contemplated implementing a Chapter 11 plan within sixty-six days of the bankruptcy filing.[iv] However, the Covid-19 related mandatory stay-at-home orders and closure orders of nonessential businesses created a unique challenge for retailers. The effect on Pier 1’s revenue is exemplified by its performance for the week ending on March 21, with go-forward stores seeing roughly a 65% drop in revenue compared to the year before.[v] Consequently, Pier 1 filed an emergency motion for order approving a revised interim budget that provided funding for “critical expenses.”.[vi] The court had granted the motion approving the interim budget in its Original Order.[vii]  The court approved the revised budget, noting that Pier 1 would not be obligated to pay rent until the earlier of the date that Pier 1 files a notice of their intent to reopen operations at some or all of their retail locations, May 31, 2020, or such date as the court orders otherwise.[viii]

The court relied on its previous decision in In re Circuit City Stores, Inc., where it held that “[s]ection 365(d)(3) does not provide a separate remedy to effect payment. If a debtor fails to perform its obligations under § 365(d)(3), “all a Lessor has is an administrative expense claim under § 365(d)(3), not a claim entitled to superpriority.”[ix] Accordingly, the court did not relieve the debtors of their rent obligations.[x] Rather, the court here simply found that the debtors may “defer such rent obligations as they accrue through the Limited Operations Period to be paid at a later date.”[xi] Further, the court noted that it would be inequitable to require the debtors to liquidate assets to meet rent obligations.[xii] Indeed, because of the pandemic, Pier 1 would likely receive less than fair market value for its assets, which would be unfair to Pier 1 and its creditors.[xiii] The court also found that there were no feasible alternatives that would have treated all creditors interests equally.[xiv] In turn, granting Pier 1’s motion and approving the interim budget was thus essential to Pier 1’s ability to maximize the value of their assets ensuring equitable treatment to Pier 1’s other creditors.[xv]

Under the Bankruptcy Code, a landlord is entitled to “adequate protection.”[xvi] Here, the court found that Pier 1 continuing to pay the related non-rent expenses and providing the lessor with assurances of cure payment in July was sufficient to protect the lessors against any perceived diminution in value.[xvii] Under In re Circuit City Stores, Inc., the lessor’s rent claim here was therefore an administrative expense and approving the interim budget subject to revisiting it at a later date was thus “just and proper under the circumstances.”[xviii]

Notwithstanding the statutory obligation to pay rent, a court may delay that obligation under appropriate circumstances if delay is in the best interests of the estate.[xix] Here, the court was persuaded that the pandemic supported a deferral of rent.[xx] However, that delay did not relieve the lessee of their obligation to pay rent.[xxi] Moreover, a court may insist on the landlord receiving adequate protection which may be met by a debtor satisfying one of the methods prescribed in section 361.[xxii]