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Cash Flows for Commercial Leases During COVID-19
Where feasible, companies do not file Chapter 11 petitions until after formulating both an exit strategy and plans to operate during the pendency of the bankruptcy case. For restaurateurs and retailers, this strategy will almost invariably require and depend upon cash flow for continued use of leased stores and restaurants. Planned Chapter 11 budgets must take this into account as landlords are entitled to full rent for the post-petition use of their property. To say the least, for those companies that filed for bankruptcy on the eve of the COVID-19 shutdowns, the strategies — and available cash flows to pay landlords — did not go as planned.
Underlying Facts
Three unrelated companies separately filed for Chapter 11 shortly before the COVID-19 pandemic shut down the country. On Feb. 17, 2020, Pier 1 Imports, Inc. (Pier 1) filed for Chapter 11 in Virginia. Pier 1 sought to pursue a going concern sale and continue its previously announced restructuring efforts, which included permanently closing hundreds of stores. On March 3, Craftworks Parent, LLC (Craftworks), the owner and franchisor of several restaurant chains, filed for Chapter 11 in Delaware. Similar to Pier 1, Craftworks planned to keep its business alive through a going concern sale resulting in a smaller footprint. On March 11, Modell's Sporting Goods, Inc. (Modell's, and Pier 1 and Craftworks, each a "debtor") filed for Chapter 11 in New Jersey. Modell's plan was to liquidate its inventory through going out of business sales in its stores. The COVID-19 crisis quickly altered the bankruptcy strategy of each of the debtors, as their plans to continue operation of their leased stores and restaurants post-filing were rendered impossible.
Each debtor requested emergency court relief, which in each case included the key features that: 1) the debtor would defer payment of post-petition rent to landlords; and 2) the Bankruptcy Code's automatic stay provisions that prevent actions taken against a debtor — such as continuing an eviction — would be preserved, absent further relief from the bankruptcy court. Craftworks sought relief under Bankruptcy Code Section 105 (giving courts equitable powers to carry out the provisions of the Bankruptcy Code), while Pier 1 and Modell's sought relief under both Bankruptcy Code Sections 105 and 305 (authorizing courts to suspend all proceedings).
Given the dire, unprecedented situation posed by the COVID-19 outbreak, the courts in these cases granted most of the extraordinary relief requested (the "extraordinary orders"). As the Pier 1 court noted in its opinion in support of the deferral: "There is no feasible alternative to the relief sought in the motion. The debtors cannot operate as a going concern and produce the revenue to pay rent because they have been ordered to close their business. […] Any liquidation efforts would be ineffective and potentially squander assets that could otherwise be administered for the benefit of all creditors." See, In re Pier 1 Imports, Inc., No. 20-30805 (KRH) (Bankr. E.D. Va., 2020) [Dkt. No. 637].
Legal Issues
A central question in each case was whether the extraordinary orders conflicted with the debtors' statutory obligations to pay their landlords for the post-petition use of their stores and restaurants. Bankruptcy Code Section 105(a) provides courts with broad equitable power to issue "any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." 11 U.S.C. §105(a). This equitable power reflects a crucial public policy charge upon bankruptcy courts: maximize value and maintain going concerns where able. However, this equitable power is limited as "[a] bankruptcy court may not contravene specific statutory provisions" of the Bankruptcy Code. Law v. Siegel, 571 U.S. 415, 421-22 (2014).
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