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COVID Shutdown Orders vs. Statutory Rent Obligations
Beginning in late March with In re Modell's Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J.), some bankruptcy courts in retail Chapter 11 cases have been allowing debtors to suspend post-petition rent payments to their landlords, in contravention of the long-accepted practice, based on Bankruptcy Code Section 365(d)(3), that such payments must continue to be made as they come due in the ordinary course of business.
In all cases where a debtor is a tenant under an unexpired commercial lease, Section 365(d)(3) requires a Chapter 11 debtor to "timely perform all [post-petition] obligations of the debtor" under any unexpired lease of nonresidential real property. The statute requires payment of "obligations … until such lease is assumed or rejected." Section 365(d)(3) further provides 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." Absent, however, is what happens when a debtor violates Section 365(d)(3). Until recently, the appropriate remedy for a debtor's violation of Section 365(d)(3) was to cause the lease to be rejected in a timely manner. In re DBSI Inc., 407 B.R. 159, 164 (Bankr. D. Del. 2009).
However, as set forth below, at least one court has determined that Section 365(d)(3) does not provide a remedy to effect payment if a debtor fails to perform its obligations under Section 365(d)(3) — a landlord simply has an administrative expense claim under §365(d)(3), not a claim entitled to "superpriority" or immediate payment.
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