Bankruptcy Court Rejects State Law-Based Arguments Of Retail Debtor To Avoid Paying Rent During Chapter 11 Pillsbury Winthrop Shaw Pittman LLP

0

This alert focuses on CEC debtor’s non-bankruptcy theories that the COVID-19 pandemic and government responses: (i) triggered the force majeure clauses of the debtor’s leases; and (ii) resulted in a violation of the purpose of these leases, thereby excusing the CEC’s obligations to perform under them. As such, fair remedies in state law, such as goal frustration, were not available. Even if the remedy was available, the debtor failed to establish the frustration of the goal because the leasehold interests were not rendered worthless by the pandemic and government regulations that limited the operations of the CEC.

Like many other retail operators, CEC Entertainment, Inc. (“CEC”), operator of Chuck E. Cheese restaurants, has seen its business severely curtailed by the COVID-19 pandemic and related government orders. The CEC’s distress finally led to its “free fall” bankruptcy filing in June 2020.

After obtaining an order to defer rent obligations for 60 days (in accordance with the Bankruptcy Code), and in an effort to preserve liquidity, the CEC filed an additional petition, based in part on theories of state law , in which she sought to delay or further reduce the rent. due to the COVID-19 pandemic and related government restrictions until the restrictions are lifted. The CEC’s “abatement” motion was initially intended to excuse the CEC’s obligation to pay rent in 141 locations in 12 states and met with opposition from several of the debtor’s landlords. Presumably concerned about the victory of the CEC and the creation of a “bad law”, many objections filed by the owners were resolved; but six owners, located in North Carolina, Washington and California continued their objections and were ultimately acquitted.

The CEC argued that it should be exempt from rent payments under state law because: (i) the COVID-19 pandemic and related government regulations triggered the force majeure CEC lease clauses; and (ii) government regulations that restricted the debtor’s operations “conflicted with the objectives” of the debtor’s leases.

Force majeure

As discussed in our companion alert, Article 365 (d) (3) of the Bankruptcy Code requires strict compliance with all rental obligations until the debtor decides to assume or reject the lease. However, if state law exempts a debtor from complying with one or more of its rental obligations, section 365 (d) (3) will generally comply with state law.

Citing state law, commercial tenants in and out of Chapter 11 have argued that the COVID-19 pandemic and related government orders have triggered force majeure clauses of their leases and thus exempted them from paying rent. Generally, force majeure The clauses excuse the performance of contractual obligations in the event of the occurrence of a covered event beyond the control of either party to the contract. See for example, In re CEC Entertainment, 2020 WL 7356380, at * 5 (Bankr. SD Tex. 2020). These contractual provisions spread the risk when performance is affected by the occurrence of events which could not have been anticipated or controlled by the parties at the time of the signing of the contract.

For Pillsbury Alerts on force majeure mainly outside of Chapter 11, please see our Tour de force series of customer alerts (latest issue dated December 3, 2020, available on Tour de force: Is force majeure in civil law jurisdictions a superior doctrine?). While many non-bankruptcy COVID-19 force majeure the cases remain in their preliminary stages, some have been decided, many rejecting the tenant’s efforts to avoid paying the rent. See, for example, East 16th Street Owner LLC v Union 16 Parking LLC, 2020 WL 7569294, at * 1 (NY Sup. Ct. 2020) (ordering the tenant to pay the rent because force majeure clause of the lease not allowing the tenant to withhold the rent); 35 East 75th Street Corp. vs. Christian Louboutin LLC, 2020 WL 7315470, at * 1 (NY Sup. Ct. 2020) (ruling in favor of the plaintiff landlord and ordering the defendant tenant to pay rent despite the impact of COVID-19). Chuck E. Cheese represents the first major post-trial decision in a Chapter 11 proceeding rejecting a commercial debtor / tenant’s effort to rely on theories of force majeure and the frustration of avoiding paying rent.

CEC leases do not expressly authorize rent relief even if force majeure is triggered

The force majeure CEC’s lease clauses for its North Carolina and Washington locations excused performance for “acts of God,” “unusual government restriction, regulation or control”, or “any other condition beyond that party’s reasonable control. “. Crucially, however, the clauses specified that they “shall not apply to the inability to pay any sum of money owed hereunder or to the failure to perform any other obligation due to the failure to do so. ‘money or the inability to raise capital or borrow for any purpose. “Based on the plain language of the leases, the bankruptcy court ruled that”[r]ent is a “sum of money owed”. force majeure clauses did not allow the debtor to delay or reduce his rent obligations.

While the Californian leases contained “force majeure carve-out ”and“ anti-force majeureclauses, the conclusion was the same – the leases did not provide the debtor with rent relief even if the force majeure the event was triggered. Therefore, the bankruptcy court found that none of the California leases allowed the CEC to reduce or reduce the rent due to force majeure.

As an aside, Chuck E. Cheese differs from In re Hitz Restaurant Group, 616 BR 374 (Bankr. ND Ill. 2020) (discussed in a previous episode of this series). Rightly or wrongly, the court concluded that the rental obligations were waived when force majeure was triggered, and that COVID-19 and government regulations triggered the force majeure provisions of the lease.

Goal frustration

Despite seeking to assume the leases as part of its plan, the CEC also argued that its rent payments should be excused under the doctrine of non-compliance. The CEC believed the doctrine applied because the pandemic and related government regulations completely frustrated the purpose of its leases, which it said is to operate family entertainment centers. The six donors responded, arguing that the force majeure and anti-force majeure clauses replaced doctrine.

The bankruptcy court rejected the CEC’s arguments. First of all, he ruled that under state law a tenant cannot invoke the doctrine of frustration when the parties had already apportioned the very risk CEC was now complaining about. Second, the bankruptcy court ruled that even if the doctrine applied, the object of the leases could not have been thwarted because the leased premises could be put to other uses. The court’s reasoning understood that the CEC was seeking to assume the leases as part of its reorganization plan, which by definition proved that the leases had not been rendered worthless. She could not see that the value of the services under the leases was totally destroyed while the CEC was at the same time trying to keep them.

Conclusion

The Chuck E. Cheese The ruling represents the first major Chapter 11 decision aligning with COVID-19-era cases to determine whether the economic distress caused by the pandemic can overcome an outright obligation to pay rent in a tenant’s lease . These cases generally support the proposition that, as in Chuck E. Cheese, the lease actually has a force majeure carve-out – a provision that says the occurrence of a force majeure the event does not excuse the obligation to pay the rent – the nature of the force majeure is irrelevant and the parties’ contract will be executed. Chuck E. Cheese may test the perception of some that bankruptcy courts are more flexible than non-bankruptcy courts in deploying equitable remedies rather than the terms of the parties’ contract. In any event, if followed by other bankruptcy and non-bankruptcy courts, we would expect this to be good news for owners (as well as counterparties to other forms of contracts) threatened with arguments that the ordinary meaning of the applicable contract can be avoided on the basis of the pandemic and the corresponding fair theories such as frustration of purpose.


Source link

Share.

About Author

Comments are closed.