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Aaron D Werner - a man in a business suit, smiling at the camera
Aaron L. Hammer
Chair | Bankruptcy Group
John W, Guzzardo - a man in a suit, smiling at the camera
John W. Guzzardo
Chair | Litigation
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Force Majeure? It’s Unorthodox, But I’ll Allow It: Bankruptcy Court Excuses § 365(d)(3) Performance Due to Coronavirus

06/10/2020
Aaron D Werner - a man in a business suit, smiling at the camera
Aaron L. Hammer
Chair | Bankruptcy Group
John W, Guzzardo - a man in a suit, smiling at the camera
John W. Guzzardo
Chair | Litigation

In an opinion for our troubled times, Northern District of Illinois Bankruptcy Judge Donald Cassling granted debtor Hitz Restaurant Group (“Hitz”) some reprieve from § 365(d)(3)’s strict requirements due to a combination of COVID-19 shutdown orders and a favorably-worded force majeure clause.

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Hitz’s landlord, Kass Management Services, Inc. (“Kass”) moved to lift the automatic stay after Hitz stop making its lease payments. Section 365 of the Bankruptcy Code affords commercial landlords strong protection by requiring debtors to timely pay post-petition rent, prioritizing this payment above even administrative expenses. Ordinarily, a debtor missing a string of post-petition lease payments makes for an open and shut stay relief proceeding.

However, the last three months have been far from ordinary. Due to the current crisis, Hitz successfully invoked the lease’s force majeure clause to summon the bankruptcy court’s equitable powers. In Illinois, force majeure is a creature of contract, with the precise verbiage determining the outcome. This lease’s language forgave non-performance due to prevention, delay, retardancy or hindrance caused by “orders of government[.]” As Hitz pointed out, the Illinois shutdown order reduced its business operations from a full restaurant to curbside pickup and delivery.

The Court was unpersuaded by Kass’ arguments that Hitz could have continued performance, finding the shutdown order “unambiguously triggered” the lease’s force majeure clause. However, since the business was only partially shutdown, and the order took effect after March’s payment was due, the Court still ordered the debtor to pay all of March’s rent and 25% of April, May and June’s rent, giving the debtor three weeks to comply.

Hitz follows a trend. In the Pier 1 case[1], a Virginia Bankruptcy Court Judge allowed the bankrupt retailer similar leeway by granting the debtors’ motion to defer payments of post-petition rent. Pier 1 filed bankruptcy before COVID-19 reached America’s shores. The debtors sought authority to defer its rent payments based on the largescale and unforeseeable global change. Unlike Hitz, Pier 1 has a large number of commercial leases spread across the country, and its motion to defer triggered no less than twenty landlord objections. Also, the Pier 1 court did not find that the debtor was in accordance with the leases’ terms. However, the court reasoned that COVID-19 was a “temporary, unforeseen, and unforeseeable glitch” and “no feasible alternative to the relief sought”[2] existed. Essentially, the choice was either grant the motion or crater the entire case. The court permitted Pier 1 to defer rent payments on largescale basis, noting that § 365(d)(3) did not give a lessor the right to compel payment, but an administrative expense claim equal to the unpaid rent payable on the plan’s effective date. The debtor is not waiving these payments, the lessors’ interests are not devalued, and the debtor provided assurance of a cure by July 2020. However, even with this accommodation, the motion couldn’t overcome the economic crisis and Pier 1 now seeks to close all stores and liquidate.

Unprecedented times may call for drastic measures, but what remains to be seen is how far these coronavirus opinions’ influence will reach when the crisis subsides, and the courts start to grapple with a new normal. Although courts have attempted to narrowly tailor these opinions to the facts at hand, future debtors will no doubt attempt to utilize COVID-19 cases to add flexibility to § 365(d)(3) when a new crisis emerges. The outcome may, like Hitz hinge on the contract’s terms, or like Pier 1, on the judge’s assessment of a lessor’s rights and the depth of the crisis.

For more on coronavirus and force majeure clause see: https://www.hmblaw.com/news/non-performance-of-contractual-obligations-during-the-covid-19-pandemic/

HMB Legal Counsel will continue to provide updates as the situation evolves. The ongoing issues related to the spread of the Coronavirus (COVID-19) have had and will continue to have a significant impact on individuals, families, businesses and markets. Visit our collection of resources providing guidance during these fast-changing circumstances. Please reach out to your lead team member to answer specific questions.

[1] In re Pier 1 Imports, Case No. 20-30805-KRH, Doc. 637 (May 10, 2020).

[2] Id at 10.

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