The Bottom Line

In In re CEC Entertainment, Inc., et al., 20-33163, 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020), the Bankruptcy Court for the Southern District of Texas held that the Bankruptcy Code does not permit the court to alter a debtor’s rent obligations beyond the 60-day post-petition period enumerated in Section 365(d)(3) of the code. However, the court declined to address the remedy for a violation of Section 365(d)(3).

What Happened?

Background

Debtor CEC Entertainment, Inc. (CEC) operates the national chain of Chuck E. Cheese dining and arcade establishments. Due to the COVID-19 pandemic and subsequent governmental regulations aimed at curbing the spread of the virus, CEC was forced to limit operations at its venues across the country. The resulting financial hardship led CEC and its affiliates to file petitions for Chapter 11 relief on June 24, 2020.  

On Aug. 3, 2020, CEC filed a motion seeking a court order abating rent payments for 141 stores closed or otherwise limited in operations by government COVID-19 restrictions until those restrictions were lifted. Several lessors objected to this motion, and many were resolved consensually. At the time the court issued its ruling, objections from six lessors from three states (North Carolina, Washington and California) were unresolved.

The Bankruptcy Court’s Decision

The court denied CEC’s abatement motion as to the objecting lessors, finding that neither the Bankruptcy Code nor the applicable leases or state law provided a basis for the relief sought.

Section 365(d)(3) of the Bankruptcy Code states that a debtor must “timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential real property until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.”^[1] The section also provides that “[t]he 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.”^[2]

The court held that the language and intent of the statute was clear on its face, “commercial real property lessees must continue to perform after filing for bankruptcy.”^[3] Section 365(d)(3) was included in the Bankruptcy Code to “prevent commercial lessors from unwillingly extending credit to debtor-lessees during the pendency of a chapter 11 case.”^[4] Notably, the court disagreed with the recent decision of the Bankruptcy Court for the Eastern District of Virginia, which held that Section 365(d)(3) “does not compel a debtor to timely pay rent in accordance with a lease.”^[5] In Pier 1, the court held that because Section 365(d)(3) lacks a remedy to compel payment when a debtor fails to perform its obligations, the lessor only has an administrative expense claim.^[6] Thus, timely performance under Section 365(d)(3) “means paying all accrued rent following plan confirmation.”^[7]

Instead of following the lead of Pier 1, the Bankruptcy Court for the Southern District of Texas determined that while the Bankruptcy Code allows a bankruptcy court to delay performance of a debtor’s lease obligations, that delay is limited to 60 days after the order for relief.^[8] The court acknowledged the dissimilar rulings, but wrote that the disagreement was “perhaps on the margins” as the “command of § 365(d)(3) remains” and the “remedy for a violation of § 365(d)(3) is beyond the scope of this opinion.”^[9]

The court went on to examine CEC’s additional arguments that force majeure clauses in its leases and/or the frustration of purpose doctrine excuse CEC’s obligation to timely pay rent. The court found neither argument persuasive.^[10] It reviewed each of the six leases and held that none of the applicable force majeure clauses therein allowed CEC to abate or reduce rent under the circumstances.^[11] The court also reviewed applicable state law on the frustration of purpose doctrine and found that North Carolina, California and Washington all allow parties to delegate the risk of frustration, and held that “[t]he leases at issue delegate the risk to CEC, preventing application of the frustration doctrine.”^[12] Moreover, even if frustration was not superseded, the doctrine would not afford CEC the relief it requested. The court determined that for the six venues at issue either the value of the venue was not completely destroyed or the applicable state law contemplated recession of the contract as the only remedy for frustration, not abatement.^[13]

While not applicable to the facts at hand, the court did state that if either “the leases or state law allow CEC to abate or reduce rent payments, then CEC’s obligation to perform under § 365(d)(3) will reflect such abatement or reduction.”^[14]

Why This Case Is Interesting

As many businesses continue to reel from the effects of the COVID-19 pandemic and related government restrictions, this ruling presents another guidepost for how a bankruptcy court will treat a debtor’s request for rent relief through Section 365(d)(3). For retail, restaurant and other businesses with substantial rent obligations, the bankruptcy court’s interpretation of Section 363(d)(3) could have an impact on the outcome of the debtor’s restructuring. It remains to be seen whether future courts will hew more closely to the reasoning of CEC or of Pier I, or perhaps seek to reconcile the two.

^[1] _{11 U.S.C. § 365(d)(3).}

^[2] _Id.

^[3] _{In re CEC Entertainment, Inc., et al., 20-33163 (Bankr. S.D. Tex. Dec. 14, 2020).}

^[4] _Id.

^[5] _{See Id. (citing In re Pier 1 Imports, Inc., 615 B.R. 196, 198 (Bankr. E.D. Va. 2020).}

^[6] _Id.

^[7] _Id.

^[8] _{In re CEC Entertainment, Inc., et al., 20-33163 (Bankr. S.D. Tex. Dec. 14, 2020).}

^[9] _Id.

^[10] _Id.

^[11] _Id.

^[12] _Id.

^[13] _Id.

^[14] _Id.