Bankruptcy Judges Disagree About Abatement of Rent During the Pandemic
Neither the Bankruptcy Code nor state law permits reducing rent when government regulations restrict a debtor’s ability to generate income, Judge Isgur says.
Neither the Bankruptcy Code nor the doctrines of force majeure or frustration of purpose enable a reorganizing debtor to abate the payment of rent as a consequence of the pandemic, according to Bankruptcy Judge Marvin Isgur of Houston.
The operator of a chain of restaurants filed a chapter 11 petition in late June. In early August, the debtor filed a motion to abate the payment of rent, contending that governmental regulations inhibited or precluded the operation of some restaurants. Several landlords granted concessions, but six landlords objected to the abatement motion.
The landlords won in Judge Isgur’s 29-page opinion on December 14.
Judge Isgur first dealt with Section 365(d)(3), which requires “timely [performance of] 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 . . . . 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.”
Saying that he disagreed “on the margins” with an opinion in May by Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., Judge Isgur decided that Section 365(d) “expressly prohibits delays beyond sixty days after the order for relief. The Court cannot override that statutory mandate.” To the extent that the section might have afforded some relief immediately after the debtor commenced reorganizing in chapter 11, “[t]hat period has expired,” Judge Isgur said.
Judge Huennekens found a statutory basis for deferring rent temporarily during the pandemic. To read ABI’s report on Judge Heunnekens’ opinion in In re Pier 1 Imports, Inc., 615 B.R. 196 (Bankr. E.D. Va. 2020), click here.
Next, Judge Isgur turned to the force majeure clauses in the leases. Although the clauses might have given the debtor relief in some circumstances, they were all virtually identical in affording no relief from the payment of rent.
The debtor fared no better by arguing frustration of purpose. If it were applicable, the remedy under state law would have been rescission, not abatement of rent. Furthermore, the allocations of risk in the force majeure clauses superseded the doctrine of frustration of purpose.
In addition, frustration of purpose only applies when there has been a practically total destruction of the value of performance, a circumstance not resulting from the pandemic.
In sum, Judge Isgur found nothing in the Bankruptcy Code nor in the doctrines of force majeure or frustration of purpose justifying abatement of the debtor’s obligation to pay rent.