Yesterday, Jaspan Schlesinger LLP appeared telephonically, on behalf of a creditor, in the Pier 1 bankruptcy proceedings before U.S. Bankruptcy Court for the Eastern District of Virginia. Pier 1 Imports, Inc., et al., Case No. 20-30805 (KRH) (Bankr. E.D. Va., Apr. 2, 2020). Pier 1 Imports Inc. and its affiliates (collectively, Pier 1) brought an emergency motion seeking financial and administrative relief in light of the COVID-19 pandemic and resulting government-mandated closures. Undoubtedly, this hearing is one of the first of many to come before our bankruptcy courts as businesses assess the viability of continued operation in these uncertain times, and as courts across the country accommodate social distancing requirements by embracing virtual courtroom technologies.
In this instance, Pier 1 sought an order permitting it to, among other things, effectively defer rental payments owed to its various landlords, including our client, for an indefinite period of time. Proceedings began with an air of somber practicality, as the Court noted the unprecedented nature of the circumstances at hand, which it termed a “critical business problem” in need of “business solutions,” rather than “litigation solutions.”
The Court drew a comparison between the Pier 1 proceedings and Modell’s Sporting Goods, Inc., No. 20-14179 (VFP) (Bankr. D. N.J., Mar. 23, 2020), a New Jersey case in which Modell’s and its subsidiaries filed for Chapter 11 bankruptcy shortly before President Trump declared the COVID-19 pandemic a national emergency. Because of the pandemic and government-mandated closures, the Modell’s debtors successfully sought a complete “suspension” of their bankruptcy cases. Specifically, they asked for a temporary suspension of all deadlines and activities in the case (pursuant to Bankruptcy Code § 305 or, in the alternative, Bankruptcy Code § 105), and the right to seek additional time in the future. They also sought to defer payment of all expenses other than those specifically outlined in their modified budget, which excluded any rent payments.
Much like the debtors in Modell’s, Pier 1 premised its motion on Bankruptcy Code § 105 and § 305, and legal doctrines such as impossibility and frustration of purposes. It argued that, until ordinary operations resume, it will be unable to make the monthly rent payments of $9.4 million owed to its various landlords. However, Pier 1 conceded that its e-commerce business remains in operation.
Notwithstanding the resounding sympathy expressed by the Court and the U.S. Trustee, as well as certain lenders, vendors, and landlords, concerns remained for the businesses and individuals to whom Pier 1 owes money. Because there is no way of knowing when Pier 1 will be able to resume operations, any order temporarily relieving them of their financial obligations might effectively leave creditors high and dry for many months.
Of those who participated in the hearing, the landlords were undoubtedly most vocal in their concerns since the relief Pier 1 sought offered little means to protect their financial interests if Pier 1 fails to reorganize and must instead liquidate without any assets remaining to satisfy debts “temporarily” set aside. Others argued that the protections typically available to creditors under the Bankruptcy Code were seemingly cast aside in light of the pandemic, and that the relief sought by Pier 1 threatened to stretch the Court’s equitable powers beyond their usual reach at the expense of the rights of Pier’s creditors.
In the end, the “business solution” ruled the day, and Pier 1 will be permitted to cease rental payments to its landlords until either the end of the pandemic is in sight, or a cogent vision of its financial prospects becomes apparent, or until the Court says otherwise. Though it is uncertain whether other debtors will be able to obtain similar relief, it is clear that the pandemic has opened new doors in bankruptcy law, and all signs point to more change ahead. For now, landlords should be prepared to bear the costs of their leased and occupied but otherwise non-operating retail properties. The decisions in Modell’s and yesterday’s proceedings in the Pier 1 bankruptcy will undoubtedly be cited by chapter 11 bankruptcy debtors who seek to halt their cases and rent obligations in their tracks due to the COVID-19 pandemic.
Our firm’s COVID-19 Resource Center is available to you day and night. Our attorneys remain on-call to assist our clients with the unprecedented challenges confronting them. Please reach out to us, your usual firm contacts or a member of our Coronavirus Response Team if you need guidance.