Pier 1 Bankruptcy Court Abates Payment of Post-petition Rent due to Pandemic

Like other national retailers, Pier 1 Imports filed for bankruptcy in March, hoping to sell its assets and to liquidate under-performing locations. Then the Covid19 Pandemic hit the U.S. with its full force, causing mandatory stay at home orders in a majority of the States. It was just a matter of time before the Pandemic started to impact the ebb and flow of large bankruptcy cases. In the case of Pier 1, in-store sales compared to the prior year fell approximately 65% for stores that were to remain open and approximately 55% for the stores that were closing.

Faced with am unanticipated cash crunch, Pier 1 sought and obtained orders from the Bankruptcy Court that permitted the accrual of post-petition rent obligations at certain locations, instead of the current payment thereof. This relief was granted and recently extended to the end of May despite the objection of landlords, who argued the Debtor had to perform all of its obligations under the leases pursuant to section 365(d)(3), including the obligation to pay rent on an as incurred basis. In rejecting this construction of section 365(d)(3), the Bankruptcy Court reasoned that "section 365(d)(3) does not give the Lessors a right to compel payment from the Debtors in accordance with the terms of the underlying leases. Rather, to the extent that the Debtors are obligated to pay rent and fail to timely pay such rent, the Lessors are entitled to an administrative expense claim. Administrative expense claims under sections 507(a)(2) and 503(b) of the Bankruptcy Code, such as post-petition date unpaid rent, must be paid “on the effective date of [a] plan . . . [in] cash equal to the allowed amount of such claim. 11 U.S.C. § 1129(a)(9)(A); see also In re Circuit City Stores, Inc., 447 B.R. at 511. As such, any allowed claims for accrued but unpaid post-Petition Date rent must be paid by the Debtors on the effective date of any plan confirmed in these Bankruptcy Cases. To compel payment by the Debtors now would be to elevate payment of rent to the Lessors to superpriority status..."

The question is whether the Pier 1 holding will become the new normal in bankruptcy cases and how aggressively will landlords fight the issue, particularly when the market for re-leasing the space is compromised due to the depressed retail environment.