615 B.R. 196
Bankr. E.D. Va.2020Background
- Pier 1 Imports and affiliated debtors filed chapter 11 on February 17, 2020, expecting a quick plan process, but the COVID-19 pandemic and government-mandated store closures halted in‑store revenue.
- Debtors proposed an Interim Budget and a Limited Operations Period (through May 31, 2020 unless extended) to fund only critical expenses and to defer certain accrued but unpaid rent while continuing payments for insurance, utilities, and security.
- Numerous commercial landlords objected, seeking immediate rent payment or adequate protection; debtors and DIP lenders argued scarce liquidity required a short pause to preserve estate value and enable a value-maximizing sale.
- The Court approved a Supplemental Order extending the interim relief through the Limited Operations Period, stressing that rent obligations continue to accrue and are deferred, not forgiven, and reserving landlord defenses on other legal doctrines.
- The Court relied on precedent that section 365(d)(3) gives lessors an administrative expense remedy (not superpriority) for postpetition unpaid rent, and found continuation of non‑rent payments plus proposed cure timing constituted adequate protection if required.
Issues
| Issue | Debtors' Argument | Lessors' Argument | Held |
|---|---|---|---|
| Whether the court may authorize short-term deferral of postpetition rent despite 11 U.S.C. § 365(d)(3) | COVID-19 created an unforeseeable need to pause payments to preserve estate value; relief is temporary and necessary | §365(d)(3) requires timely performance; landlords should receive immediate rent | Court allowed temporary deferral; §365(d)(3) yields an administrative expense remedy for unpaid rent, not a right to immediate superpriority payment |
| Whether landlords are entitled to adequate protection under §§ 361 and 363 because deferral diminishes their property interests | Debtors continue insurance, utilities, security, and will cure arrears in July; no diminution in value justifying further protection | Deferred rent decreases landlords' interests and warrants cash or other adequate protection | Court concluded no demonstrable diminution; continued non‑rent payments and assurance of cure are sufficient adequate protection if needed |
| Whether use of equitable powers under § 105 to defer rent conflicts with the Bankruptcy Code | §105 permits necessary relief in extraordinary circumstances to carry out the Code | Relief cannot override explicit statutory mandates like §365(d)(3) | Court held §105 relief here is appropriate and does not override the Code; referenced Law v. Siegel as limiting principle |
| Whether the order cancels or alters landlords' accrual or enforcement rights under leases | Debtors said rent continues to accrue and will be paid later; order only defers payment | Landlords argued deferral undermines lease enforcement and remedies | Court emphasized obligations continue to accrue; order defers payment only and preserves landlords’ rights and defenses (except immediate collection) |
Key Cases Cited
- In re Circuit City Stores, Inc., 447 B.R. 475 (Bankr. E.D. Va. 2009) (section 365(d)(3) provides administrative expense remedy, not superpriority payment)
- Law v. Siegel, 571 U.S. 415 (2014) (limits on bankruptcy court equitable powers under section 105)
- Davis v. Davis (In re Davis), 170 F.3d 475 (5th Cir. 1999) (section 105 grants broad equitable authority to bankruptcy courts)
- In re Va. Packaging Supply Co., Inc., 122 B.R. 491 (Bankr. E.D. Va. 1990) (treatment of administrative expense for postpetition lease obligations)
- In re Banks, 577 B.R. 659 (Bankr. E.D. Va. 2017) (automatic stay provides a debtor with a temporary breathing spell)