We previously highlighted the shifting bankruptcy paradigm caused by the COVID-19 pandemic. As anticipated, indoor retail and dining establishments, hit particularly hard by the pandemic and related shutdowns, have been forced to scratch and claw for survival. This has included seeking bankruptcy protection and utilizing every advantage provided by the Bankruptcy Code.
Some entities that have sought bankruptcy relief, such as Ruby Tuesday, Chuck E. Cheese, Pier 1, and J.C. Penney, have tried to reduce the pressure on their businesses by requesting rent abatement as part of the bankruptcy process (whether the requested relief was rooted in the Bankruptcy Code or in state law). So far, such requests have met with mixed results. The issue came up most recently in the Ruby Tuesday cases. These cases are particularly interesting as the Ruby Tuesday debtors pursued the abatement issue in a unique way. The outcome of their pursuit could provide valuable guidance to landlords and tenants alike, and possibly change the bankruptcy landscape in a significant way.
The Ruby Tuesday Cases
In October, RTI Holding Company, LLC and fifty affiliates (collectively, “Ruby Tuesday”) sought chapter 11 relief in the United States Bankruptcy Court for the District of Delaware before the Honorable John T. Dorsey.1 As with other debtors, Ruby Tuesday anticipated that “in recognition of the unpredictability of the continuing impact of the coronavirus, . . . the payment of rent as it comes due during the first 60 days of [the proceedings] will severely strain [Ruby Tuesday’s] financial resources.”2 However, the debtors deviated from recent precedent to confront this challenge, and sought an order “abating rent payments for stores closed or otherwise limited in operations as a result of any governmental order or restriction until such restriction or order has been lifted . . . .”3 Where prior debtors had relied on the Bankruptcy Code for relief, as discussed below, Ruby Tuesday sought to effectuate this request through the implementation of a litigation protocol that would allow for the adjudication of state law issues (such as the enforcement of force majeure clauses) on an expedited basis.
On December 9, 2020, Judge Dorsey approved Ruby Tuesday’s proposed rent abatement litigation schedule over the objection of several landlords.4 In short, the schedule bifurcates rent abatement litigation into two phases: the determination phase and the quantifying phase.5 The determination phase is designed to first assess whether certain state law legal doctrines apply in the context of the pandemic. If such doctrines applied, the quantifying phase would then assess the amount of abatement warranted under particular leases.
On December 14, 2020, Ruby Tuesday filed five adversary complaints against landlords pursuant to the scheduling order. In each complaint they argue that the COVID-19 pandemic and related government restrictions (1) triggered force majeure clauses that relieve them of rent obligations; (2) frustrated the fundamental purpose of their lease; and (3) rendered their performance under the lease impossible or impracticable.6
This approach impacts a bankruptcy landscape that already features varying approaches to the issue of rent abatement (the degree of that impact will depend on the success of the approach). A few of the more recent decisions:
- On December 14, 2020, Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas Houston Division denied a motion made by the debtors in the Chuck E. Cheese bankruptcy cases, which sought rent abatement for certain locations restricted from offering indoor dining.7 The debtors argued its rent obligations could be abated pursuant to the Bankruptcy Code, in addition to the state law doctrines relied on by the Ruby Tuesday debtors.8 However, Judge Isgur rejected all of these arguments.9 He found that (i) the Bankruptcy Code does not permit a bankruptcy court to equitably alter the debtors’ state law rent obligations, (ii) the underlying leases prohibited the debtors from delaying rent obligations based a force majeure event, and (iii) “[f]rustration of purpose does not apply because the force majeure clauses supersede application of the doctrine under state law or because the purpose of each lease is not entirely frustrated.”10
- In June, Judge David Jones of the U.S. Bankruptcy Court for the Southern District of Texas Corpus Christi Division granted the debtors’ request in the J.C. Penney bankruptcy cases to delay $34 million in rent payments until mid-July pursuant to section 105(a) of the Bankruptcy Code.11
- Likewise, in May, Judge Kevin Huennekens of the U.S. Bankruptcy Court for the Eastern District of Virginia Richmond Division used his equitable powers under Section 105 of the Bankruptcy Code to allow the debtors in the Pier 1 bankruptcy cases to temporarily defer their rent obligations.12
The Ruby Tuesday cases are the latest in the bankruptcy/abatement continuum and will be something for landlords and tenants alike to keep an eye on. Any decision by the court on the merits will be critical. Seward & Kissel’s Corporate Restructuring & Bankruptcy Group will continue to closely monitor the situation and remains accessible to clients dealing with this crisis.