Commercial Leases in Bankruptcy Cases: Are "Mothball" Motions Mothballed?

As stores across the country were being shuttered due to COVID-19 restrictions and operating cash became scarce, retailers began negotiating various types of rent relief with their landlords, including deferrals, abatement and lease terminations. Those retailers that had already filed for bankruptcy protection under Chapter 11, or that were about to do so, had a different tool in their belt — the ability to “mothball” operations by asking bankruptcy courts to permit them to defer rent payments otherwise due on a timely basis.

In the early days of the pandemic, bankruptcy courts used a variety of code provisions, including Section 105 and Section 305(a), to "mothball" cases by imposing meet-and-confer requirements prior to all motion practice, freezing motions for relief from stay for some period of time, suspending all hearings in the bankruptcy case, and granting deferrals of rent payments.

When stay-at-home orders began to be lifted in mid-2020, retail debtors shifted their focus to Section 365(d)(3), which permits a court to extend, “for cause”, the debtor’s obligations to timely perform under commercial leases. In asking courts to permit them to defer rent payments (for up to 60 days), many debtors cited various state orders and guidelines regarding social distancing as "cause." One went further: In the bankruptcy of True Religion, Inc., filed in the Delaware bankruptcy court, the debtor's DIP lender conditioned DIP financing on an order suspending rent payments for 60 days. The debtor cited this condition as "cause" for its Section 365(d)(3) motion, and the court granted it.

By the second half of 2020, debtors consolidated their efforts around Section 365(d)(3), but started employing two new strategies. First, the circumstances cited for "cause" began to shift, including an expected decrease in foot traffic, tightened trade terms, and strained liquidity. Second, debtors appear to have used Section 365(d)(3) motions as leverage to negotiate settlements with their landlords and other creditors.

In our recent Chambers article, my colleagues Sunni Beville, Michael Reining and I explore the case law on this issue and discuss the potential expansion of "cause" under Section 365(d)(3).