ABI: Examining ‘Mothball Motions’ for Bankrupt Retailers During COVID-19 Pandemic

Since the start of the COVID-19 pandemic, courts have alleviated some financial burdens of bankrupt retailers by granting “mothball motions,” allowing companies to shelve post-petition rental payments, according to an article in the August ABI Journal from the American Bankruptcy Institute.

“Stay-at-home orders spawned by the pandemic have forced many retailers to close their brick-and-mortar shops, causing severe and unexpected cash flow shortages,” Paul J. Ricotta and Kaitlin R. Walsh of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo wrote in the article, “Mothballing Motions from Retail Debtors to Avoid Rent Payments Due to COVID-19 Pandemic.” “Most retailers lease their store locations, therefore the cost of rent constitutes a large proportion of their operating expenses.”

Retailers that have filed for bankruptcy protection prior to (Modell’s and Pier 1) and during (J. Crew, True Religion and J.C. Penney) the crisis have cited the pandemic and its effects as a reason for the court to defer payment of post-petition rents, according to Ricotta and Walsh.

“They have argued, among other things, that because they have been forced to ‘mothball’ their store locations, any obligations to pay current rents should also be postponed unless and until they are allowed to fully reopen store locations,” Ricotta and Walsh wrote.

However, commercial landlords have strenuously objected to mothball motions. The authors wrote that landlords have asserted that the well-known rule under §365(d)(3) of the bankruptcy code — which requires that a debtor continue to “timely” perform its post-petition obligations such as paying rent as it becomes due — should not be ignored, even during the current public health crisis.

“To date, a majority of bankruptcy courts have been sympathetic to the exigent circumstances created by the COVID-19 pandemic,” Ricotta and Walsh wrote.

The courts have allowed debtors to remain in possession of the premises and temporarily cease paying rents while at the same time continuing to pay other administrative expenses, such as salaries and professional fees. The authors wrote that the willingness of courts to allow debtors to defer their post-petition rent obligations in light of the ongoing uncertainty caused by COVID-19 signals a divergence from the strict enforcement of the protections previously afforded commercial landlords under §365(d)(3), and it requires landlords to shoulder more of the risk of a debtor’s potential administrative insolvency.

“As stay-at-home orders expire and nonessential retail is permitted to reopen across the U.S., it remains to be seen whether motions seeking to defer post-petition rent obligations will continue to be granted and whether courts will continue to accommodate such requests as the effects of COVID-19 (hopefully) begin to wane,” Ricotta and Walsh wrote.

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