Opinion of Interest – In re CEC Entertainment Inc.: COVID Disruptions Do Not Justify Additional Rent Deferrals Beyond Initial 60-Day Period Expressly Permitted by Bankruptcy Code

In a new opinion issued in the Chuck E. Cheese bankruptcy cases, In re CEC Entertainment, Inc., Case No. 20-33163 (Bankr. S.D. Tex.),¹ Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas ruled² that CEC Entertainment, Inc. (“CEC”), the parent company of the Chuck E. Cheese pizza chain, could not defer its rent obligations due to ongoing COVID-19 disruptions beyond the initial 60-day period authorized by section 365(d)(3) of the Bankruptcy Code.  While CEC had initially sought rent relief with respect to dozens of its store locations, it was able to settle with the landlords for all but six locations in North Carolina, Washington, and California; the non-settling landlords continued to insist that CEC was required to pay rent despite the global pandemic and CEC’s bankruptcy filing.  In its December 14, 2020 opinion, the court agreed with these landlords and rejected each of CEC’s arguments for its proposed relief, including that: (1) sections 105 and 365 of the Bankruptcy Code authorized the Bankruptcy Court to suspend CEC’s rent obligations beyond the 60-day period included in Section 365(d)(3); (2) the COVID-19 pandemic—and related restrictions put in place by state and local governments—constituted a force majeure event under each of the six leases at issue; and (3) CEC’s inability to fully utilize the leased premises as a result of state and local restrictions on indoor dining and entertainment entitled CED to a “frustration of purpose” defense with respect to each lease.

With respect to CEC’s argument that sections 105 and 365 of the Bankruptcy Code authorized the court to suspend CEC’s rent obligations beyond the initial 60-day period provided for in section 365(d), the Bankruptcy Court held “the Code expressly prohibits delays [in payment of rent] beyond sixty days after the order for relief. That period has expired. The Bankruptcy Code does not provide the Court with authority to alter lease obligations beyond that sixty-day window.”  With respect to CEC’s force majeure argument, the Bankruptcy Court found that it did not need to decide whether the COVID-19 pandemic, and related governmental restrictions, constituted a force majeure because of the at-issue leases that had force majeure clauses (one did not), each expressly carved out CEC’s obligation to pay rent from any force majeure relief.  And with respect to CEC’s frustration of purpose argument, the court held either that the force majeure clauses in the leases at issue superseded the frustration of purpose defense, or that the purpose of each lease was not entirely frustrated thus negating the applicability of the defense under applicable state law.

While expressing sympathy “to the hardship which CEC” and other similarly situated companies have “endured as a result of the global pandemic,” the court ultimately found that its hands were tied and that CEC was required to comply with its rent obligations under the applicable sections of the Bankruptcy Code.  The court acknowledged that other courts had decided differently.  See, e.g., In re Pier 1 Imports, Inc., 615 B.R. 196 (Bankr. E.D. Va. 2020) (allowing the debtors to defer rent payments for 104 days after filing for bankruptcy).  But it insisted that it likely disagreed with these courts only “on the margins” as it was not deciding what remedy the landlords would have should CEC choose to continue to defer rent payments, only that such deferrals were not permitted by the Bankruptcy Code.

¹ See our prior post here regarding an earlier decision in the case regarding the destruction of prize tickets.

² See December 14, 2020 Memorandum Opinion on Debtors’ Abatement Motion.