Page 10 - NBIZ June2021

Drawing on a Letter of Credit May Not landlords. The debtor's quick rejection pre-default, and, if a default occurs,
Violate the Automatic Stay also means it does not have to pay draft or amend leases that increase
Letters of Credit issues can the landlord its monthly rent under rent payments in later months to
become eventful if a tenant files Section 365(d)(3). Unfortunately, account for previous defaults. N
bankruptcy before a landlord drawing when that occurs, landlords have little
on the letter of credit. Once a tenant to no recourse. Endnotes
files bankruptcy, the automatic stay However, the longer a debtor 1. In re CEC Entm't, Inc., 625 B.R. 344, 352–53
locks into place and ceases all actions. waits in a bankruptcy case, the more (Bankr. S.D. Tex. 2020).
However, as issued by an indepen- unlikely it will be that a bankruptcy 2. Case No. 20-20182, In re J.C. Penny Company,
dent, third party, letters of credit may court will grant this retroactive relief. Inc. (Jointly Administered), In the United States
Bankruptcy Court for the Southern District of
not be considered property of the Moreover, in cases where the debtor is Texas, Houston Division. (DRJ); (Bankr. S.D.
bankruptcy estate. This is especially actively using a space and that use is Tex. June 11, 2020), Order (I) Extending Time
true, if, the landlord is not required to either generating income or provid- for Performance of Obligations Arising Under
notify the tenant before drawing down ing a benefit to the estate, it will be Unexpired Non-Residential Real Property Leases
on the letters of credit. hard-pressed to convince a court that and Granting Related Relief [Dkt. 721]
3. In re Neiman Marcus Grp. Ltd LLC, et al.,
The Fifth Circuit, in Stonebridge retroactive rejection is advisable. Case No. 20-32519- DRJ, Declaration of Mark
6
Techs., Inc., determined Weinstein, Chief Restructuring
that a landlord drawing on Officer, of Neiman Marcus Group
a letter of credit was not a Ltd LLC, in Support of The
violation of the automatic Debtors’ Chapter 11 Petitions
and First Date Motions [Dkt. 86].
stay as the landlord had By rejecting the abandoned leases 4. In re Belk, Inc., (Bankr. S.D.
not filed a proof of claim in Texas 2021)
5
the bankruptcy. It deter- on the petition date, the debtor is 5. In re Stonebridge Techs., Inc.,
mined that the landlord did 430 F.3d 260, 265 (5th Cir. 2005)
not have a claim against relieved of any post-petition 6. See Case No. 20-33163; In
re CEC Entertainment, Inc., et
the property of the estate, al; (Jointly Administered), In
as the letters of credit were administrative expense claims the United States Bankruptcy
issued by an independent, by the landlords. The debtor's quick rejection Court for the Southern District
third party, the bank. The also means it does not have to pay the landlord of Texas, Houston Division.
Court also found that the (MI); Case No. 20-32564, In
re Stages Stores, Inc. (Jointly
amount drawn upon was its monthly rent under Section 365(d)(3). Administered), In the United
not limited by the Bank- Unfortunately, when that occurs, landlords States Bankruptcy Court for
ruptcy Code, too. Never- have little to no recourse. the Southern District of Texas,
theless, a landlord should Houston Division. (DRJ);
still seek legal counsel and Case No. 20-20182, In re J.C.
Penny Company, Inc. (Jointly
weigh the benefits and Administered), In the United
consequences of drawing upon letters In the past year, debtors are States Bankruptcy Court for the Southern
of credit without the Bankruptcy assuming a large number of leases on District of Texas, Houston Division. (DRJ)
Court’s permission. their terms without curing monetary
defaults.This is potentially a grave A good primer on Letters of Credit is in the NBIZ
Retroactive Rejection danger not only to landlords but also Magazine’s Spring 2006 issue, article written by
In the past, landlords would usually to the purchasers of these leases. For Brian Womac.
be entitled to post-petition rents as an example, occupancy requirements Angeline Vachris Kell is an Attorney at
administrative claim. This would mean and loan to value ratios could invoke HooverSlovacek LLP. She received her
the landlord would at least be paid in technical defaults under a landlord’s J. D. from South Texas College of Law
full for the rent it was owed between note risking a change of ownership. and a Bachelor of Arts with a major in
the date the bankruptcy case was filed Monetary defaults are also possible Spanish from the University of Texas.
and the date the lease was rejected. due to the debtor's financial inability Mrs. Kell is the Past President of the
But it is becoming more common for to cure his or her rent defaults to Hon. Arthur L. Moller/David B. Foltz,
debtors to ask that a lease be rejected the landlord. So, a landlord’s first Jr. American Inn of Court.
retroactively to the bankruptcy filing inclination is to fight back. Without
date. Debtors have also been moving the lease, the debtor’s plan will not Elias Yazbeck is a 3L at South Texas
more quickly to reject leases. be effective. However, pre-bankruptcy College of Law where he serves as
By rejecting the abandoned leases planning may be less costly and Articles Editor for the South Texas
on the petition date, the debtor is more effective. With this knowledge, Law Review and incoming Student
relieved of any post-petition ad- landlords can require Letters of Managing Editor for the Texas Bar
ministrative expense claims by the Credit, increase communications Construction Law Journal.

10 NBIZ ■ June 2021