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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
        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)
        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.

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