Article courtesy of Michael Robson (Greenberg Traurig, LLP)
In re Hitz Restaurant Group, 616 B.R. 374, 2020 WL 2924523 (Bankr. N.D. Ill. 2020)
In a bankruptcy proceeding relating to the interpretation of a force majeure clause in a restaurant lease (the “Lease”) in the Covid 19 pandemic (“Covid 19”), the United States Bankruptcy Court for the Northern District of Illinois (the “Court”) held that a Chicago restaurant was able to forego a portion of its rent as the State of Illinois’ Covid-19 response had triggered the force majeure terms under the Lease, resulting in a rent reduction.
Hitz Restaurant Group (“Hitz”) is the operator of Giglio’s State Street Tavern (the “Restaurant”). Hitz failed to pay its February rent and subsequently filed for Chapter 11 bankruptcy protection on February 24th, 2020. On March 16, 2020, the State of Illinois issued Executive Order 2020 18 (the “Covid Order”) which set forth certain restrictions that limited on premises operation of restaurants but permitted restaurants to continue delivery services and pick up for off premises consumption. Hitz continued not paying rent after the issuance of the Covid Order through June, prompting the agent for Hitz’s landlord, Kass Management Services Inc. (“Kass”), to file a motion before the Court for the payment of back rent owed to Kass. In response, Hitz argued that the force majeure clause in the Lease excused the contractual obligations, including the payment of rent, as the clause included an express reference to “orders of government” – of which Kass argued the Covid Order qualified as.
Kass moved (1) to enforce the payment of post petition rent under 11 U.S.C. Section 365(d)(3) (the “Section 365”) of the Bankruptcy Code (the “Code”), (2) to modify the automatic stay under Section 362(d)(1) and (3) for the Court to order Hitz to vacate the premises unless post petition rent was paid and all future obligations were performed in a timely manner. Section 365 requires a debtor in possession to “timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property until such lease is assumed or rejected, notwithstanding § 503(b)(1) of this title.” 11 U.S.C. § 365(d)(3). In the case of In re Consolidated Indus. Corp., 234 B.R. 84, 86 87 (Bankr. N.D. Ind. 1999), the Court held that the parties should look to the terms of the lease and whether the obligation at issue was due before or after the petition was filed. The Lease stipulated that the monthly rent was due on the first of each month and, as such, the Court held that the payment of February rent was a pre petition obligation, while the payments due from March onward qualified as post petition obligations. Hitz’s argument that the March rent should also be a post petition payment was not persuasive as the Covid Order was issued on March 16th and March rent was due on March 1st. As to the payment of rent for future months, the Court looked to In Northern Ill. Gas Co. v. Energy Co op., Inc., 461 N.E.2d 1049, 1058 (Ill. App. Ct. 1984), where that court held force majeure clauses excuse contractual performance so long as the triggering event was the proximate cause of nonperformance. The Court reasoned that the Covid Order constituted a “government order” and that said order hindered the ability of the Restaurant to function at full capacity and level of service and as such held that the Covid Order was the proximate cause of the nonperformance at hand.
In response to the Court’s ruling, Kass mounted a three pronged attack against the bankruptcy and force majeure defenses. First, Kass argued that the Covid Order had not shut down the financial and postal services of the state and as such Hitz should have been able to make the rental payments. The Court rejected this argument flatly as ignorant of the language in the force majeure clause. Second, Kass argued the force majeure clause should not be triggered as Hitz’s failure to perform was due to a “lack of money”, which the Lease expressly states does not trigger the force majeure clause. The Court rejected this argument on the basis that Hitz was not arguing that it had insufficient funds, rather that the Covid Order was the proximate cause. Third, Kass argued that Hitz could have secured a loan from the Small Business Administration. The Court flatly rejected this argument on the grounds that Kass had not provided any legal precedent or language from the Lease that required Hitz to pursue additional financing before triggering the force majeure clause.
While the Court rejected Kass’ arguments generally, Kass did find partial relief in its argument that its interests were not being protected as Hitz had not paid any post petition rent. To achieve the limited protection of Kass’ rights, the Court looked to the scope of the Covid Order which permitted the Restaurant to operate for delivery and take out. As the Restaurant could have continued operating in this manner, the Court determined that the monthly rent would be reduced by 75% the amount of the Restaurant rendered unusable by the Covid Order. The Court ordered the reduced rental payments, including fees associated with common area maintenance and real estate taxes, be paid by for April, May and June pursuant to Section 365.
