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Law360 (June 10, 2020, 7:56 PM EDT) -- Landlords that own hundreds of retail locations leased by bankrupt retailer J.C. Penney objected to the debtor's request to delay rent payments, saying this week that many of the stores have reopened after the lifting of coronavirus-related business restrictions and should pay their lease obligations.
In a series of objections filed in Texas bankruptcy court Tuesday and Wednesday, the landlords say they understand that the pandemic has had severe negative impacts on the retail industry, but argue that their bottom lines have also been affected and that further delaying up to $34 million in lease payments is not justified for the stores that are back in business.
J.C. Penney, along with many other retailers, closed all of its stores in response to restrictions arising from the global spread of COVID-19. The loss of revenue from its brick-and-mortar operations hastened its move to file for bankruptcy, which it was trying to avoid with a top-to-bottom organizational restructuring. It has said it anticipates reopening 95% of its stores by the end of June.
In the first two weeks of the case, the debtor moved to delay its rent obligations until July 14, hoping to preserve $34 million in liquidity in the initial stages of its case while working with landlords to negotiate rent concessions going forward.
Simon Property Group, which holds leases for 75 of J.C. Penney's 850 stores, filed its objection Wednesday, saying that 30 states and territories have allowed shopping centers to resume operations, and delaying the retailer's June and July rent obligations until July 14 would harm landlords more than the spread of the coronavirus already has. Simon's objection said that 42 of the 75 locations it leases to J.C. Penney have already reopened.
"The extension period through July 14, 2020 fails to recognize that in SPG's circumstance alone, under government-sanctioned reopening guidelines, approximately 161 of SPG's shopping centers already commenced reopening in May and June," the objection said. "The Motion fails to address or recognize that there should be a distinction made between suspending lease obligations for open and operating stores as opposed to those stores that remain closed during the Extension Period."
Pyramid Management Group LLC and other landlords holding leases for 16 stores filed a similar objection Wednesday, also arguing that lease obligations for 154 stores J.C. Penney has decided to liquidate in bankruptcy should not be extended, as the properties are making money for the benefit of the debtor's estate and delaying rent payments would prejudice the landlords.
J.C. Penney declined to comment on the objections Wednesday.
Rent relief has featured in other retail bankruptcies triggered or complicated by the coronavirus pandemic. Some judges have limited the relief to stores that have not yet reopened and limited the amount only for the time period during which the stores were closed. In the Stage Stores Chapter 11 case, U.S. Bankruptcy Judge David R. Jones, who is also presiding over the J.C. Penney case in Houston, granted the extension of time in late May but imposed caveats on the relief.
A phone and videoconference hearing on the motion is scheduled for Thursday afternoon before Judge Jones in Houston.
J.C. Penney filed for bankruptcy on May 15, saying it had been undergoing a comprehensive business overhaul for the last two years to deal with the general decrease in brick-and-mortar retail sales and had been putting together an out-of-court restructuring of its $8 billion in debt until the coronavirus pandemic doomed those efforts. The company was forced to shutter all 850 of its stores and furlough most of its 85,000 employees.
Last week, the court approved a $450 million debtor-in-possession financing package provided by a group of lenders holding about 73% of its $500 million in first-lien debt.
J.C. Penney's Chapter 11 plan proposes splitting off the debtor's real estate holdings into a separate entity and closing up to 242 stores in multiple waves, according to court filings.
J.C. Penney is represented by Joshua A. Sussberg, Christopher J. Marcus and Aparna Yenamandra of Kirkland & Ellis LLP, and Matthew D. Cavenaugh, Jennifer F. Wertz, Kristhy M. Peguero and Veronica A. Polnick of Jackson Walker LLP.
Simon Property Group is represented by Michael M. Parker and Ronald M. Tucker of Norton Rose Fulbright.
Pyramid Management Group LLC, RPT Realty LP, Inland Commercial Real Estate Service LLC and Lilac Mall Associates LLC are represented by Kevin M. Newman and Scott L. Fleischer of Barclay Damon LLP.
The case is In re: J.C. Penney Company Inc., case number 20-20182, in the U.S. Bankruptcy Court for the Southern District of Texas.
--Additional reporting by Rick Archer and Jeff Montgomery. Editing by Alanna Weissman.
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