In re Vital Pharm.
| Decision Date | 08 May 2023 |
| Docket Number | 22-17842-PDR |
| Parties | In re: Vital Pharmaceuticals, Inc., et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
ORDER GRANTING DEBTORS' MOTION FOR ENTRY OF AN ORDER (I) RULING SECTION 365 AS AMENDED BY THE ACT APPLIES TO THE DEADLINE BY WHICH THE DEBTORS MAY ASSUME OR REJECT UNEXPIRED LEASES OF NONRESIDENTIAL REAL PROPERTY AND (II) GRANTING RELATED RELIEF
THIS CASE came before the Court on May 4, 2023, at 2:00 p.m., on Debtors' Motion for Entry of an Order (I) Ruling Section 365 as Amended by the Act Applies to the Deadline by which the Debtors May Assume or Reject Unexpired Leases of Nonresidential Real Property and (II) Granting Related Relief (the "Motion").[1] In their Motion, the Debtors ask the Court to rule that they have 210 days from the petition date to assume unexpired nonresidential leases of real property and to provide an additional 90-day extension. Under the Consolidated Appropriations Act of 2021, Congress amended Bankruptcy Code § 365(d)(4) to extend the time for debtors to assume unexpired nonresidential leases of real property from 120 days to 210 days. By its terms, that amendment, which sunsetted on December 27, 2022, continues to apply only in subchapter V cases, not to traditional chapter 11 cases, that were pending before the sunset date. Because a rational Congress could not have conceivably intended the amendment to § 365(d)(4) to continue to apply only in subchapter V cases, and not traditional chapter 11 cases this Court (1) concludes that the amendment to § 365(d)(4) continues to apply in traditional chapter 11 cases like this one, filed before the amendment sunsetted; and (2) finds cause for a 90-day extension of the deadline to assume.
In March 2020, the country found itself amid a national emergency.[2] By that time, COVID-19 had already spread to the United States, and thousands of new cases were being reported each day.[3] To keep COVID-19 from overwhelming the country's healthcare system, states began issuing stay-at-home orders, which resulted in the closure of nonessential businesses.[4] As a result, consumer spending and the country's gross domestic product plummeted, while unemployment skyrocketed.[5]
Congress needed to act fast to provide relief to American workers and businesses. And it did. Within two weeks of the President declaring a national emergency, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020).[6]
Nine months later, on December 21, 2020, Congress passed the Consolidated Appropriations Act (2021) (the "Act"), which was signed into law on December 27, 2020.[7] Spanning 5,593 pages, far and away the longest bill ever passed by Congress, the Act provided roughly $900 billion in COVID-19 relief (in addition to $1.4 trillion in regular appropriations).[8]
The Act also included a variety of relief to bankrupt debtors. For instance, it provided that COVID-19 relief stimulus payments did not become part of a debtor's bankruptcy estate;[9] ensured that no debtor would be denied relief under certain provisions of the CARES Act because of their status as a debtor;[10] and extended the time for subchapter V debtors to perform under unexpired leases.[11]
Relevant to this case, the Act also extended the time for debtors to assume unexpired nonresidential leases of real property.[12] Before Congress passed the Act, Bankruptcy Code § 365(d)(4) gave debtors 120 days from the petition date to assume an unexpired nonresidential lease, failing which the lease would be deemed rejected.[13] The Act, however, amended § 365(d)(4) to give debtors 210 days-rather than 120.[14] But the amendment to § 365(d)(4) had a sunset provision under which the time period would revert to 120 days on December 27, 2022.[15]
Importantly, § 365(d)(4) authorizes only one 90-day extension for cause, after which the debtor must obtain "prior written consent of the landlord" for any further extension. If the landlord does not provide such consent, the debtor has a Hobson's choice: it must decide whether to seek assumption even though it may not be prepared to do so or to allow the nonresidential lease of real property to be deemed rejected upon the passing of the deadline.[16] Both options may have detrimental impacts on the estate. If the debtor assumes a lease, it may regret the decision because, for example, in this case a later buyer may have preferred the lease be rejected. If the debtor allows the lease to be rejected, the debtor must deal with a (potentially hefty) rejection-damage claim and the consequences of a buyer potentially preferring assumption.
On October 10, 2022, two months before the § 365(d)(4) amendment sunsetted, the Debtors filed for chapter 11 bankruptcy.[17] The Debtors, which manufacture and distribute performance energy drinks, operate out of twelve leased "Direct Store Delivery" locations; three leased "Fuel Team" buildings; nine leased "Distribution Centers"; ten leased "Parkout Storage" locations; and eighteen leased "POS Storage" locations.[18] So, in all, the Debtors have more than 50 leases that are crucial to its operations.
Much of the Debtors' efforts during the early stages of this case were focused on negotiating with its lenders and the Official Committee of Unsecured Creditors to secure debtor-in-possession (DIP) financing.[19] As part of that process, the Debtors settled on an exit strategy: the Debtors would maximize the value of their assets by soliciting bids for the sale of their business as a going concern. By mid-January 2023, the Debtors' investment banker had contacted nearly 150 potential buyers, roughly 40 of whom entered into nondisclosure agreements, and the Debtors negotiated with potential bidders from whom they received non-binding indications of interest.[20] This all culminated with the Debtors filing a motion seeking approval of bid procedures designed to promote a competitive sale and yield maximum value for their assets.[21]
To maximize the value of their assets, though, the Debtors must retain flexibility to assume or reject unexpired nonresidential leases: it goes without saying that any buyer will want to evaluate the Debtors' unexpired leases, so until the Debtors know who the buyer is, they won't know which leases the buyer will want (i.e., which leases need to be assumed and assigned). To maintain that flexibility, the Debtors moved in late-January 2023 to extend the deadline for assuming unexpired nonresidential leases.[22]
In their motion, the Debtors explained that even though the amendment to § 365(d)(4), which gave them 210 days to assume their leases, had sunsetted in December 2022, they believed they still had the benefit of the 210 days because the amendment had been in effect at the time the case was filed.[23] But if the 120-day period applied, it would have expired on February 7, 2023-nearly three months before the sale of the Debtors' assets was originally supposed to take place. Ultimately, the Court granted the Debtors an "extension" through May 8, 2023 to assume any unexpired leases, but the "extension" was without prejudice to the Debtors seeking (1) a determination that the 210-day lease assumption period had been in effect (and therefore the "extension" through May 8, 2023 was really not an extension at all); and (2) a statutorily authorized 90-day extension for cause.[24]
The Debtors now seek such relief.[25] Although the Debtors have stipulated to an extension with fourteen of their landlords,[26] there are two landlords from whom the Debtors were unable to obtain consent. This Court must now determine whether the 210-day lease-assumption period in the § 365(d)(4) amendment in effect at the time this case was filed applies even though the amendment sunsetted on December 27, 2022.[27]
If the 210-day lease-assumption period applies, then the initial lease-assumption deadline was May 8, 2023. That means this Court may extend the May 8 lease-assumption deadline-over a landlord's objection-for cause. If, however, the 120-day lease-assumption deadline applies, then the Debtors have used their "for cause" extension, in which case this Court is powerless to extend the deadline further absent "prior written consent" of the landlord.
No party has objected to the Debtors' request that this Court declare that the 210-day lease-assumption deadline applies in this case. However, § 365(d)(4) specifically provides that if the Court grants a debtor an initial 90-day extension of the lease-assumption deadline, "the court may grant a subsequent extension only upon prior written consent of the lessor in each instance."[28] While it is tempting to rely on the absence of any objections to grant the relief the Debtors request, that approach would require the Court to ignore § 365(d)(4)'s prohibition against doing so absent "prior written consent" of the lessor. The Court will not do so.
By its terms, the § 365(d)(4) amendment sunsetted on December 27, 2022.[29]The Act includes a specific provision expressly providing that the amendment extending the lease-assumption deadline from 120 days to 210 days "shall apply in any case commenced under subchapter V of chapter 11 of title 11, United States Code, before the date that is 2 years after the date of enactment of this Act."[30] In other words, the sunset provision is clear that a subchapter V debtor that filed bankruptcy during the pendency of the amendment receives the full benefit of the 210-day period, even in cases...
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