Cinemex USA Real Estate Holdings, Inc.
Bankruptcy

Memorandum Opinion On (Re: 366 Motion to Compel Compliance With Section 365(d)(3) filed by Creditor Cobb Lakeside, LLC).

Southern District of Florida (Bankruptcy), flsb-1:2020-bk-14695

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Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 1 of 16 ORDERED in the Southern District of Florida on January 26, 2021. Laurel M. Isicoff Chief United States Bankruptcy Judge ___________________________________________________________________________ Tagged Opinion UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA MIAMI DIVISION IN RE: CASE NO. 20-14695-BKC-LMI CINEMEX USA REAL ESTATE Chapter 11 HOLDINGS, INC, et al., Jointly Administered Debtors. _________________________________/ MEMORANDUM OPINION ON COBB LAKESIDE'S MOTION TO COMPEL COMPLIANCE WITH SECTION 365(d)(3) This matter came before the Court for final hearing on August 21, 2020 on the Motion to Compel Compliance with Section 365(d)(3) filed by Cobb Lakeside, LLC (ECF #366) (the "Motion to Compel"). On October 13, 2020, this Court 1 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 2 of 16 entered its Order Granting in Part and Denying in Part Cobb Lakeside's Motion to Compel Compliance with 11 U.S.C. §365(d)(3) (ECF #707) (the "Order"), finding, for the reasons stated on the record and outlined below, that there is no administrative claim for unpaid rent for the period March 20, 2020 through June 4, 2020, but there is an administrative claim for unpaid rent from June 5, 2020 forward.1 FACTS Cinemex USA Real Estate Holdings, Inc. ("Cinemex Real Estate"), Cinemex Holdings USA, Inc. ("Cinemex Holdings"), and CB Theater Experience LLC ("CB Theater" and, with Cinemex Real Estate and Cinemex Holdings, the "Debtors") filed Voluntary Chapter 11 Petitions in this Court on April 25, 2020, and April 26, 2020 (the "Petition Date"). The Debtors are in the movie theater business and operated 41 movie theaters across 12 states. At the time of filing, the Debtors, collectively, were party to 41 unexpired real property leases for where they operate upscale dine-in movie theaters. One of those leases (the "Lakeside Lease") is between the Debtor CB Theater as Lessee and Cobb Lakeside, LLC ("Lakeside") as Lessor. The Lakeside Lease relates to a movie theater property (the "Lakeside Theater") located at the Lakeland Village Shopping Center in Lakeland, Florida. 1 The Court read its ruling into the record at a hearing on October 2, 2020. See Transcript of 10/2/2020 Hearing (ECF #694). This memorandum opinion reduces that oral ruling to writing (with some additions and clean-up). However, neither the substance nor the conclusion of that ruling has been altered. 2 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 3 of 16 PROCEDURAL HISTORY Immediately after the bankruptcy cases were filed, the Debtors sought authority to reject several leases and, with respect to the balance of the leases, sought to delay or excuse payment of rent. The Debtors filed Debtors' Emergency Motion for Entry of an Order (I) Extending Time for Performance of Obligations Arising Under Unexpired Real Property Leases; (II) Establishing Temporary Case Administration Procedures; and (III) Granting Related Relief (ECF #92) (the "Original Rent Motion").2 In the Original Rent Motion, the Debtors sought to delay payment of administrative rent for a period of sixty days as authorized by 11 U.S.C. §365(d)(3). Further, the Debtors requested that all lease payments be suspended completely. The Debtors argued that, while section 365(d)(3) "requires a debtor to satisfy all postpetition obligations under an unexpired lease of nonresidential real property until the date of rejection,"3 for a variety of reasons under non- bankruptcy law based on the terms of the leases, the "takings doctrine," impossibility of performance, and frustration of purpose, the Debtors had no postpetition obligation under their leases to pay rent while the theaters were ordered closed due to the COVID-19 pandemic. At the conclusion of the first hearing on the Original Rent Motion, the Debtors agreed to provide a detailed brief detailing which leases, and under 2 A hearing on the Original Rent Motion was continued several times with respect to various landlords with whom the Debtors were negotiating rent concessessions. However, Lakeside did not agree to these extensions. 3 In re CHS Electronics, Inc., 265 B.R. 339, 344 (Bankr. S.D. Fla. 2001). 3 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 4 of 16 which theories, the Debtors believed their rent payment obligations were suspended (the "Rent Suspension Brief").4 The Rent Suspension Brief divided the unexpired leases into several categories, identifying with respect to each lease the basis for the Debtors' request for suspension of lease payments.5 CB Theater identified the equitable doctrines of impossibility of performance and frustration of purpose as its justification for suspension of payments under the Lakeside Lease from March 20, 2020 when Florida Governor Ron DeSantis closed the movie theaters in Florida, until the theaters actually reopened. CB Theater argued that performance under the Lakeside Lease was impossible during the time theaters were ordered to close completely and that the purpose of the Lakeside Lease was frustrated by the COVID-19 pandemic and the closure orders, which not only shut down the Debtors' operations, but also caused the cessation of movie production, and therefore, no new movie titles were released. CB Theater also sought excused rent, or reduced rent, when, once reopened, capacity in the Lakeside Theater was limited to fifty percent occupancy.6 CB Theater argued that the purpose of the Lakeside Lease remained frustrated due to the lack of new movie title releases and the public's reluctance 4 Brief In Support of Debtors' Motion Abating Performance of Obligations Under Unexpired Real Property Leases (ECF #299). 5 The Debtors cited to the "takings" clauses contained in their leases, the doctrines of impossibility and frustration of purpose, and force majeure clauses contained in their leases as grounds for suspension of the Debtors' rent obligations under the respective leases. 6 Governor DeSantis closed all movie theaters on March 20, 2020 by Executive Order No. 20-70. On June 5, 2020, by Executive Order No. 20-139, movie theaters were allowed to reopen at fifty percent capacity, except in Miami-Dade, Broward, and Palm Beach counties, where theaters remained closed. 4 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 5 of 16 to go to theaters amidst the COVID-19 pandemic, and that rent should be abated until the full reopening of movie theaters. In addition to objecting to any continuance of the Original Rent Motion, Lakeside filed its Motion to Compel arguing that CB Theater should be compelled to pay all rent due under the Lakeside Lease from the Petition Date forward. Lakeside argued that the doctrines of impossibility and frustration of purpose did not apply once CB Theater was able to reopen at fifty percent capacity, and argued that the provisions of the Lakeside Lease did not excuse the requirement to pay rent for acts of God and governmental action.7 ANALYSIS8 The Lakeside Lease is governed by Florida law. Florida law recognizes both the doctrine of impossibility of performance and the doctrine of frustration of purpose with respect to contract obligations. "Impossibility of performance refers to those factual situations, too numerous to catalog, where the purposes, for which the contract was made, have, on one side, become impossible to perform." Home Design Ctr.--Joint Venture v. Cty. Appliances of Naples, Inc., 563 So. 2d 767, 770 (Fla. 2d DCA. 1990) (internal quotations omitted); See also 11 Fla. Jur. 2d Contracts §261 ("A party that contracts absolutely and unqualifiedly to do something that is possible to be accomplished must make the promise good unless performance is rendered actually impossible by an 'Act of God,' the law, 7 The Debtors' Third Amended Chapter 11 Plan of Reorganization (ECF #772) (the "Plan") was confirmed on November 25, 2020 (ECF #936). The Lakeside Lease was assumed by the Debtors by the terms of Article V.A. of the Plan. 8 The following constitute this Court's findings of fact and conclusions of law under Fed. R. Civ. P. 52 made applicable to this proceeding by Fed. R. Bankr. P. 7052. 5 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 6 of 16 or another party. Under Florida contract law, the defense of impossibility may be asserted in situations where the purposes for which the contract was made have, on one side, become impossible to perform."); Cook v. Deltona Corp., 753 F.2d 1552, 1558 (11th Cir. 1985) (In determining whether, under the doctrine of impossibility of performance, a supervening event excuses the performance of a contract party, the court should not "pass on the relative difficulty caused by a supervening event, but [] ask whether that supervening event so radically altered the world in which the parties were expected to fulfill their promises that it is unwise to hold them to the bargain."). "Frustration of purpose refers to that condition surrounding the contracting parties where one of the parties finds that the purposes for which [it] bargained, and which purposes were known to the other party, have been frustrated because of the failure of consideration, or impossibility of performance by the other party." Home Design Ctr., 563 So. 2d at 770; see also Equitrac Corp. v. Kenny, Nachwalter & Seymour, P.A., 493 So. 2d 548, 548 (Fla. 3d DCA 1986) (holding, in a per curiam opinion, that because "the purpose for which the subject contract was formed became entirely frustrated. . . due to no fault of either party. . . . the contract was rendered unenforceable based on the doctrine of frustration of purpose."). Florida law recognizes the difference between these two court-created doctrines: Impossibility of performance refers to the nature of the thing to be done, and not to the ability of the party to perform what the party has agreed to do. Impossibility of performance concerns those factual situations where the purposes for which the contract was 6 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 7 of 16 made have, on one side, become impossible to perform. In contrast, frustration of purpose arises when one of the parties finds that the purposes for which he or she bargained, and which purposes were known to the other party, have been frustrated because of the failure of consideration or impossibility of performance by the other party. 11 Fla. Jur. 2d Contracts §262. Irrespective of whether performance is impossible or the purpose frustrated, the defenses are usually not available "if the relevant business risk was foreseeable at the inception of the agreement and could have been the subject of an express contractual agreement." Home Design Ctr., 563 So. 2d at 769. "As a general rule, a contract is not invalid, nor is the obligor discharged from its binding effect, because the contract turns out to be difficult or burdensome to perform." Id. at 769-70. The issue presented to the Court is whether and to what extent CB Theater should be excused from any payment obligations under the Lakeside Lease, and for how long. Should CB Theater be able to suspend in full the payment of rent until it chooses to reopen the Lakeside Theater? Should CB Theater be able to suspend in full the payment of rent while the theaters were shut down by order of Governor DeSantis? And if CB Theater is obligated to pay rent upon the suspension of the government orders, which allowed the Lakeside Theater to reopen (albeit at reduced capacity) on June 5, 2020, how much rent, if any, should CB Theater be obligated to pay from June 5, 2020 on? CB Theater argues that it is entitled to the relief sought for several reasons: when Governor DeSantis ordered all movie theaters to close, it was impossible for CB Theater to operate a movie theater, as required by the Lakeside Lease; the 7 Case 20-14695-LMI Doc 1009 Filed 01/27/21 Page 8 of 16 purposes of the Lakeside Lease were frustrated by the COVID-19 pandemic itself – because even after movie theaters were reopened in Florida (albeit at reduced