By David F. Mills

Little Mint, Inc., a North Carolina company that operates restaurants under the name “Highway 55,” filed for Chapter 11 bankruptcy on December 31, 2024, in the U.S. Bankruptcy Court for the Eastern District of North Carolina.  This is likely to create much uncertainty for the landlords who own the buildings where these restaurants are located.  In fact, Highway 55 has already filed a motion to reject (terminate early) some 24 leases, and more closings and rejections are likely to follow. 

Once a tenant files for bankruptcy, a lease becomes subject to the rules of bankruptcy, the tenant becomes largely untouchable, and you “get in line” according to your priority as a creditor. Bankruptcy triggers certain legal rights and obligations not included in the lease itself that a landlord must navigate to minimize loss.

In Chapter 11, a debtor—in this case, Highway 55—may decide to either assume an ongoing lease (and either continue to operate or assign the lease to someone else), or reject that lease, with court approval.  With nonresidential leases like Highway 55’s restaurants, the debtor must continue to perform under the lease until it is rejected.  The landlord’s expectation of being paid rent will depend largely on (a) whether the rent was incurred before the case is filed or after the case is filed, (b) whether the tenant continues to occupy the premises after the case is filed, and (c) whether the lease is assumed, assigned, or rejected. 

In bankruptcy, the tenant’s debts, including rent, are divided into pre- and post-petition debts, that is, rent that accrues before the bankruptcy case is filed and rent that accrues after the case is filed. Under the “automatic stay,” which goes into effect as soon as a bankruptcy case is filed, any action to collect pre–petition debt, such as pre-bankruptcy rent, is prohibited. So too is the landlord’s ability to evict the tenant or apply (i.e. “setoff”) the tenant’s security deposit against the past due rent. The landlord should file a claim in the bankruptcy for the amount owed for pre-petition rent, and there is a limited amount of time to do so. 

Post–petition rent may be moved from the “back-of-the-line” to a higher priority as an “administrative expense” (often one of the highest payment priorities in a bankruptcy case). A landlord must file a motion with the bankruptcy court showing that the occupancy of the leased premises provides an actual and necessary benefit to the estate and the tenant must continue to pay rent as usual.  Otherwise, the tenant can be evicted, though the landlord should consult bankruptcy counsel on the process for doing so.

Sometimes rent arises between the petition date and the first post-petition rent payment due under the lease? This is called “stub rent.”  I discussed the issue of stub rent in a previous blog. 

In large reorganization cases like this one, events happen quickly and the Court imposes strict deadlines.  It is important that Highway 55’s landlords act promptly and correctly to protect their interests and enforce their rights. 

David F. Mills, a Board-Certified Specialist in Business Bankruptcy Law, can assist you in protecting your interests in the Highway 55/Little Mint case.