Modell’s Sporting Goods Inc.'s Chapter 11 case is on hold through April 30 after a bankruptcy judge approved the retailer’s emergency request to invoke a rarely used provision of the law in the wake of the new coronavirus pandemic.
The decision Friday by Judge Vincent F. Papalia of the U.S. Bankruptcy Court for the District of New Jersey grants a March 23 request from Modell’s, which relied on bankruptcy code section 305(a). The provision allows courts to “mothball” a bankruptcy case if “the interests of creditors and the debtor would be better served.”
Just days after the court authorized Modell’s to conduct going-out-of-business sales, Modell’s was forced to shut the doors to all of its retail stores and laid off all but 13 employees in its corporate office, according to the motion.
Modell’s filed for bankruptcy March 11.
Other retailers already in bankruptcy are likely to turn to Section 305(a), particularly as social isolation orders make going-out-of-business sales all but impossible right now, said Robyn Sokol, a partner with Brutzkus Gubner in Los Angeles.
“It makes complete sense; it’s the right thing to do,” Sokol said Thursday. Debtors such as Modell’s get a “breathing spell” and time to rethink their strategy or liquidation, Sokol said.
Corporate bankruptcy lawyers are struggling to deal with the unprecedented turmoil the economic crisis is creating in ongoing retail cases and delay maybe the only option in the near term.
David Golubchik, a partner of Levene, Neale, Bender, Yoo & Brill LLP in Los Angeles, cites as an example a client that’s required to sell high-end Beverly Hills property and file a reorganization plan within a short time frame.
The debtor can’t even show the properties and funding sources are drying up, he told Bloomberg Law.
“It makes sense to delay bankruptcy proceedings to maximize value for the estate and creditors,” Golubchik said.
Share the Pain
Many of Modell’s landlords objected to Modell’s suspension motion, arguing that they were being forced to foot the bill for the debtor’s liquidation.
Under the bankruptcy code, landlords of commercial property are entitled to be paid for rent accruing after the bankruptcy filing. The landlords complained that Modell’s lenders benefit by continuing to accrue interest at default rates and other fees, which they stand to recover later from eventual liquidation sales.
“Time is no one’s friend—except the banks,” attorney Mark Lichtenstein, a partner at Crowell & Moring in New York, said in an interview.
During a hearing earlier in the week, Papalia noted that the instant crisis is no one’s fault, as opposed to the 2008 recession triggered by massive failure of subprime mortgages. Taxpayers paid for everything while the banks and their principals suffered minimal, if any, consequences, he said.
“There needs to be some sharing of the risk and the pain,” Papalia said March 25.
The case is In re Modell’s Sporting Goods, Inc., Bankr. D.N.J., No. 20-14179, Hearing 3/27/20.
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