Modell’s Sporting Goods is turning to a seldom-used bankruptcy law provision to temporarily freeze its Chapter 11 case in what could become a well-trodden path for debtors seeking a time-out as the new coronavirus disrupts the economy.
A New Jersey bankruptcy court judge is expected to rule Friday on whether to grant a temporary suspension under a bankruptcy code provision that allows courts to do so if “the interests of creditors and the debtor would be better served.”
At a March 25 hearing, Judge Vincent F. Papalia of the U.S. Bankruptcy Court for the District of New Jersey said that prior case law suggests it’s an “extraordinary remedy that should be used sparingly” before signaling this might just be the right time to use it.
“There have never been more extraordinary times than these,” Papalia said.
Modell’s filed Chapter 11 March 11, planning to close its stores by the end of April. The bankruptcy court March 13 authorized the company to run going-out-of-business sales, with the goal of raising enough money to pay secured lenders and landlords and having money left over for unsecured creditors.
That plan became impractical as stay-at-home orders spread and non-essential businesses shuttered. Modell’s asked the court in its March 23 emergency motion to “mothball” the case for 60 days.
Other retailers already in bankruptcy are likely to turn to the same provision, 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
Modell’s has already fired most of its employees—everyone except 13 people in the corporate office—the company’s attorney Michael D. Sirota of Cole Schotz P.C. told the court March 25. The sporting goods retailer is seeking to pause the case until the end of April. It wants to limit administrative costs until it can resume liquidating its inventory.
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.
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, giving the parties until Friday to try to reach a consensus on how the suspension might work.
Among the unresolved questions is whether landlords can demand rent if they’re unable to provide access to properties ordered closed by states or municipalities. That’s a question posed to the court at the March 25 hearing by Daniel Fiorillo, whose firm Otterbourg P.C. represents lender JP Morgan Chase Bank.
The case is In re Modell’s Sporting Goods, Inc., Bankr. D.N.J., No. 20-14179, Preliminary hearing 3/25/20.