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INSIGHT: Temporary Suspension of Bankruptcy Cases During Pandemic

May 1, 2020, 8:00 AM

Despite financial aid packages by governments and central banks, the precipitous drop in consumer spending and limited credit availability means that even companies that commenced chapter 11 cases pre-pandemic are finding that their pre-petition strategies may be undone by factors beyond their control.

While it is impossible to determine when the pandemic will subside, some bankruptcy courts appear to be embracing a debtor’s request to temporarily suspend the case to “wait and see” how the response to the pandemic evolves.

Chapter 11 debtors in Modell’s, CraftWorks, and Pier 1 recently requested and received bankruptcy court approval under section 305(a) of the Bankruptcy Code for a temporary pause of the proceeding given the pandemic.

These cases illustrate that bankruptcy courts recognize the unprecedented circumstances facing debtors and other parties-in-interest and that halting the case temporarily may be a useful tool for debtors (and creditors) to take stock of the situation and attempt to develop or negotiate a revised strategy to move the case forward.

Will Holds Facilitate Plans or Be Detrimental?

In essence, debtors in recently commenced chapter 11 cases sought and received court authorization to temporarily suspend the case in an effort to get past the government imposed lockdowns. The hope appears to be that putting the case on hold temporarily will facilitate the implementation of the pre-pandemic reorganization plans.

However, there may come a time when the ongoing interruption to a bankruptcy case is too detrimental—whether, for example, because asset values nose-dive or secured creditors’ interest accrues at default rates such that there is no value for other creditors. Indeed, there may come a time when a court requires the debtor to justify the hiatus by demonstrating that there will be viable restructuring options when the case resumes.

As courts of law and equity, bankruptcy courts have always had the inherent power to delay proceedings by taking matters under advisement—either to allow parties time to reach a consensual resolution or for facts and circumstances to evolve. Recently, however, bankruptcy courts were confronted with requests by debtors to temporarily suspend their cases under the courts’ equitable powers and a seldom-used provision of the Bankruptcy Code: 11 U.S.C. § 305(a).

A New Jersey bankruptcy court on March 27 suspended for 60 days the chapter 11 cases of Modell’s Sporting Goods Inc. and its affiliated debtors (collectively Modell’s), which were in the process of conducting going-out-of-business sales. See In re Modell’s Sporting Goods Inc. (Bankr. D.N.J. March 27, 2020).

The Delaware bankruptcy court presiding over the chapter 11 cases of restaurant and brewpub chain CraftWorks Parent LLC and its affiliates (collectively CraftWorks) and the Virginia bankruptcy court overseeing the chapter 11 cases of home-furnishing retailer Pier 1 Imports Inc. and its affiliates (collectively Pier 1) recently granted similar relief, mothballing the debtors’ bankruptcy cases (over the objections of landlords and various other creditors) in an effort to weather the Covid-19 storm and, hopefully, preserve value for all creditors. See In re CraftWorks Parent LLC (Bankr. D. Del. Mar. 30, 2020); In re Pier 1 Imports Inc. (Bankr. E.D. Va. April 2, 2020).

In short, these debtors were able to persuade the courts that a temporary pause in the proceedings will give them an opportunity to resurrect their prepetition restructuring plans.

Other End of Spectrum

At the other end of the spectrum is In re Art Van Furniture LLC, filed March 8 in Delaware. In that case, the debtors’ (collectively Art Van) pre-pandemic plan involved reducing its overall operational footprint and emerging with a rightsized balance sheet.

Unfortunately, the case was filed only days before state and local governments issued social distancing and stay-at-home directives. Art Van sought to follow CraftWorks, Modell’s, and Pier 1 and pause the case, but it was unable to propose a viable path forward that garnered the support of Art Van’s secured creditors and other stakeholders. Thus, to avoid administrative insolvency, Art Van moved to convert the cases to chapter 7, which the court approved on April 6.

In ordinary times—and even during the financial crisis of 2008-2009—bankruptcy courts expect debtors to keep cases moving apace. See Taggert v. Lorenzen (2019) (“a chief purpose of the bankruptcy laws [is] to secure a prompt and effectual resolution of bankruptcy cases within a limited period” (internal quotation marks and citations omitted).

The relief granted in Modell’s, CraftWorks, and Pier 1 illustrates that courts recognize the ongoing economic and operational damage wrought by Covid-19. As such, debtors, creditors, other interested parties and bankruptcy courts may have a new tool in section 305(a) to provide a breathing spell to get past the pandemic as long as the case stakeholders and court are convinced that such a “pause” is not simply a delay tactic to avoid an inevitable liquidation.

In other instances, such as the circumstances present in Art Van Furniture, it may be that even a temporary suspension of the case is insufficient to preserve value and implement a restructuring plan that, pre-pandemic, was thought to provide value to all stakeholders.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Heather Lennox is partner-in-charge in Jones Day’s Cleveland office. She helps boards of directors and management teams navigate crises—their own, their company’s, or their stakeholders’.

Dan T. Moss is partner in Jones Day’s Washington, D.C., office. He has represented debtors, creditors, trustees, and creditor committees in some of the largest and historic corporate and government reorganizations in the U.S.

The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.