Modell's Liquidation Gets OK Despite Coronavirus Worries

By Rick Archer
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Law360 (March 13, 2020, 6:23 PM EDT) -- Modell's Sporting Goods got a New Jersey bankruptcy judge's nod Friday to start liquidating all of its locations around the country, despite misgivings from the stores' landlords that all of the sports events canceled because of the coronavirus will severely eat into the revenues from those going-out-of-business sales.

Despite the expressed misgivings that the sales would not cover post-Chapter 11 rent, U.S. Bankruptcy Court Judge Vincent F. Papalia approved preliminary orders authorizing Modell's to use cash collateral and begin liquidation sales, telling landlords immediate action was needed and that they could file objections or seek changes before he rules on the final orders in three weeks.

"These are uncertain times, and there might be some bending to reflect that," the judge said.

The New York-based sporting goods giant — with the iconic slogan "Gotta Go To Mo's" — operates 153 stores in New York, New Jersey, Pennsylvania, Connecticut, Rhode Island, Massachusetts, New Hampshire, Delaware, Maryland, Virginia and Washington, D.C.

The company filed for Chapter 11 on Wednesday, citing both the general challenges brick-and-mortar retailers have faced from online competition and more specific issues, such as warm winters reducing sales of cold-weather products and local sports team performances depressing the sales of licensed goods over the past two years.

The company said in its filings it has just under $43.4 million in secured debt. The company also said it had more than $100 million in unsecured claims and that its pension fund is underfunded by about $25.8 million.

At the hearing, Modell's counsel Michael Sirota said the company made a serious effort to reach an out-of-court restructuring agreement or find a buyer, but that no "realistic sales option" was found, leading it to go ahead with the liquidation plan.

He told the court that the planned going-out-of-business sales, set to run through April 25, are expected to generate enough proceeds to fully cover both the secured debt and post-petition administrative costs.

However, counsel for a number of Modell's landlords told the court they were concerned the sales would not bring in enough to cover post-petition costs, including rent. One argued that if poor team performances hurt the company's sales that recent suspensions and postponements of professional sports seasons due to the coronavirus would as well. He also argued possible school closings would cut back on demand from scholastic sports and questioned if Little League would be held in the spring. 

Others argued a provision in the cash collateral motion giving professional fees priority should be eliminated.

While saying he understood the concerns, Judge Papalia approved the interim orders, saying Modell's would sustain "immediate harm" without permission to use cash collateral. He said the landlords could raise objections to the final orders before a scheduled April 6 hearing if the parties can't come to a compromise before that.

"If they don't deal with them, I'll deal with them," Judge Papalia said.

Modell's is represented by Michael D. Sirota, David M. Bass and Felice R. Yudkin of Cole Schotz PC.

The case is In re: Modell's Sporting Goods Inc., case number 20-14179-VFP, in U.S. Bankruptcy Court for the District of New Jersey.

--Additional reporting by Bill Wichert. Editing by Jay Jackson Jr.

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