Modell's Ch. 11 Case Headed To Pause Amid COVID-19 Crisis

Law360 (March 25, 2020, 9:54 PM EDT) -- A New Jersey bankruptcy judge indicated Wednesday that he would grant Modell’s Sporting Goods’ “extraordinary” request to hit the pause button on its Chapter 11 cases in light of the impact of the COVID-19 pandemic on the company’s going-out-of-business sales, saying “this is a whole new world.”

After hearing lawyers for the business, lenders and creditors clash over the need for such a move, U.S. Bankruptcy Judge Vincent F. Papalia said during a telephone hearing that he would suspend the cases and told the attorneys that “you guys need to talk about sharing the pain and dealing with unprecedented circumstances in the real world that we live in.”

“The one legal principle that permeates all this is that ... the suspension is an extraordinary remedy, and there is no more extraordinary time than this one, so I’m going to suspend for some period of time,” Judge Papalia said.

The parties are expected to continue hashing out the details of the pending suspension and then go before Judge Papalia for another telephone hearing on Friday.

Less than two weeks after the business filed for Chapter 11 protection with plans to liquidate all its stores, Modell’s on Monday moved for a suspension of up to 60 days, asking the judge to let it defer payments of all nonessential expenses until coronavirus restrictions are lifted and it can conduct the liquidation sales it says are the “cornerstone” of its case.

The company stressed how government-ordered store closings and other restrictions related to the public health crisis have hampered its ability to conduct the going-out-of-business sales.

Before Wednesday’s hearing, Modell’s submitted a revised proposed order, reducing the suspension to an initial 45-day period and providing that parties could seek relief from the court under certain circumstances during the suspension. The original order said all parties would be barred from seeking relief during the suspension.

During the hearing, Modell’s attorney Michael D. Sirota of Cole Schotz PC said “our objective is to present a program that seeks to maximize value with minimal pain under really, really difficult circumstances.”

“We don’t think we have a reasonable option other than to mothball the debtors’ operations to preserve value with the hope that we can re-commence operations in the very near future and hopefully successfully liquidate these assets for the benefit of all parties and interests,” Sirota said.

But counsel for landlords expressed concerns during the hearing about Modell’s missing rent payments during the suspension and questioned the need for a suspension altogether.

Landlords’ attorney Arthur J. Steinberg of King & Spalding LLP suggested that Judge Papalia only needed to approve a modified budget running through April, saying “everything else gets carried ... to the next status conference and all arguments are preserved.”

“I actually don’t understand why we’re suspending anything,” Steinberg said. “I actually don’t know what we’re trying to accomplish by suspending anything other than to put restrictions on creditors coming to court.”

Another landlords’ attorney, Edward M. Fox of Seyfarth Shaw LLP, echoed those points and noted Modell’s is obligated to pay rent to its landlords on the first day of each upcoming month.

“I suspect, if anything is driving the timing here, it’s the desire of the debtors not to have to pay April 1 rent, but they have to make a showing under [Section 365(d)(3) of the U.S. Bankruptcy Code] that it’s appropriate and show cause why they shouldn’t have to pay that,” Fox said.

Judge Papalia then pointed to the extraordinary circumstances presented by the coronavirus pandemic.

“What would be a more appropriate situation?” the judge asked.

Fox explained that the difficulty with “putting off the rent payment is that this is exactly the situation that 365(d) was intended to avoid, which is for debtors to try to ... reorganize or run their cases on the backs of their landlords.”

But the judge later added he was not going to preclude parties from “coming to the court on emergent situations.”

“I’m not going to shut the courthouse doors to anyone,” said Judge Papalia, adding that “we’re going to deal with it on a rational, reasonable basis, so that we get through a very difficult, unprecedented situation.”

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 2:20-bk-14179, in U.S. Bankruptcy Court for the District of New Jersey.

--Additional reporting by Rick Archer. Editing by Amy Rowe.

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