By Jeannie O'Sullivan

Law360 (April 30, 2020, 6:13 PM EDT) -- A New Jersey bankruptcy judge agreed Thursday to keep Modell's Sporting Goods Inc.'s Chapter 11 case suspended due to COVID-19's shutdown of nonessential retail stores, acknowledging the unprecedented pandemic has delayed the retailer's ability to conduct liquidation sales to generate rent money.

U.S. Bankruptcy Judge Vincent F. Papalia rendered his decision to extend the pause through May 31 after a lengthy telephone hearing in which the retailer's store landlords sought an order that Modell's should pay all or part of rent that's due May 11, while Modell's argued that the court can waive that obligation during the pause. 

Judge Papalia considered the bankruptcy code provisions that Modell's and the landlords used to bolster their opposing stances, but said that a mediator, not the court, would have to resolve the dispute. The retailer's monthly rental obligations amount to about $7 million, but practically speaking, the money is "just not there at the moment" thanks to the coronavirus, Judge Papalia said.

"We haven't dealt with a pandemic in our lifetime," the judge said. "There's no guidebook, there's no precedent that I'm aware of or that's been provided to me."

Modell's has argued that the U.S. Bankruptcy Code's suspension provision, Section 305, gives courts wide latitude to fashion tailored remedies. Landlords, however, have emphasized Section 365(d)(3), which sets a 60-day limit on rental deferrals during suspensions. In their objections to the retailer's first and second pause requests, the landlords have cited Section 365(d)(3) in seeking to enforce the May 11 due date.

An attorney for a group of landlords, Edward M. Fox of Seyfarth Shaw LLP, told Judge Papalia on Thursday that the landlords understand there's no cash for rent, but that the promise to pay the rent later left the building owners with only an "aspiration." He voiced concern that the uncertain duration of the pandemic could delay the liquidation sales that Modell's hopes to have in June.

"That leaves the landlords completely exposed to all the risks, and I very much appreciate your comments, but if they don't wind up in a court order, we don't have any protection for now," Shaw told the judge, though he acknowledged that he would appreciate mediation.

Judge Papalia said at one point that Section 365(d)(3) doesn't "put money in the landlord's pocket if the debtor doesn't have it."

"There's a whole slew of people that aren't getting paid and it's not anybody's fault," the judge said.

In its Chapter 11 petition in mid-March, Modell's bemoaned the challenging retail environment as it detailed more than $100 million in debt and plans to liquidate all of its stores. The retailer operates 134 stores on the East Coast.

The coronavirus shutdowns happened shortly thereafter, and Modell's secured from the court a 30-day suspension of the case March 27. On April 20, Modell's indicated its intent to ask the court to extend the pause for another 30 days, given that COVID-19 retail restrictions aren't likely to be lifted any time soon.

One landlord group is appealing the pause in district court.

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

The landlord group appealing the pause is represented by Edward M. Fox, James S. Yu and Nascine C. Howell of Seyfarth Shaw LLP.

The official committee of unsecured creditors is represented by Jeffrey Cohen and Nicole A. Fulfree of Lowenstein Sandler LLP.

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.

--Editing by Abbie Sarfo.

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