Modell’s Bankruptcy Pause ‘Extraordinary Relief Under Extraordinary Circumstances’

This article originally appeared in New Jersey Law Journal written by Suzette Parmley on March 28, 2020; quoting Eric Horn. It is reprinted here with permission from New Jersey Law Journal.

A federal judge in Newark has suspended the bankruptcy of sporting goods retailer Modell’s until April 30, buying the retailer time to liquidate its stores after this month’s COVID-19 restrictions temporarily shuttered its going-out-of business stores as shoppers and foot traffic disappeared.

In a March 27 teleconference hearing, U.S. Bankruptcy Judge Vincent Papalia of the District of New Jersey largely agreed—with some modifications—to a consensual agreement hammered out earlier this week between Modell’s, lenders, landlords and other creditors.

The ruling, the first known one of its kind pertaining to bankruptcies, allows Modell’s to suspend bankruptcy proceedings until April 30, as well as not having to pay April rent to landlords.

“The order specifically reserves the right for Modell’s to make the argument that parties are not entitled to be paid on account of those reserved expenses,” said Eric Horn, a bankruptcy attorney at A.Y. Strauss in Roseland, who has been closely watching the case and listened in on the teleconferences. “Although not expressly stated in the order, the expense that the parties are referring most to has to do with rent. The argument … is that since Modell’s cannot operate the stores due to governmental restrictions, they should not be required to pay rent.”

Another hearing is scheduled for April 30 on whether to extend the 30-day suspension, which is half of what Modell’s originally asked for.

“It was a good day for all the stakeholders to hit the pause button and then reconvene on April 30,” said Michael Sirota of Cole Schotz in Hackensack, counsel for Modell’s, in a phone call afterward. “I don’t view this as a win or a loss. It’s extraordinary relief under extraordinary circumstances.

“We are fortunate that Judge Papalia invested an enormous [amount of] time while the courthouse is closed and entertained everyone’s position,” Sirota said.

The ruling provides a glimpse of how the novel coronavirus has upended another aspect of the embattled brick-and-mortar retail industry, which before the pandemic was already reeling from online retailers such as Amazon taking market share.

In securing the extension, Sirota, co-chairman of his firm’s bankruptcy and corporate restructuring department, said his client relied on an infrequently used bankruptcy law provision—Section 305 of the U.S. Bankruptcy Code—which allows the suspension of a bankruptcy case if it is in the interest of the bankruptcy estate and creditors.

On top of that, Papalia also exercised his discretion to grant the temporary reprieve and temporary suspension of the case given the extraordinary circumstances, Sirota added.

Modell’s Sporting Goods—with 134 stores nationally, including 33 in New Jersey, and several in Pennsylvania and Delaware—was in the midst of closing them out after filing for Chapter 11 bankruptcy on March 11.

Five days later, New Jersey Gov. Phil Murphy issued an executive order mandating all nonessential retail to close as a preventive measure against the rapid spread of the novel coronavirus. Only essential retailers, such as grocery stores, pharmacies and gas stations, among others, are allowed to continue to operate during the COVID-19 state of emergency.

A similar order came down in Pennsylvania from Gov. Tom Wolf on March 15.

Modell’s, founded by Morris Modell in 1889 and described in court documents as “America’s oldest family-owned and operated retailer of sporting goods, athletic footwear, active apparel, and licensed fan gear,” suddenly found itself hosting closeout sales at stores that shoppers could no longer venture into because of the pandemic. With zero cash flow, it let go all its employees and distribution center staff. The retailer has operated with a skeletal crew with about a dozen people from its corporate office, according to Sirota.

On March 23, Modell’s filed an emergency application with the U.S. Bankruptcy Court in New Jersey to suspend the liquidation process, stating: “Notwithstanding the Debtors’ best laid plans COVID-19 has prevented the Debtors from conducting the robust liquidation sales that seemed possible just one week ago; it has left the Debtors with no choice but to temporarily ’mothball’ their operations to preserve value, with the hope that they can recommence operations in the near future and successfully liquidate inventory for the benefit of all parties-in-interest.”

Mitchell Modell, chief executive officer and president of Modell’s Sporting Goods, issued a statement following the granting of the suspension: “I want to personally thank Judge Vincent F. Papalia for being so understanding in these most difficult and unprecedented times. … I also appreciate the collaborative efforts of the vendors and landlords in reaching this temporary solution.”

A two-hour teleconference hearing on March 25 with 78 people involved, including counsel for Modell’s, the creditors’ committee, prepetition lenders and various landlords, ended without a resolution. It concluded with Papalia issuing a continuance for the morning of March 27, and saying if the parties failed to reach a consensual agreement at the close of that hearing, that he would issue a ruling. However, the judge also noted the parties were caught in “unprecedented times warranting the entry of extraordinary relief.”

The hearing itself, originally scheduled for federal court in Newark, was made by a teleconference call after the courthouse was ordered to close earlier in the week due to an employee testing positive for COVID-19. The March 27 hearing, with about 50 calling in this time, yielded the agreement for the 30-day suspension and Modell’s being allowed to hold off on paying April rent.

“We told the landlords, ‘it’s not as if we don’t want to pay you for … occupancy [of] your space, but we are deprived through state, county and municipal mandates not to go and use your space,’” Sirota said.

Lawrenceville-based Joseph Lemkin, a shareholder and member of Stark & Stark’s bankruptcy and creditors’ rights group, represents a landlord who owns properties with three Modell’s stores in central and northern New Jersey and New York. He said landlords are fearful they will be left holding the bag indefinitely.

“There are different provisions of the Bankruptcy Code, and Section 365-D3 requires tenants to pay landlords for their commercial leases,” Lemkin said after the March 27 hearing.

“The court will give you a little bit of a break, but ultimately you have to catch up within 60 days. By the 60th day, you have to be current on post-bankruptcy payments, including to landlords who own the buildings,” Lemkin said.

The scheduled April 30 hearing on whether to continue the suspension if necessary was cutting it close for May rent, said Lemkin, who represents creditors nationwide in bankruptcy and other insolvency proceedings, including Pier 1 in Delaware, Fairway in New York, Borden Dairy in Delaware, and Dean Foods in Texas, among others.

“From my perspective, it’s not a position you want to be in,” Lemkin said. “The understanding is, that all the [Modell’s] liquidations will all be done in April, and the landlords would get their space back by May 1.”

“But no one knows if anyone can go into the stores by April 30,” he added.