Modell’s Bankruptcy Suspended Due to Coronavirus Store Closures

This article originally appeared in Retail Dive written by Cara Salpini on March 26, 2020 and updated on March 27, 2020; quoting Eric Horn. It is reprinted here with permission from Retail Dive.

UPDATE: March 27, 2020: On Friday, the United States Bankruptcy Court for the District of New Jersey approved Modell’s request to suspend its bankruptcy, after the retailer stated that the coronavirus outbreak had made its liquidation sales impossible to complete. According to court documents, the suspension allows the retailer to pause its Chapter 11 case until April 30, and seek a further extension if necessary. The suspension includes: ceasing all store closing sales, as well as online order fulfillment, and all in-person corporate operations. As a result, all store-level and distribution center employees will be laid off without severance, as well as “most” corporate employees. All parties will be permitted to seek relief from the court and landlords will have access to inspect their properties.

Dive Brief:
Modell’s Sporting Goods filed for a reprieve in its Chapter 11 bankruptcy case, asking the court to approve a 45-day bankruptcy and operating suspension due to the impacts of the coronavirus outbreak on Modell’s store closing sales. The retailer had planned to liquidate its entire 134-store footprint.

In court documents, the retailer asserted that the “unprecedented, exponential spread of Coronavirus disease” has impacted its bankruptcy proceedings, most notably its liquidation sales. “The cornerstone of these cases is the liquidation of the Debtors’ 134 stores and e-commerce site through store closing sales. 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,” the company wrote.

If approved, the suspension would include putting a pause on all store closing sales, laying off store associates and distribution center employees without severance, and laying off “most” corporate employees without severance. The remainder would be a “skeleton crew of essential employees” in human relations, finance and infrastructure technology roles.

Dive Insight:
The impacts of the coronavirus are being felt all over the retail industry — from distressed businesses to e-commerce — and now even by retailers that were already in the process of folding.

Modell’s filed for Chapter 11 in mid-March after efforts to work with landlords and suppliers to save the business failed to pan out. It ultimately decided to liquidate its entire store base, but shortly after the bankruptcy filing, the coronavirus began to seriously impact U.S. retail. Healthy and financially struggling retailers alike have shut stores to help combat the outbreak, which leaves Modell’s liquidation sales — a means of repaying its creditors — in an uncomfortable place.

Based in New York, an epicenter of the U.S. coronavirus outbreak, Modell’s stores have been hit hard by the string of closures.

“At this time, nearly all of the Debtors’ stores have been impacted by these restrictions, modified hours, and closures,” the retailer wrote, noting that the company has had to “temporarily ‘mothball’ their operations to preserve value.”

While it’s undoubtedly a difficult time to try to operate any storefront, landlords of the retailer are not pleased with the suggested suspension. If approved, the proposal would delay payment of rent to the landlords for a month and a half, with no guarantee that they’ll get that money back.

“Whether the landlords get paid on account of post-petition rent and the extent of such payments will be determined by the liquidation proceeds,” Eric Horn, a bankruptcy attorney at A.Y. Strauss familiar with the case, said in emailed comments. “Liquidation proceeds will be hard to forecast particularly since the Debtors may end up, depending on when the stores reopen, liquidating goods outside of the inventory lifecycle. For instance, liquidating winter goods in the summer.”

As a result, a group of landlords objected to the retailer’s original 60-day suspension request, pointing to the retailer’s likely administrative insolvency, as well as their inability to seek relief during the suspension period, according to court documents.

A hearing on Wednesday to discuss the matter will be continued on Friday, and it will likely see Modell’s request approved, with the addition that landlords will be able to seek relief, Horn said. He added that Modell’s set of circumstances is somewhat unique in this case, but bankruptcy filings are likely to come down heavy in a few months, and could come with “a lot” more liquidations.

“We are forecasting a substantial uptick in retail failures over the next several months which will lead to a large increase in bankruptcy filings,” Horn said. “We will not see a substantial uptick in the retail filings until the malls are open and customers are shopping again. After [all], you need shoppers and sales coming in to do a restructuring or liquidation.”