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Modell’s Sporting Goods, Inc. – Court Agrees to Further Suspension of COVID-Impacted Debtors’ Chapter 11 Cases through May 31st, Directs Parties to Mediate Open Issues

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April 30, 2020 – The Court hearing the Modell’s Sporting Goods cases issued an order which extends the period during which the Debtors’ Chapter 11 cases are suspended through and including May 31, 2020 [Docket No. 294]. On March 27, 2020, the Court ordered an initial suspension through April 30th [Docket No. 166].

The order comes after numerous objections filed by the Debtors' estimated 134 landlords who argue that they are being unfairly singled out (the payment of rent, the only actual obligation being suspended by the order) and being asked to underwrite the Debtors' Chapter 11 cases to benefit secured lenders by continuing to warehouse the Debtors' merchandise for free. They also question the decision of the Debtors to delay going-out-of-business ("GOB") sales pending more clarity on the COVID-19 crisis. The Debtors' merchandise is getting stale, the landlords argue; and given that clarity is unlikely (and things could actually get worse), the Debtors should just get on with their GOB efforts and their Chapter 11 cases. These landlords want to get paid rent, be provided with adequate protection during the Debtors' cases and/or have their properties back as soon as possible.

Notwithstanding the further suspension order, the landlords did not come up totally empty handed, however; with Judge Papalia "directing" the parties to mediate, with a hearing to be held on may 20th as to the status of settlement negotiations.Given that landlord issues, and other tensions between the parties directed to mediation, would be part of a normal Chapter 11 process; it might therefore be more appropriate to consider this a partial suspension of the cases…key elements of the Debtors' cases clearly not being suspended.

The "further suspension" order reads in relevant part: "As set forth at the hearing on the Motion, the interested parties are directed to mediate the open issues between and among the Debtor, the Landlords, the Banks and the Creditors Committee before Judge Sherwood of this Court. The necessary arrangements may be made through Judge Sherwood's chambers. A conference shall be held on May 20, 2020 at 2:30p.m. to address the status of the mediation and settlement negotiations, the status of Debtors' plans to re-open, the scope and scheduling of any issues that require resolution by the Court and other relevant matters, including the likelihood of any further extension request by the Debtors.

Background

The Modell's cases were the first to request a COVID-19 related mothballing of operations, a step that has since been embraced in further cases (and courts), including The CraftWorks brewpub chain (Delaware) and Pier 1 Imports (Eastern District of Virginia). The Art Van Furniture cases (also Delaware), however, show that certain debtors cannot be saved by these extraordinary efforts to preserve corporate life. Coronavirus-afflicted Art Van suddenly finding itself without the resources necessary to see it through the crisis on a Chapter 11 ventilator; and without a "viable path" requesting a conversion of their cases to Chapter 7.

First Suspension Order

On March 27, 2020, the Court issued an order [Docket No. 166] temporarily suspending the Debtors’ Chapter 11 cases; shutting their 134 stores (and online efforts) for a period of 30 days and terminating the majority of their employees without severance pay. Citing “social and ethical duties to promote social distancing,” the Debtors had requested “a temporary suspension of all deadlines and activities in their chapter 11 cases, for a period of up to sixty days.”

The order stated, “To the extent they have not already done so, the Debtors shall immediately (i) cease operations, including Store Closing Sales, at all 134 of their retail stores as well as fulfillment of orders on the e-commerce site, (ii) terminate store-level and distribution center employees, without severance, and (iii) cease all in-person operations at their corporate headquarters and terminate most corporate employees, without severance."

There is nothing in the Debtors' motion or proposed Court order that would seem to anticipate the interplay of (i) a Court order which allows for the termination of employees without severance pay, on the one hand, and (ii) state and federal efforts to mitigate the impact of COVID-19 on employees that have lost their jobs, on the other.

The initial Court order also apparently brushes aside several objections (and joinders to those objections) filed by landlords who object to the Debtors' request for a modified budget that does not include the payment of rent during the "Operational Suspension." One of the objecting landlords [Docket No. 131], sums up the landlords' hostility to the Debtors' efforts as follows: "The Debtors seek the entry of an order broadly suspending these cases under sections 105 and 305 of the Bankruptcy Code, including with respect to the Debtors’ obligations under section 365(d)(3) of the Bankruptcy Code, in light of the ongoing COVID-19 pandemic for a period of up to 60 days. The circumstances presented by the COVID-19 outbreak are unprecedented, but so too is the scope of the relief requested by the Debtors, which would give the Debtors the benefit of an injunction but without any of the obligations that come with being a debtor-in-possession."

In a March 23rd motion requesting the suspension, the Debtors' stated, “The unprecedented, exponential spread of Coronavirus disease COVID-19 (‘COVID-19’) throughout the United States over the course of the last week, along with the resulting, state-imposed limitations and prohibitions on non-essential retail operations, has forced the Debtors to re-evaluate the short-term trajectory of their chapter 11 cases. 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; 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 their inventory for the benefit of all parties-in-interest.

In order to mothball their operations and abide by their social and ethical duties to promote social distancing, the Debtors seek a temporary suspension of all deadlines and activities in their chapter 11 cases, for a period of up to sixty days, pursuant to section 305 of the Bankruptcy Code, without prejudice to their right to seek additional time. Critically, the Debtors seek to defer payment of all expenses other than those that are absolutely essential, as outlined in their Modified Budget. Moreover, as part of the Bankruptcy Suspension, the Debtors have instituted or intend to immediately institute an Operational Suspension, which will entail, among other things:

  • The cessation of operations, including Store Closing Sales, at all 134 of their retail stores as well as fulfillment of orders on their e-commerce site
  • The termination of store-level and distribution center employees; and
  • The cessation of all in-person operations at their corporate headquarters and termination most corporate employees, leaving in place a skeleton crew of essential employees to effectuate critical human relations, finance, and infrastructure technology functions during the Operational Suspension.

The Debtors, along with their professionals, have developed a plan to re-operationalize after COVID-19 abates and believe that the breathing spell provided by the Bankruptcy Suspension is in the best interests of their estates and all creditors as it will allow the Debtors, in time, to maximize the value of their inventory and leasehold interests. The Debtors recognize that all parties are suffering during these uncertain times. Nevertheless, the Debtors believe that the Bankruptcy Suspension will inure to the benefit of all parties such that it is warranted pursuant to section 305 of the Bankruptcy Code.”

Landlord Objection

In what is representative of numerous objections filed by landlords (the Debtors have 134 landlords), on April 24, 2020, Creditor Remo Tartaglia Associates, LLC (“RTA”) filed an objection to the Debtors' request for a further suspension of their Chapter 11 cases, arguing that a complete suspension is most certainly not in their interest as creditor landlords and that the Debtors should get on with liquidating their stores and merchandise [Docket No. 257]. 

RTA argues that there is nothing in current COVID-19 restrictions (at least not in Connecticut) that prohibits the Debtors from taking remotely placed orders and offering curbside pick-up and further suggests that the Debtors should be doing what is possible to generate sales and get a jump on the liquidation process; it being "in the Debtors’ interest to continue to liquidate their business operations promptly instead of accruing further administrative rent claims without generating any revenue during a prolonged suspension."

RTA also wants the Court to order adequate protection for landlords "now," arguing that the Debtors continue to use leased properties to store their merchandise and that compelling landlords to provide the use of their property to the Debtors for free is "effectively subsidizing the secured creditor’s recovery…each passing day enrich[ing] the Debtors and secured creditor at RTA’s expense." Absent adequate protection, RTA insists, the Debtors should minimally be required to hand over the leased property.

On April 20th, the Debtors’ notified the Court that they intend to seek an extension of an existing suspension order through and including May 31, 2020 [Docket No. 234]. On March 27, 2020, the Court issued an initial order that suspended all deadlines and activities in the Debtors' Chapter 11 cases through April 30th [Docket No. 166].

It should be noted that several of the Debtors' creditors are appealing the bankruptcy Court's initial suspension order to a District Court [Docket No. 220]; no briefs/arguments have been filed with the Court (District of New Jersey: 2:20-cv-04054-JMV) as yet.

The RTA objection states, “First, the Debtors are not prohibited from selling goods from their Connecticut locations. Although Executive Orders issued by Connecticut’s Governor prohibit the operation of ‘Non-Essential Business,’ non-essential retailers may be staffed on site ‘provided that they may only offer remote ordering (e.g. phone, internet, mail, dropbox) and delivery or curb-side pick-up.’ Connecticut Executive Order No. 7J (Exhibit A) Indeed, other competing sporting goods stores remain open for business in Connecticut in this limited capacity. Obviously, the economics of the Debtors’ business may change considerably given the COVID-19 restrictions. Remote or other means of sale are not ideal. Nevertheless, it is in the Debtors’ interest to continue to liquidate their business operations promptly instead of accruing further administrative rent claims without generating any revenue during a prolonged suspension. There is no telling when retail sporting goods sales will be restored to anything approaching their pre-petition status. The Debtors will not be well served by delaying their inevitable liquidation only to ensure their own administrative insolvency.

Even if the Debtors believe the suspension may be in their interest, any continued suspension of these cases without adequate protection is certainly not in the interest of RTA or the other similarly-situated landlords. Despite its inability or unwillingness to continue selling inventory, MC2 continues to use RTA’s space for storage of its goods and fixtures — this despite the termination of MC2’s lease due to the passage of the quit date in the notice to quit served on MC2 prior to its bankruptcy filing. In essence, RTA and other landlord creditors are providing value to the Debtors without any realistic chance of recovery.

Any additional suspension cannot possibly be in the interests of RTA and the other landlord creditors. RTA already provided MC2 with significant rent deferment before the commencement of this bankruptcy. RTA has its own debt to service on this building. The Debtors are not the only parties suffering significant financial stress as a result of COVID-19. RTA should not be prevented from receiving rent or retaking possession of its premises simply because the Debtors finds that arrangement convenient. Each passing day enriches the Debtors and secured creditor at RTA’s expense.

Pursuant to 11 U.S.C. § 363(e), RTA respectfully requests that the Court condition MC2’s further use of this property upon the payment of adequate protection. If it is not possible for the Debtors to make immediate cash payment, the Court should order a carve-out for RTA and other landlords under 11 U.S.C. § 506(c), because the continued storing of the Debtors’ goods and fixtures constitute ‘necessary costs and expenses for preserving, or disposing of, [] property [securing an allowed secured claim] to the extent of any benefit to the holder of such claim[.]’…If this case is administratively insolvent, only the secured creditor will directly benefit from the continued use of RTA’s property. If the case is administratively solvent, the secured creditor will not be negatively impacted by giving priority to landlords for administrative rent claims.

The landlords would be effectively subsidizing the secured creditor’s recovery by allowing the Debtors to retain possession of leased property without paying rent. It would be inequitable for the Court to allow the Debtors to occupying RTA’s space without ordering adequate protection now. The Court should not defer this issue until after the retail world comes back to ‘normal’ and the Debtors are able to sell their inventory. In order to comply with the requirements of the Bankruptcy Code, the Court should provide RTA with adequate protection now or restore it to possession of its property.”

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The post Modell’s Sporting Goods, Inc. – Court Agrees to Further Suspension of COVID-Impacted Debtors’ Chapter 11 Cases through May 31st, Directs Parties to Mediate Open Issues appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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