Modell’s Sporting Goods, Inc. – Seeks Extension of Suspension of Chapter 11 Cases Through May 31st as COVID-19 Restrictions Continue; Several Creditors Set to Appeal Order

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April 20, 2020 – The Debtors’ have notified the Court hearing their Chapter 11 cases 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].

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.

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 present notice states, “Pursuant to the Suspension Order, and in light of the fact that various state and local orders aimed at minimizing infections and deaths from the novel coronavirus known as COVID-19 continue to prevent the Debtors from conducting retail sales at their various locations, the Debtors submit this notice (the ‘Extension Notice’) of their intent to seek a further suspension of these chapter 11 cases through and including May 31, 2020, without prejudice to the Debtors’ right to seek additional time.”

Further Background

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.”

The next hearing on the suspension period is scheduled for April 30, 2020, with objections due by April 24, 2020.

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