Modell's Sporting Goods, Inc. (“Debtor Tenant”) has asked The United States Bankruptcy Court for the District of New Jersey to enter an Order formally suspending its Chapter 11 Bankruptcy Proceedings and deferring rent payments until the COVID-19 restrictions are lifted and its retail stores can either
recommence operations or proceed with liquidation sales where appropriate.
Judge Vincent F. Papalia heard argument from the Debtor Tenant on Tuesday as to (1) why suspension of its bankruptcy proceedings is authorized under the U.S. Bankruptcy Code and equitable in light of the current pandemic, (2) why Landlords should be forced to deal with "short-term pain" and (3) why a rent deferral is justified.
This national retail Debtor Tenant has requested this unprecedented relief in order to provide some certainty during these extremely uncertain times. Debtor Tenant argued that absent suspension of the bankruptcy proceedings, the nationwide moratorium on nonessential businesses will effectively prevent it from being able to maximize its value for the benefit of its creditors, including its landlords, through liquidation, restructuring and/or reorganization. Modell’s argued that if it is unable to sell the company's remaining inventory, there will be no assets and nothing available for rent.
The Debtor Tenant relied upon statutory and equitable arguments in support of its request for an Order suspending its bankruptcy proceedings and deferring its rents for at least sixty days. Modell’s argued that during this time all parties, tenants, landlords, vendors, professionals and lenders must work together and compromise to help each other "weather this storm." Modell's seeks a deferral but also argued that it may even be entitled to a rental abatement since the government-mandated shutdowns left it no choice but to postpone its liquidation sales. Modell’s argued that its payment obligation should be excused by the doctrines of frustration of purpose and intervening impossibility. Modell’s argued that rent relief is also justified under the takings doctrine, because the government shutdowns have effectively taken its stores that can no longer be used as intended. Finally, Modell’s brought to the Court’s attention that a Virginia bankruptcy court agreed to a similar rent deferral for Pier 1 Imports, Inc.
Yes, this is within a bankruptcy proceeding and the bankruptcy code does provide the Court some leeway to suspend proceedings and/or defer rent payment if it is intended to benefit non-debtor third parties, like the creditors. However, once a federal court chooses to suspend court proceedings and enter an affirmative order deferring rents, the question really becomes whether that relief actually benefits Debtor Tenant’s Landlords in the long run or simply delays the inevitable, increasing the ultimate damage caused beyond repair.
We are experiencing unprecedented times in our world, our economy and our courts. Everything is changing; therefore, we are anxiously awaiting Judge Papalia’s decision in this unpredictable yet significantly affected area of the law.
