On Thursday April 30, 2020, the United States Bankruptcy Court for the District of New Jersey granted Modell's Sporting Goods, Inc. an unprecedented rent deferral when Judge Vincent F. Papalia entered an Order suspending bankruptcy proceedings through at least May 31, 2020.
Modell’s filed its Chapter 11 petition detailing more than $100 million in debt and plans to liquidate all of its stores on March 11, 2020. The pandemic and COVID-19 retail restrictions followed shortly thereafter. Modell’s was unable to take any steps towards liquidating its stores and the court, in an earlier decision, temporarily suspended the bankruptcy proceedings as authorized by Section 305 of US Bankruptcy Code as a result. That temporary suspension expired last week, and Modell’s sought to extend.
Modell's asked for a further suspension and rent relief arguing that the court has the authority to tailor remedies under Section 305, while the Landlords emphasized that Section 365(d)(3) sets a 60-day limit on any rent deferrals during suspensions. Because Modell’s Petition was filed March 11th, Landlords argued that Modell’s maximum 60-day rent deferral authorized by Section 365 lapses May 11, 2020. Judge Papalia disagreed and instead extended the rent deferral for an additional twenty days beyond what Section 365 authorizes.
Judge Papalia made this unprecedented decision without providing the Landlords any compensation or security for Modell’s future performance, despite Modell’s continued occupancy and protection under the bankruptcy stay. In Judge Papalia’s own words, “(t)here's a whole slew of people that aren't getting paid and it's not anybody's fault."
The Bankruptcy Code provides the Court some leeway to suspend proceedings and/or defer rent payment, but Judge Papalia has chosen to enter an affirmative order exceeding that limited leeway. Thus, while a tenant’s chapter 11 bankruptcy under normal circumstances isn’t necessarily a bad/risky thing for a landlord, Judge Papalia’s April 30th order potentially has changed that, providing other bankruptcy Judges precedent to allow a debtor tenant to avoid post-petition rents. Further, while this decision arose in the bankruptcy context, it is possible it might gain some traction in the realm of general litigation as well.
We urge our Landlord/Owner and Property Management clients to take this recent decision into account in your efforts to amicably resolve COVID-19 rental delinquencies with your tenants. If an amicable resolution cannot be reached and a tenant bankruptcy cannot be avoided, Landlords run the risk that other courts might see things similar to Judge Papalia. If you need assistance negotiating, drafting or crafting your deal in a manner that the parties will find mutually agreeable, we can assist.
