The COVID-19 pandemic has wreaked havoc on retailers in an already battered industry. Commencing in mid-March, governors from a majority of states issued executive orders requiring nonessential businesses to close to combat the spread of COVID-19. Retailers who rely on foot traffic to support their businesses felt a swift and severe impact. Retailers who recently had filed bankruptcy under chapter 11 had their reorganization efforts disrupted in unprecedented fashion.
With expenses still accruing and revenue drastically cut, retailers in chapter 11 faced the risk that their bankruptcy proceedings would devolve into a chaotic (and expensive) motions practice in which creditors raced to obtain court relief against the debtors and their assets. Such an onslaught could eliminate any hope for a successful chapter 11 case. To address this risk, at least three retail debtors sought to put their cases “on ice” by requesting orders suspending their cases for a limited period until they could resume operations.covi
Chapter 11 debtors Modell’s Sporting Goods, Inc., Pier 1 Imports, Inc., CraftWorks Parent, LLC and a group of restaurant chains each obtained orders in late March or early April granting relief that allows them to mothball their cases for a limited amount of time while the COVID-19 situation unfolds. Although the terms of the orders varied, they generally authorized the debtors to defer payment of noncritical expenses for approximately 30 days and restricted the ability of creditors to seek relief against the debtors and their assets.
Although some states have begun lifting stay-at-home orders and authorizing the reopening of some nonessential businesses, each of these debtors recently sought and obtained further extensions of the case suspension orders.
Last week, New Jersey Bankruptcy Judge Vincent F. Papalia extended the stay order in place for Modell’s through May 31, citing the fact that funds are “just not there at the moment” to pay creditors, including landlords at the 134 retail locations where Modell’s has planned liquidation sales. Similarly, while announcing a deal with its senior secured lender to effectuate a semiprivate sale, CraftWorks obtained an extension of the previously entered suspension order from Delaware Bankruptcy Judge Brendan L. Shannon, who described the deal as a “welcome prospect” in the midst of the COVID-19 crisis. Also last week, Bankruptcy Judge Kevin R. Huennekens of the Eastern District of Virginia extended the stay order for Pier 1 through May 31, but noted that “we’re not going to go on forever and ever.” As part of his order, Judge Huennekens required that the furniture retailer file a status report by May 21 indicating what preparations the company had undertaken to resume operations and the anticipated timeline for doing so.
The depth of the unprecedented economic crisis caused by the COVID-19 pandemic and forced closing of many retail establishments has tested the limits of chapter 11. As the three examples discussed above demonstrate, however, bankruptcy judges have exercised prudence in approaching the difficult task of balancing the requirements of the Bankruptcy Code with the stark reality of the impact of the current economic crisis on both retail tenants and their landlords and other creditors.
Hunton Andrews Kurth LLP represents interested parties in the chapter 11 bankruptcy cases of In re Craftworks Parent, LLC, and In re Pier 1 Imports, Inc., and its[SBS1] bankruptcy attorneys have significant experience advising distressed retailers and their creditors across the country.