Economic Shutdown and Commercial Rent in Chapter 11
I. Introduction
TOPAs we know all too well, the COVID-19 pandemic caught the world off-guard. The virus continues to accumulate a staggering list of victims, but the direct threat to public health also carried with it shock waves that rocked the global economy. At the beginning of the pandemic, commentators in the United States predicted an increase in financially distressed corporations filing for Chapter 11 bankruptcy.1
See Khristopher J. Brooks, Bracing for the Next Phase of the Coronavirus Recession: Bankruptcies, CBS News: Moneywatch (June 9, 2020), https://www.cbsnews.com/news/bankruptcy-coronavirus-recession-2020/[https://perma.cc/QP7V-8U7R].
See Peter Coy, Bankruptcies Show a Surprising Decline, Bloomberg Businessweek (Oct. 9, 2020), https://www.bloomberg.com/news/articles/2020-10-09/bankruptcies-show-a-surprising-decline[https://perma.cc/2V6A-ULPN].
In the United States, the President declared a national emergency, and state governors issued “stay-at-home” orders that had the effect of shutting down the economy. Business leaders had to adapt rapidly to these unprecedented government orders. This was especially true for captains at the helm of distressed corporations in Chapter 11 bankruptcy. Proclamation No. 9994, Fed. Reg. 15,337 (Mar. 13, 2020); see Sarah Mervosh et al., See Which States and Cities Have Told Residents to Stay at Home, N.Y. Times (Apr. 20, 2020), https://www.nytimes.com/interactive/2020/us/coronavirus-stay-at-home-order.html[https://perma.cc/N39U-8ACY]; see also Status of State COVID-19 Emergency Orders, Nat’l Governors Ass’n (last updated July 19, 2021), https://www.nga.org/coronavirus/[https://perma.cc/FQD5-4HM7];see, e.g., Order of the Governor of the Commonwealth of Pennsylvania Regarding the Closure of All Businesses That Are Not Life Sustaining (Mar. 19, 2020) (closing non-essential businesses); N.Y. Exec. Order 202.8 (Mar. 20, 2020) (same); Conn. Exec. Order 7H (Mar. 20, 2020) (same).
See 11 U.S.C. § 363(b)(1).
See id.
See 11 U.S.C. § 1123.
In this realm of distressed corporate debtors, this Comment will focus on Judge Papalia’s serial suspension orders in the Chapter 11 case of the famous Tri-State sporting goods retailer headquartered in New York City, Modell’s Sporting Goods, Inc. In In re Modell’s Sporting Goods, Inc.7
No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020).
Overleveraged and out of options, Modell’s Sporting Goods, Inc., and its subsidiaries (collectively “Modell’s”), like many retailers before it,8
See Walter Loeb, More Than 15,500 Stores Are Closing in 2020 So Far—A Number that Will Surely Rise, Forbes (July 5, 2020), https://www.forbes.com/sites/walterloeb/2020/07/06/9274-stores-are-closing-in-2020--its-the-pandemic-and-high-debt--more-will-close/?sh=5a896a2d729f[https://perma.cc/9YUE-WDDB](explaining that the decline of brick-and-mortar retail sales (the “retail apocalypse”), which began in 2010 with the rise of e-commerce competition, accelerated during the pandemic summer of 2020).
Voluntary Petition for Non-Individuals Filing for Bankruptcy, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 1 [hereinafter “Voluntary Petition”]. The filing included thirteen debtor entities including Modell’s Sporting Goods, Inc.; Modell’s NJ II, Inc.; Modell’s DC II, Inc.; Modell’s DE II, Inc.; Modell’s II, Inc.; Modell’s Maryland II, Inc.; Modell’s Massachusetts, Inc.; Modell’s NH, Inc.; Modell’s NY II, Inc.; Modell’s Online, Inc.; Modell’s PA II, Inc.; Modell’s VA II, Inc.; and MSG Licensing, Inc.
In re Owens Corning, 419 F.3d 195, 211 (3d Cir. 2005), as amended (Aug. 23, 2005), as amended (Sept. 2, 2005), as amended (Oct. 12, 2005), as amended (Nov. 1, 2007)
(“[T]he general expectation of state law and of the Bankruptcy Code, and thus of commercial markets, is that courts respect entity separateness.”).
See Fed. R. Bankr. P. 1015.
Order Pursuant to Fed. R. Bankr. P. 1015(b) Directing Joint Administration of Related Chapter 11 Cases at 6, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 88.
On the same day, Modell’s filed a motion that outlined a straightforward path through Chapter 11.13
Interim Order (I) Authorizing the Debtors to Assume the Consulting Agreement, (II) Approving Procedures for Store Closing Sales, and (III) Approving the Implementation of Customary Store Bonus Program and Payments to Non-Insiders Thereunder at 6, 39, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 63 [hereinafter “Mar. 13 Interim Order”].
Debtor’s Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to Assume the Consulting Agreement, (II) Approving Procedures for Store Closing Sales, and (III) Approving the Implementation of Customary Store Bonus Program and Payments to Non-Insiders Thereunder at 3, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 8 .
See id. at 5.
See id. at 4.
See id.
See id. at 5, 20.
Transcript of Motion Hearing Before Honorable Vincent F. Papalia United States Bankruptcy Judge at 5, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 31, 2020), ECF No. 187 [hereinafter “March Suspension Hearing”].
Modell’s original Chapter 11 budget spanned eight weeks: March 11 to May 2.20
Interim Order (I) Authorizing Use of Cash Collateral and Affording Adequate Protection; (II) Modifying Automatic Stay; (III) Scheduling A Final Hearing; And (IV) Granting Related Relief at 57, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 31, 2020), ECF No. 66.
Id.
Id.
Id.
Id.
COVID-19 had other plans for Modell’s. On March 21, New Jersey Governor Philip Murphy issued a stay-at-home order.25
See Mervosh et al., supra note NOTEREF _Ref76593996 \h \* MERGEFORMAT 3 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003500390033003900390036000000 .
See id.
See id.
Debtors’ Verified Application in Support of Emergency Motion for Entry of an Order Temporarily Suspending Their Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305 at 2–3, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 115 [hereinafter “Suspension Motion”].
See id. at 6–7.
See id. at Ex. A. (Modified Budget); see also Transcript of Telephonic Hearing Re: Doc #115 Motion Re: Debtor’s Verified Application In Support of Emergency Motion for Entry of an Order Temporarily Suspending Their Chapter 11 Cases Pursuant to 11 U.S.C. Sections 105 and 305 Filed by Michael D. Sirota on Behalf of Modell’s Sporting Goods, Inc. and Objections to Debtor’s Verified Application in Support of Emergency Motion for Entry of an Order Temporarily Suspending their Chapter 11 Cases Pursuant to 11 U.S.C. Sections 105 and 305 Filed by Michael D. Sirota on Behalf of Modell’s Sporting Goods, Inc. at 13, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J., Apr. 30, 2020), ECF No. 210 [hereinafter “April Suspension Extension Hearing”] (Judge Papalia: “[T]here’s not enough cash on hand to pay one month’s rent.”).
Over the persistent dissent of nearly half of Modell’s commercial landlords,31
See April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h \* MERGEFORMAT 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 95 (“[T]hese landlord objections represent 44 of the debtor’s landlords and 53 of the debtor’s more than 134 – 130 stores or approximately 39.5 percent, so a significant portion of the stores.”).
Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
11 U.S.C. § 365(d)(3).
Id.
Order Further Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Apr. 30, 2020), ECF No. 294.
Order Further Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305 Through and Including June 15, 2020 and Setting Final Hearing on Cash Collateral Motion, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. June 5, 2020), ECF No. 371.
Though Judge Papalia achieved a desirable outcome in Modell’s Case, he used the wrong provision—§ 305(a). Judge Papalia’s decision left no binding precedent,37
See 11 U.S.C. § 305(c); see also 28 U.S.C.A. § 158(a)(1–3); April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h \* MERGEFORMAT 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 11 (Mr. Sirota for the debtor: “There’s no binding Third Circuit or circuit authority under 305(a), and that’s for good reason because there’s no relief and no ability to appeal a 305 ruling to a circuit or to the United States Supreme Court.”).
11 U.S.C. §§ 105, 363(b)(1).
This Comment proceeds in two additional Parts. Part II explains the key provisions and principles that are at play in Modell’s Case. This Part will discuss key concepts, including the property of the estate, the automatic stay, claims, the absolute priority rule, nonresidential leases under § 365, equitable discretion under § 105(a), and abstention under § 305(a). Part III argues that Judge Papalia achieved a desirable result for the case but erred in applying § 305(a) and § 105(a) to “partially” suspend the case. The Comment concludes that, due to § 365(d)(3)’s lack of remedy, Judge Papalia could have reached the same sensible result by simply approving Modell’s proposed limited operating budget under § 363(b)(1) and § 105(a).
II. Dynamics At Play: Foundational Elements of Chapter 11
TOPWhen a corporation owes more than it can pay, its board of directors may decide to file for bankruptcy.39
See In re Integrated Telecom Express, Inc., 384 F.3d 108, 121 (3d Cir. 2004); 11 U.S.C. § 301.
See Douglas G. Baird, Elements of Bankruptcy 19 (Foundation Press, 6th ed. 2014).
Id. at 59.
Id.
11 U.S.C. § 1107(a); see also Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 573 (3d Cir. 2003) (“In Chapter 11 cases where no trustee is appointed, § 1107(a) provides that the debtor-in-possession, i.e., the debtor’s management, enjoys the powers that would otherwise vest in the bankruptcy trustee. Along with those powers, of course, comes the trustee’s fiduciary duty to maximize the value of the bankruptcy estate.”).
Chinery, 330 F.3d at 573.
See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 20.
Chapter 11 usually results in one of two outcomes. One possibility is that the firm reorganizes and continues as a going concern46
Will Kenton, Going Concern, Investopedia (last updated Apr. 20, 2021), https://www.investopedia.com/terms/g/goingconcern.asp[https://perma.cc/M46R-65RA].
See 11 U.S.C. §§ 1129, 1141; see also Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 19–20.
11 U.S.C. § 1129(b).
11 U.S.C. § 1141; see also Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 20.
See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 20.
See id.
See id. at 19, 235–38.
See id. at 58, 59.
Mar. 13 Interim Order, supra note NOTEREF _Ref64227007 \h \* MERGEFORMAT 13 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320037003000300037000000 .
A. The Property of the Estate and the Automatic Stay
TOPAs soon as a bankruptcy petition is filed, the property of the bankruptcy estate is protected by the automatic stay.55
11 U.S.C. § 362; but see 11 U.S.C. §§ 544(b), 547, 548 (collectively providing the trustee with avoiding powers that can claw property back into the estate if, for example, the property was improperly snatched on the eve of bankruptcy under § 547 “Preferences” or in the years preceding under § 548 “Fraudulent Transfers and Obligations” along with § 544).
See id.
See 11 U.S.C. § 1107.
See United States v. Whiting Pools, 462 U.S. 198, 203 (1983) (explaining that a “reorganization effort would have small chance of success . . . if property essential to running the business were excluded from the estate”); see also Douglas G. Baird et al., The Bankruptcy Partition, 166 U. Penn. L. Rev. 1675, 1684 (2018).
Section 541 of the Bankruptcy Code defines what is considered the property of the estate. Among other rights detailed in § 541, property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”59
11 U.S.C. § 541(a)(1).
See, e.g., In re Costas, 555 F.3d 790, 794 (9th Cir. 2009); In re Ginn, 186 B.R. 898, 902 (Bankr. D. Md. 1995) (referencing “the Butner principle that nonbankruptcy law should apply the same inside as outside of a bankruptcy case”).
440 U.S. 48 (1979).
Id. at 54.
11 U.S.C. § 362(d).
Parties that have legal title to property in the debtor’s possession, and therefore under the stay’s protection, must petition the bankruptcy judge to lift the stay if they wish to regain possession.64
See id.
See 11 U.S.C. §§ 362(d), 362(f), 363(b)(1).
11 U.S.C § 362(d)(1).
B. Claims and the Absolute Priority Rule
TOPThe debtor is likely in Chapter 11 because of financial distress; it owes more money than it can pay. The debtor’s creditors hold claims to the estate, and § 101(5)’s definition of “claims” is broad and includes “right[s] to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.”67
11 U.S.C. § 101(5).
Id.
11 U.S.C. § 363(f) (“The trustee may sell property . . . free and clear of any interest in such property . . . .”). This Comment will not address these sales beyond this reference. For a discussion and critique of “free and clear” sales under § 363(f), see generally Karen Cordry, Section 363 Sales: Cherry-Picking the Code: Successor Liability and Lessons from Wile E. Coyote, 28 Norton J. Bankr. L. & Prac. 1 (Dec. 2019) (explaining that “free and clear” sales have grown into a sale of parts or the entirety of a business without confirmation of a Chapter 11 plan).
11 U.S.C. § 1141(c) (“[T]he property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.”).
In Chapter 11 liquidations like Modell’s Case, the debtor-in-possession converts the property of the estate into cash.71
See Mar. 13 Interim Order, supra note NOTEREF _Ref64227007 \h \* MERGEFORMAT 13 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320037003000300037000000 .
11 U.S.C. § 1121; see 11 U.S.C. § 1123.
11 U.S.C. §§ 1122, 1123(a)(1)–(4).
See 11 U.S.C. § 1129; see also 11 U.S.C. § 1126.
See 11 U.S.C. § 726(a), (b) (requiring pro rata distribution); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 (1989) (explaining that creditors hold “hierarchically ordered claims to a pro rata share of the bankruptcy res”).
See 11 U.S.C. § 726(a).
See id.
See id.
The absolute priority rule requires this rigid hierarchy of payment. The principle is central to the negotiation dynamics in Chapter 11—senior lenders have more say.79
See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 75 (“The dynamics of any negotiation are defined by what there is to bargain over and the place of each of the parties in the pecking order.”).
At a cramdown hearing, the debtor in possession seeks confirmation of a reorganization plan over the dissent of a creditor class. 11 U.S.C. § 1129(b).
See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 74 (“The absolute priority rule is central to the law of corporate reorganizations because it is a source of substantive rights as well as the procedural protections that each participant in a reorganization enjoys.”). For a cogent discussion of the absolute priority rule’s history and evolution see generally Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 .
Id. at 69 (“Case [a Supreme Court decision] . . . forged a link between the phrases ‘fair and equitable’ and ‘absolute priority,’ a link that lawyers, judges, and Congress have accepted ever since.”).
See 11 U.S.C. § 1129(b)(2)(A).
11 U.S.C. § 1129(b)(2)(B)(ii).
See id.
See Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 Stan. L. Rev. 69, 72 (1991).
See, e.g., In re Toy & Sports Warehouse, Inc., 37 B.R. 141, 150 (Bankr. S.D.N.Y. 1984)
(explaining that “[t]he debtors’ equity shareholders in [the lowest class within the Absolute Priority Rule] are impaired under the plan because they will be wiped out and all of the stock of [the company] will be cancelled”).
See 11 U.S.C. § 1129(b)(1) (“[T]he court . . . shall confirm the plan . . . if the plan . . . is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted the plan.”).
Section 507(a) also creates a hierarchy among other creditors.89
11 U.S.C. § 507(a).
Id.
11 U.S.C. § 503(b)(1)–(9).
11 U.S.C. § 503(b).
Of course, the debtor in bankruptcy has finite resources, so administrative expenses are still at risk of partial or non-payment. Administrative insolvency occurs in Chapter 11 cases where the debtor cannot afford to pay the allowed administrative expenses in full.93
Alec P. Ostrow, The Animal Farm of Administrative Insolvency, 11 Am. Bankr. Inst. L. Rev. 339, 340 (2003) (noting that unsuccessful Chapter 11 cases can result in the debtor being unable to pay in full the bills it accumulated during the proceedings—a nightmare scenario for professionals and lenders who risked their time and resources in the endeavor).
See id. at 345.
As a firm approaches administrative insolvency, parties holding administrative expense claims begin to sweat. Administrative expense claims do not receive equal treatment. The clearest—and most relevant—example of this is the Code’s preferential treatment of professional services expenses.95
See 11 U.S.C. § 331.
Id.
Ostrow, supra note NOTEREF _Ref64228905 \h \* MERGEFORMAT 94 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320038003900300035000000 , at 346–48.
11 U.S.C. § 726(b).
C. Nonresidential Leases Under Section 365
TOPCommercial leases are one potentially large “actual, necessary cost[ ] and expense[ ]” for retail businesses in Chapter 11.99
11 U.S.C. § 503(b).
See 11 U.S.C. § 365(a), (d)(4)(A)(i–ii).
See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 134.
See In re Airlift Int’l, Inc., 761 F.2d 1503, 1508 (11th Cir. 1985).
11 U.S.C. § 365(g).
11 U.S.C. § 101(5).
11 U.S.C. § 365(g) (“[T]he rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such . . . lease.”).
See id.
In cases like Modell’s, however, the trustee may not immediately assume or reject upon filing petition for Chapter 11. Instead, the trustee can take the time permitted by the Code to determine which unexpired leases (and executory contracts) would benefit the estate and which should be rejected. The trustee has 120 days to decide whether to assume or reject unexpired leases, subject to court granted extensions.107
See 11 U.S.C. § 365(d)(4)(A)(i–ii), (B)(i–ii).
Id.
Despite lobbying efforts from commercial landlords, this special landlord protection under § 365(d)(3) has more bark than bite. Congress added this provision to the Code in the Bankruptcy Amendments and Federal Judgeship Act of 1984.109
Pub. L. No. 98-353, 98 Stat. 333.
In re Mr. Gatti’s, 164 B.R. 929, 932 (Bankr. W.D. Tex. 1994) (quoting 130 Cong. Rec. S8891, 599 (1984) (statement by Sen. Hatch)).
Id.
Id. at 933 (“As straightforward as newly added Section 365(d)(3) was regarding the obligation of the debtor-tenant to fully and timely perform, it was wholly lacking with regard to any expression of the remedies available to the lessor in the event of a default.”); see also 11 U.S.C. § 365.
Because the Code is silent on the remedy for default,113
See CIT Comm. Fin. Corp. v. Midway Airlines Corp. (In re Midway Airlines Corp.), 406 F.3d 229, 235 (4th Cir. 2005) (“While it is clear that § 365(d)(10) and § 365(d)(5) impose on [the debtor-in-possession] the duty to perform all lease obligations in a timely manner, these sections do not specify a lessor’s remedy should the [debtor-in-possession] fail to perform.”).
831 F.2d 848 (9th Cir. 1987).
Id. at 854.
Id.
In re Westview 74th St. Drug Corp., 59 B.R. 747, 754 (Bankr. S.D.N.Y. 1986) (“[T]he appropriate remedy for such a failure is one which should be formulated by the court after a review of the facts of the particular case.”).
In re DBSI, Inc., 407 B.R. 159, 164 (Bankr. D. Del. 2009).
After deciding whether to apply a more extreme remedy to enforce § 365(d)(3), the judge must determine the priority level of the landlord’s claim. Courts fall into three groups at this point: (1) courts that “do not automatically grant administrative status to the lessor’s claim”119
See, e.g., In re Mr. Gatti’s, 164 B.R. 929, 935–38, 946 (Bankr. W.D. Tex. 1994) (citing other courts that follow the minority approach and adopting the minority approach).
See, e.g., In re Worths Stores Corp., 135 B.R. 112, 116 (Bankr. E.D. Mo. 1991) (holding that the lessor need not meet the requirements under § 503(b)(1)(A)); see also In re Mr. Gatti’s, 164 B.R. at 937–40 (identifying courts that follow the majority approach).
See, e.g., In re Telesphere Communications, Inc., 148 B.R. 525, 531 (Bankr. N.D. Ill. 1992) (“Pursuant to the plain language of Section 365(d)(3), the trustee or debtor in possession has a duty, prior to assumption or rejection of a lease of nonresidential real property, to make timely payment of the full rent due, from any available funds (subject to Section 363(c)(2) of the Code), regardless of the administrative solvency of the estate.”).
In re Mr. Gatti’s, 164 B.R. at 940–42.
Ostrow, supra note NOTEREF _Ref64228905 \h \* MERGEFORMAT 94 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320038003900300035000000 , at 347–48.
In summary, the language of § 365(d)(3) presents a bright line requirement. The debtor must “timely” pay their lease obligations, and they cannot receive an extension to pay beyond sixty days. Nonetheless, the bankruptcy judge may exercise considerable discretion due to the Code’s lack of remedy—especially in the Third Circuit where there is no binding precedent on this issue.
D. Equitable Discretion Under § 105(a)
TOPSection 105(a) of the Code grants the bankruptcy judge residual equitable power that enables judges to craft discretionary orders.124
See United States v. Energy Res. Co., 495 U.S. 545, 549 (1990) (“[Section 105(a)] [is] consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.”).
11 U.S.C. § 105(a).
See, e.g., Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1189–90 (9th Cir. 2003) (recognizing the bankruptcy court’s authority to sanction a party for civil contempt under § 105(a)); Bayer Corp. v. MascoTech, Inc. (In re Autostyle Plastics, Inc.), 269 F.3d 726, 748 (6th Cir. 2001) (explaining that “a bankruptcy court can consider whether to recharacterize a claim of debt as equity” using its authority under section 105(a)).
Bayer Corp., 269 F.3d at 749 (allowing recharacterization of insider debt as equity). But see Unsecured Creditors Comm. Of Pac. Express, Inc. et al. v. Pioneer Com. Funding Corp. (In re Pacific Express, Inc.), 69 B.R. 112, 115 (B.A.P. 9th Cir. 1986) (explaining that because “there is a specific provision governing [recharacterization],” (Equitable Subordination under 11 U.S.C. § 510(c)) “it is inconsistent with the interpretation of the Bankruptcy Code to allow such determinations to be made under different standards through the use of a court’s equitable powers” under section 105(a)); In re CoServ, L.L.C., 273 B.R. 487, 497 (Bankr. N.D. Tex. 2002) (explaining that “it is only logical that the bankruptcy court be able to use Section 105(a) of the Code to authorize satisfaction of the prepetition claim in aid of preservation or enhancement of the estate”); In re Kmart Corp., 359 F.3d 866, 874 (7th Cir. 2004) (ruling that § 105(a) without another provision of the Code does not grant the court authority to issue payment of prepetition claims in what have become known as critical vendor orders).
See Palmer v. United States (In re Palmer), 219 F.3d 580, 586 (6th Cir. 2000) (explaining that though “these equitable powers [under section 105(a)] are sufficient to toll the § 507(a)(8)(A)(i) look-back period if the facts of a given case require such an action,” they do not create an “automatic tolling provision that Congress expressly failed to include”); In re Lehigh & N. E. Ry. Co., 657 F.2d 570, 582 (3d Cir. 1981) (explaining that the court’s use of 105(a) to order payment of pre-petition creditors “is neither an expansive nor a broad [holding]” but is particular to “the general principles . . . in the Trust Fund cases” and “cannot control a situation where all funds have been dissipated”).
Despite the variety of orders that use § 105(a), there are “two general schools of thought regarding the breadth of section [sic] 105.”129
2 Collier on Bankruptcy ¶ 105.01 (16th ed. 2020).
See id.
See Law v. Siegel, 571 U.S. 415, 421 (2014).
2 Collier on Bankruptcy ¶ 105.01 (16th ed. 2020) (“The broad view currently prevails, and this tracks the power of district courts in equity receiverships.”).
But see id. ¶ 105.01, n. 6 (“Section 105 of the Bankruptcy Code bestows on bankruptcy courts a specific equitable power to act in accordance with principles of justice and fairness. Bankruptcy courts have broad latitude in exercising this power.”) (quoting Sears, Roebuck & Co. v. Spivey, 265 B.R. 357, 371 (E.D.N.Y. 2001)).
See id. ¶ 105.01.
See In re Oi Brasil Holdings Cooperatief U.A., 578 B.R. 169, 201 (Bankr. S.D.N.Y. 2017), reconsideration denied, 582 B.R. 358 (Bankr. S.D.N.Y. 2018) (“Section 105(a) is understood as providing courts with discretion to accommodate the unique facts of a case consistent with the policies or directives set by the other applicable substantive provisions of the Bankruptcy Code.”); see also New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91–92 (2d Cir. 2003) (“The equitable power conferred . . . by section 105(a) is the power to exercise equity in carrying out the provisions of the Bankruptcy Code, rather than to further the purposes of the Code generally, or otherwise to do the right thing. This language suggests that an exercise of section 105 power be tied to another Bankruptcy Code section and not merely to a general bankruptcy concept or objective.”) (internal citations omitted); Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392, 403 (1st Cir. 2002) (“The authority bestowed [by section 105(a)] may be invoked only if, and to the extent that, the equitable remedy dispensed by the court is necessary to preserve an identifiable right conferred elsewhere in the Bankruptcy Code.”).
Occasionally, even judges on the same court may disagree about which approach should be applied. For example, in In re Kmart Corp.,136
359 F.3d 866 (7th Cir. 2004).
Id. at 871.
Id.
808 F.3d 1186, 1188 (7th Cir. 2015).
Id. at 1188.
Despite the diverse issues that § 105(a) could apply to, there has been a trend in circuit court opinions restricting bankruptcy judges’ use of § 105(a).141
Lawrence Ponoroff, Whither Recharacterization, 68 Rutgers L. Rev. 1217, 1222 (2016).
See In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003); see also Ponoroff, supra note NOTEREF _Ref73871579 \h \* MERGEFORMAT 142 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370033003800370031003500370039000000 , at 1222.
United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986); see also In re Dairy Mart Convenience Stores, Inc., 351 F.3d at 92; S. Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir. 1985).
Law v. Siegel, 571 U.S. 415, 421 (2014) (citing 2 Collier on Bankruptcy ¶ 105.01 (16th ed. 2020)).
E. Section 305 Abstention
TOPThough a norm has developed that tying § 105 to another provision of the Code can justify all sorts of creative orders so long as they don’t contravene another section, Modell’s Case presents an odd challenge to this proposition. In Modell’s Case the order in question used § 105 with § 305—another discretionary provision that is viewed as an extraordinary remedy.
Under § 305(a)(1), a judge “may dismiss a case . . . or may suspend all proceedings in a case . . . at any time if—(1) the interests of creditors and the debtor would be better served by such dismissal or suspension.”145
11 U.S.C. § 305(a)(1).
11 U.S.C. § 305(c) (“An order under subsection (a) of this section dismissing a case or suspending all proceedings in a case . . . is not reviewable by appeal or otherwise by the court of appeals . . . .”).
In re RAI Mktg. Servs., Inc., 20 B.R. 943, 945 (Bankr. D. Kan. 1982) (“[G]iven that an abstention order is not appealable, this Court finds that § 305 should be strictly construed.”); In re Artists’ Outlet, Inc., 25 B.R. 231, 232 (Bankr. D. Mass. 1982) (“As a dismissal under § 305 is not appealable, application of § 305 is not to be made indiscriminately.”); In re 82 Milbar Boulevard, Inc., 91 B.R. 213, 216 (Bankr. E.D.N.Y. 1988) (“[Section 305] should be used sparingly . . . .”).
See In re Colonial Ford, Inc., 24 B.R. 1014, 1023 (Bankr. D. Utah 1982) (“Section 305(a)(1) permits ‘suspension’ as well as dismissal of a case, suggesting the possibility that efforts toward settlement may proceed on more than one front at the same time.”).
See, e.g., Pennino v. Evergreen Presbyterian Ministries (In re Pennino), 299 B.R. 536, 538 (B.A.P. 8th Cir. 2003) (“The Code . . . permits a court to abstain and dismiss a case only when the best interests of both the debtor and his or her creditors are better served.”); GMAM Inv. Funds Tr. I v. Globo Comunicacoes E Participacoes S.A. (In re Globo Comunicacoes E Participacoes S.A.), 317 B.R. 235, 255 (S.D.N.Y. 2004) (“Courts that have construed Section 305(a)(1) are in general agreement that abstention in a properly filed bankruptcy case is an extraordinary remedy, and that dismissal is appropriate under that provision only where the court finds that both ‘creditors and the debtor’ would be ‘better served’ by a dismissal.”); In re Iowa Coal Mining Co., 242 B.R. 661, 671 (Bankr. S.D. Iowa 1999) (“[T]he statute requires only that the best interests of both the debtors and the creditors be served.”).
See In re Trina Assocs., 128 B.R. 858, 867 (Bankr. E.D.N.Y. 1991) (“Although the tests are useful, in determining whether dismissal under § 305(a) is appropriate, courts must look to the facts of the individual cases.”); In re Birchall, 381 B.R. 13, 19 (Bankr. D. Mass. 2008) (considering “the particular facts of th[e] case” though they were “[n]ot included in the [ ] listed factors”); Farmer v. First Va. Bank, 22 B.R. 488, 491 (E.D. Va. 1982) (“[A]bstention is appropriate only if it will not impair the interests of any of the parties involved.”).
Though there are two different remedies under § 305, according to the limited legislative history, the legislature focused more on dismissal than suspension at the time of enactment. The House Judiciary Committee Report (“Committee Report”) noted that § 305(a) is designed to enable a bankruptcy court to decline jurisdiction.151
See H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 325 (1977).
Id.
Id.; see also 11 U.S.C. § 304(c) (repealed) (“[T]he court shall be guided by what will best assure an economical and expeditious administration of such estate, consistent with—(1) just treatment of all holders of claims against or interests in such estate; (2) protection of claimholders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding; (3) prevention of preferential or fraudulent dispositions of property of such estate; (4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title; (5) comity; and (6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.”).
H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 325 (1977).
See In re 801 S. Wells St. Ltd. Pshp., 192 B.R. 718, 723 (Bankr. N.D. Ill. 1996) (“Had Congress intended the illustrative example in the legislative history to limit the factual scenarios under which abstention is authorized, it would have included such language in § 305(a) itself.”).
See In re Spade, 258 B.R. 221, 230 (Bankr. D. Colo. 2001) (collecting cases) (“[T]he vast majority of cases applying § 305 . . . [v]iew[ ] their [the court’s] discretion to be . . . broad under § 305, these courts routinely use a wide variety of factors to evaluate the question of whether dismissal would better serve the interests of the creditors and the debtor.”).
Courts have applied § 305(a) in a wide range of cases. They have ordered § 305(a) dismissal when creditors file involuntary petitions to hinder out-of-court workouts.157
See In re Wine & Spirits Specialties, Inc., 142 B.R. 345, 347 (Bankr. W.D. Mo. 1992) (dismissing an involuntary petition filed by a single creditor where bankruptcy proceedings would disrupt an ongoing and profitable liquidation sale).
See, e.g., First Conn. Consulting Group, Inc. v. Mocco (In re First Conn. Consulting Group, Inc.), 340 B.R. 210 (D. Vt. 2006), aff’d, 254 Fed. App’x 64 (2d Cir. 2007) (affirming the bankruptcy judges use of equitable discretion under § 1112(b) and § 305(a) to dismiss Chapter 11 case for bad faith filing); In re Long Bay Dunes Homeowners Ass’n, 246 B.R. 801, 806 (Bankr. D.S.C. 1999) (dismissing the case under § 305 “[b]ecause the issues . . . appear[ed] to be primarily between two parties with a long history of litigation in the state court and numerous orders ha[d] already been entered by the state court dealing with the issues”).
See In re Spade, 258 B.R. 221, 235 (Bankr. D. Colo. 2001) (“There is no need for a federal court to resolve this two-party dispute that implicates purely state law issues.”).
See In re Milestone Educ. Inst., 167 B.R. 716, 724 (Bankr. D. Mass. 1994) (ordering “relief from stay for cause and concomitant suspension of all activity in th[e] case pursuant to 11 U.S.C. § 305” to preserve the case and enable “the Massachusetts Appeals Court to review the Superior Court’s order and address novel and unsettled issues of receivership law”); In re Duratech Indus., 241 B.R. 283, 287 (E.D.N.Y. 1999) (affirming the bankruptcy court’s decision “to abstain from administering Duratech’s Chapter 11 case” because the outcome of ongoing litigation the debtor and one of its creditors “could substantially bear upon Duratech’s ability to confirm a plan of reorganization”).
In re Duratech Indus., 241 B.R. 283, 287 (E.D.N.Y. 1999) (affirming the bankruptcy court’s decision “to abstain from administering Duratech’s Chapter 11 case” because the outcome of ongoing litigation the debtor and one of its creditors “could substantially bear upon Duratech’s ability to confirm a plan of reorganization”).
In re Northshore Mainland Servs., Inc., 537 B.R. 192, 208 (Bankr. D. Del. 2015) (“Here, considerations of comity support abstention pursuant to § 305(a).”).
Despite the variety of applications, § 305(a) should only be applied to a case in its entirety. The Committee Report emphasizes that “[a]bstention under this section . . . is of jurisdiction over the entire case.”163
H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 325 (1977).
See, e.g., Andrus v. Ajemian (In re Andrus), 338 B.R. 746, 750 (Bankr. E.D. Mich. 2006) (“By its terms, § 305(a) applies to entire cases or all proceedings in a case, not particular proceedings in a case, such as this adversary proceeding.”); In re Bellucci, 119 B.R. 763, 771 (Bankr. E.D. Cal. 1990) (“[Section 305(a)] is applicable on an all-or-nothing basis to the bankruptcy ‘case,’ . . . . The court cannot rely on section 305 abstention to pick and choose proceedings within the case.”).
III. Modell’s Misconceived Suspension Order
TOPJudge Papalia granted Modell’s proposed suspension order.165
March Suspension Hearing, supra note NOTEREF _Ref76920256 \h \* MERGEFORMAT 19 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003900320030003200350036000000 , at 62–63.
Id. at 8.
11 U.S.C. § 305(a)(1) (emphasis added).
11 U.S.C. § 105(a).
See March Suspension Hearing, supra note 19, at 60–65.
The order allowed the debtor to institute a new Limited Operating Budget170
Suspension Motion, supra note NOTEREF _Ref64231226 \h \* MERGEFORMAT 28 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200330031003200320036000000 , at Ex. 1.
March Suspension Hearing, supra note 19, at 39–40.
Id. (Judge Papalia: “When in my long life . . . have there been more extraordinary circumstances or would there be a better reason to at least put it off for the 60 days, the 365(d)(3)?”).
See Fed. R. Bankr. P. 9006.
Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305 at 3, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
Order Further Suspending the Debtor’s Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. April 30, 2020), ECF No. 294 (scheduling status conference for May 20); Order Further Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305 Through and Including June 15, 2020 and Setting Final Hearing on Cash Collateral Motion, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. June 5, 2020), ECF No. 371 (scheduling status conference for June 11).
See Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305 at 4, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
The landlords’ objected that Modell’s was “run[ning] [the] case[ ] on the backs of the landlords.”177
March Suspension Hearing, supra note NOTEREF _Ref76920256 \h \* MERGEFORMAT 19 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003900320030003200350036000000 , at 40.
April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h \* MERGEFORMAT 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 100.
Id. at 13.
The landlords protested that Judge Papalia was inappropriately altering their substantive right to “timely payment” under the unexpired lease agreements.180
See id. at 37.
Id. at 46–47.
See id. at 33.
571 U.S. 415 (2014).
Id. at 37. See also Limited Objection of 498 Seventh LLC to Extension of Temporary Suspension of Debtors’ Chapter 11 Cases at 7, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. April 30, 2020), ECF No. 254.
Judge Papalia did not use § 105(a) in a way that altered the landlords’ substantive rights. Indeed, it is true that § 105(a) should not be used to alter parties’ substantive rights.185
United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986); see also In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003); S. Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir. 1985).
Judge Papalia also did not use § 105(a) in a way that contravened § 365(d)(3), which would have been unlawful under Seigel. Because of the diversity of decisions about the § 365(d)(3) rent obligations, the question of exactly when and whether Modell’s had to pay this rent remained an open issue that could have required litigation. Judge Papalia simply postponed the determination of this issue.
It is also a good thing that Judge Papalia did not ask the parties to litigate the issue at that juncture. Consider the following counterfactual: If Judge Papalia had asked the landlords to litigate the issue with so much of Modell’s value still tied up in merchandise, legal fees might have depleted the dwindling supply of cash earmarked to pay essential expenses until the economy reopened. If the landlords had prevailed and received administrative expense priority, they would have a claim to be paid at the end of the case, not immediately. After expending resources litigating the issue, they would be in close to the same place—holding a claim to be paid sometime in the future if Modell’s had enough money to pay. Alternatively, assuming the court granted immediate payment, the landlords would be awarded their rent payments from a pool of money insufficient to pay them in full.186
See April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 38–39 (Judge Papalia: “[T]hey have three million which is not even a - - as I see it, not even a half a month. But they need a million anyway to get started.”).
See id.
From a practical perspective, Judge Papalia probably made the best decision for the case by delaying the rent issue and allowing the debtors to run on the Limited Operating Budget. If debtor’s counsel kept his word and Modell’s eventually paid the rent in full when stores reopened, the § 365(d)(3) issue might not even require litigation—saving an unnecessary legal expense.
At the hearing, Judge Papalia reassured the landlords that he took their concerns seriously. The landlords still had access to the court.188
Id. at 57 (Judge Papalia: “[T]he order that we have in place says you can ask for relief . . . .”).
Id.
Id. at 56.
Id. at 14.
Id. at 56.
See id. at 57–59.
However, as outlined by the discussion concerning the ambiguity of the landlords’ right to payment under § 365(d)(3), this argument is comparing apples to oranges. The landlords did not have a guaranteed right to payment that could overpower the absolute priority rule. The banks that provided cash to run the sales had a security interest in Modell’s assets.194
See Interim Order (I) Authorizing Use of Cash Collateral and Affording Adequate Protection; (II) Modifying Automatic Stay; (III) Scheduling a Final Hearing; and (IV) Granting Related Relief at 8, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 13, 2020), ECF No. 66.
Practically, Judge Papalia’s anomalous use of § 305(a) was unappealable under § 305(c). Judge Papalia reasoned soundly that the COVID-19 pandemic presented extraordinary circumstances. He appropriately attempted to mitigate any persuasive effect of his ruling on future cases by highlighting the extraordinary circumstances justifying an extraordinary order.195
March Suspension Hearing, supra note NOTEREF _Ref76920256 \h \* MERGEFORMAT 19 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003900320030003200350036000000 , at 39–40; April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 100 (Judge Papalia: “There’s no question that it’s an extraordinary remedy, just as I said at the other hearing — at the previous hearing. There is no question that these are extraordinary times”).
See, e.g., In re My Type, Inc., 407 B.R. 329, 337 (Bankr. C.D. Ill. 2009) (“Uncertainty, while it may be a boon to bankruptcy trustees, is the bane of commercial laws, whose primary purpose is to promote certainty in commercial transactions.”).
Legally, however, Judge Papalia did not have the authority to grant this order. Both § 105 and § 305 are extraordinary remedies. Section 305(a) does not permit a partial suspension. The temporary order enabled Modell’s to continue to receive the benefits of the automatic stay under § 362 while using some property of the estate to pay essential expenses on a limited operating budget.197
Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305 at 4, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
See, e.g., In re Bellucci, 119 B.R. 763, 771 (Bankr. E.D. Cal. 1990).
Furthermore, the prohibition against appeal under § 305(c) should inform the usage of § 305(a). Bankruptcy judges should not be able to use § 105(a) to enable a bespoke, piecemeal application of § 305(a) that alters the rights of the parties simply because their decision cannot be appealed. The § 305(c) prevention of appeal of a decision to dismiss or suspend all proceedings indicates Congress must have intended a narrow and simple application for § 305(a) that bankruptcy judges could apply with little or no error. A bespoke tailoring of “suspension” using § 105(a) increases judicial discretion and necessarily increases the likelihood of error. This is especially true in light the Supreme Court’s comments in Siegel: “Section 105(a) confers authority to ‘carry out’ the provisions of the Code, but it is quite impossible to do that by taking action that the Code prohibits.”199
Law v. Siegel, 571 U.S. 415, 421 (2014).
Roche v. Evaporated Milk Ass’n, 319 U.S. 21, 26 (1943).
See Mallard v. U.S. Dist. Court for the S. Dist. of Iowa, 490 U.S. 296, 309 (1989) (“To ensure that mandamus remains an extraordinary remedy, petitioners must show that they lack adequate alternative means to obtain the relief they seek.”).
Interestingly, by the end of the suspension extension hearing on April 30, the understanding between the parties more closely resembled an order modifying the budget than a partial suspension of the proceedings. In short, the same effect could have and should have been legally achieved using § 105(a) paired with § 363(b)(1). Section 363(b)(1) permits “[t]he trustee . . . [to] use, sell, or lease, other than in the ordinary course of business, property of the estate.” Instead of granting the Suspension Order under § 105(a) and § 305(a), Judge Papalia should have clarified the applicable uses of § 305(a) and encouraged the debtor to refile using § 105(a) and § 363(b)(1). While the outcome would have been the same, the order would have avoided opening up an avenue for possible abuse of § 305(a).
IV. Conclusion
TOPIn moments of crisis, lawyers make novel requests to solve novel problems. Though extraordinary relief may be warranted in rare cases, bankruptcy judges should resist problem-solving that contradicts accepted understandings of the Code. Bankruptcy judges may still be able to reach the practical solutions under legitimate legal authority even in the face of catastrophic unforeseen circumstances like a pandemic. Modell’s Case illustrates the resilience of the bankruptcy Code and of the bankruptcy courts. Though the economic shutdown posed a significant obstacle for the success of the proceedings, upon closer examination, two run-of-the-mill provisions—§ 363(b)(1) and § 105(a)—could have resolved seemingly extraordinary COVID-19 problems.
- 1See Khristopher J. Brooks, Bracing for the Next Phase of the Coronavirus Recession: Bankruptcies, CBS News: Moneywatch (June 9, 2020), https://www.cbsnews.com/news/bankruptcy-coronavirus-recession-2020/[https://perma.cc/QP7V-8U7R].
- 2See Peter Coy, Bankruptcies Show a Surprising Decline, Bloomberg Businessweek (Oct. 9, 2020), https://www.bloomberg.com/news/articles/2020-10-09/bankruptcies-show-a-surprising-decline[https://perma.cc/2V6A-ULPN].
- 3In the United States, the President declared a national emergency, and state governors issued “stay-at-home” orders that had the effect of shutting down the economy. Business leaders had to adapt rapidly to these unprecedented government orders. This was especially true for captains at the helm of distressed corporations in Chapter 11 bankruptcy. Proclamation No. 9994, Fed. Reg. 15,337 (Mar. 13, 2020); see Sarah Mervosh et al., See Which States and Cities Have Told Residents to Stay at Home, N.Y. Times (Apr. 20, 2020), https://www.nytimes.com/interactive/2020/us/coronavirus-stay-at-home-order.html[https://perma.cc/N39U-8ACY]; see also Status of State COVID-19 Emergency Orders, Nat’l Governors Ass’n (last updated July 19, 2021), https://www.nga.org/coronavirus/[https://perma.cc/FQD5-4HM7];see, e.g., Order of the Governor of the Commonwealth of Pennsylvania Regarding the Closure of All Businesses That Are Not Life Sustaining (Mar. 19, 2020) (closing non-essential businesses); N.Y. Exec. Order 202.8 (Mar. 20, 2020) (same); Conn. Exec. Order 7H (Mar. 20, 2020) (same).
- 4See 11 U.S.C. § 363(b)(1).
- 5See id.
- 6See 11 U.S.C. § 1123.
- 7No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020).
- 8See Walter Loeb, More Than 15,500 Stores Are Closing in 2020 So Far—A Number that Will Surely Rise, Forbes (July 5, 2020), https://www.forbes.com/sites/walterloeb/2020/07/06/9274-stores-are-closing-in-2020--its-the-pandemic-and-high-debt--more-will-close/?sh=5a896a2d729f[https://perma.cc/9YUE-WDDB](explaining that the decline of brick-and-mortar retail sales (the “retail apocalypse”), which began in 2010 with the rise of e-commerce competition, accelerated during the pandemic summer of 2020).
- 9Voluntary Petition for Non-Individuals Filing for Bankruptcy, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 1 [hereinafter “Voluntary Petition”]. The filing included thirteen debtor entities including Modell’s Sporting Goods, Inc.; Modell’s NJ II, Inc.; Modell’s DC II, Inc.; Modell’s DE II, Inc.; Modell’s II, Inc.; Modell’s Maryland II, Inc.; Modell’s Massachusetts, Inc.; Modell’s NH, Inc.; Modell’s NY II, Inc.; Modell’s Online, Inc.; Modell’s PA II, Inc.; Modell’s VA II, Inc.; and MSG Licensing, Inc.
- 10In re Owens Corning, 419 F.3d 195, 211 (3d Cir. 2005), as amended (Aug. 23, 2005), as amended (Sept. 2, 2005), as amended (Oct. 12, 2005), as amended (Nov. 1, 2007)
(“[T]he general expectation of state law and of the Bankruptcy Code, and thus of commercial markets, is that courts respect entity separateness.”).
- 11See Fed. R. Bankr. P. 1015.
- 12Order Pursuant to Fed. R. Bankr. P. 1015(b) Directing Joint Administration of Related Chapter 11 Cases at 6, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 88.
- 13Interim Order (I) Authorizing the Debtors to Assume the Consulting Agreement, (II) Approving Procedures for Store Closing Sales, and (III) Approving the Implementation of Customary Store Bonus Program and Payments to Non-Insiders Thereunder at 6, 39, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 63 [hereinafter “Mar. 13 Interim Order”].
- 14Debtor’s Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to Assume the Consulting Agreement, (II) Approving Procedures for Store Closing Sales, and (III) Approving the Implementation of Customary Store Bonus Program and Payments to Non-Insiders Thereunder at 3, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 11, 2020), ECF No. 8 .
- 15See id. at 5.
- 16See id. at 4.
- 17See id.
- 18See id. at 5, 20.
- 19Transcript of Motion Hearing Before Honorable Vincent F. Papalia United States Bankruptcy Judge at 5, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 31, 2020), ECF No. 187 [hereinafter “March Suspension Hearing”].
- 20Interim Order (I) Authorizing Use of Cash Collateral and Affording Adequate Protection; (II) Modifying Automatic Stay; (III) Scheduling A Final Hearing; And (IV) Granting Related Relief at 57, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 31, 2020), ECF No. 66.
- 21Id.
- 22Id.
- 23Id.
- 24Id.
- 25See Mervosh et al., supra note NOTEREF _Ref76593996 \h \* MERGEFORMAT 3 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003500390033003900390036000000 .
- 26See id.
- 27See id.
- 28Debtors’ Verified Application in Support of Emergency Motion for Entry of an Order Temporarily Suspending Their Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305 at 2–3, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 115 [hereinafter “Suspension Motion”].
- 29See id. at 6–7.
- 30See id. at Ex. A. (Modified Budget); see also Transcript of Telephonic Hearing Re: Doc #115 Motion Re: Debtor’s Verified Application In Support of Emergency Motion for Entry of an Order Temporarily Suspending Their Chapter 11 Cases Pursuant to 11 U.S.C. Sections 105 and 305 Filed by Michael D. Sirota on Behalf of Modell’s Sporting Goods, Inc. and Objections to Debtor’s Verified Application in Support of Emergency Motion for Entry of an Order Temporarily Suspending their Chapter 11 Cases Pursuant to 11 U.S.C. Sections 105 and 305 Filed by Michael D. Sirota on Behalf of Modell’s Sporting Goods, Inc. at 13, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J., Apr. 30, 2020), ECF No. 210 [hereinafter “April Suspension Extension Hearing”] (Judge Papalia: “[T]here’s not enough cash on hand to pay one month’s rent.”).
- 31See April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h \* MERGEFORMAT 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 95 (“[T]hese landlord objections represent 44 of the debtor’s landlords and 53 of the debtor’s more than 134 – 130 stores or approximately 39.5 percent, so a significant portion of the stores.”).
- 32Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
- 3311 U.S.C. § 365(d)(3).
- 34Id.
- 35Order Further Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Apr. 30, 2020), ECF No. 294.
- 36Order Further Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305 Through and Including June 15, 2020 and Setting Final Hearing on Cash Collateral Motion, In re Modell’s Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. June 5, 2020), ECF No. 371.
- 37See 11 U.S.C. § 305(c); see also 28 U.S.C.A. § 158(a)(1–3); April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h \* MERGEFORMAT 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 11 (Mr. Sirota for the debtor: “There’s no binding Third Circuit or circuit authority under 305(a), and that’s for good reason because there’s no relief and no ability to appeal a 305 ruling to a circuit or to the United States Supreme Court.”).
- 3811 U.S.C. §§ 105, 363(b)(1).
- 39See In re Integrated Telecom Express, Inc., 384 F.3d 108, 121 (3d Cir. 2004); 11 U.S.C. § 301.
- 40See Douglas G. Baird, Elements of Bankruptcy 19 (Foundation Press, 6th ed. 2014).
- 41Id. at 59.
- 42Id.
- 4311 U.S.C. § 1107(a); see also Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 573 (3d Cir. 2003) (“In Chapter 11 cases where no trustee is appointed, § 1107(a) provides that the debtor-in-possession, i.e., the debtor’s management, enjoys the powers that would otherwise vest in the bankruptcy trustee. Along with those powers, of course, comes the trustee’s fiduciary duty to maximize the value of the bankruptcy estate.”).
- 44Chinery, 330 F.3d at 573.
- 45See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 20.
- 46Will Kenton, Going Concern, Investopedia (last updated Apr. 20, 2021), https://www.investopedia.com/terms/g/goingconcern.asp[https://perma.cc/M46R-65RA].
- 47See 11 U.S.C. §§ 1129, 1141; see also Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 19–20.
- 4811 U.S.C. § 1129(b).
- 4911 U.S.C. § 1141; see also Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 20.
- 50See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 20.
- 51See id.
- 52See id. at 19, 235–38.
- 53See id. at 58, 59.
- 54Mar. 13 Interim Order, supra note NOTEREF _Ref64227007 \h \* MERGEFORMAT 13 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320037003000300037000000 .
- 5511 U.S.C. § 362; but see 11 U.S.C. §§ 544(b), 547, 548 (collectively providing the trustee with avoiding powers that can claw property back into the estate if, for example, the property was improperly snatched on the eve of bankruptcy under § 547 “Preferences” or in the years preceding under § 548 “Fraudulent Transfers and Obligations” along with § 544).
- 56See id.
- 57See 11 U.S.C. § 1107.
- 58See United States v. Whiting Pools, 462 U.S. 198, 203 (1983) (explaining that a “reorganization effort would have small chance of success . . . if property essential to running the business were excluded from the estate”); see also Douglas G. Baird et al., The Bankruptcy Partition, 166 U. Penn. L. Rev. 1675, 1684 (2018).
- 5911 U.S.C. § 541(a)(1).
- 60See, e.g., In re Costas, 555 F.3d 790, 794 (9th Cir. 2009); In re Ginn, 186 B.R. 898, 902 (Bankr. D. Md. 1995) (referencing “the Butner principle that nonbankruptcy law should apply the same inside as outside of a bankruptcy case”).
- 61440 U.S. 48 (1979).
- 62Id. at 54.
- 6311 U.S.C. § 362(d).
- 64See id.
- 65See 11 U.S.C. §§ 362(d), 362(f), 363(b)(1).
- 6611 U.S.C § 362(d)(1).
- 6711 U.S.C. § 101(5).
- 68Id.
- 6911 U.S.C. § 363(f) (“The trustee may sell property . . . free and clear of any interest in such property . . . .”). This Comment will not address these sales beyond this reference. For a discussion and critique of “free and clear” sales under § 363(f), see generally Karen Cordry, Section 363 Sales: Cherry-Picking the Code: Successor Liability and Lessons from Wile E. Coyote, 28 Norton J. Bankr. L. & Prac. 1 (Dec. 2019) (explaining that “free and clear” sales have grown into a sale of parts or the entirety of a business without confirmation of a Chapter 11 plan).
- 7011 U.S.C. § 1141(c) (“[T]he property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.”).
- 71See Mar. 13 Interim Order, supra note NOTEREF _Ref64227007 \h \* MERGEFORMAT 13 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320037003000300037000000 .
- 7211 U.S.C. § 1121; see 11 U.S.C. § 1123.
- 7311 U.S.C. §§ 1122, 1123(a)(1)–(4).
- 74See 11 U.S.C. § 1129; see also 11 U.S.C. § 1126.
- 75See 11 U.S.C. § 726(a), (b) (requiring pro rata distribution); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 (1989) (explaining that creditors hold “hierarchically ordered claims to a pro rata share of the bankruptcy res”).
- 76See 11 U.S.C. § 726(a).
- 77See id.
- 78See id.
- 79See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 75 (“The dynamics of any negotiation are defined by what there is to bargain over and the place of each of the parties in the pecking order.”).
- 80At a cramdown hearing, the debtor in possession seeks confirmation of a reorganization plan over the dissent of a creditor class. 11 U.S.C. § 1129(b).
- 81See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 74 (“The absolute priority rule is central to the law of corporate reorganizations because it is a source of substantive rights as well as the procedural protections that each participant in a reorganization enjoys.”). For a cogent discussion of the absolute priority rule’s history and evolution see generally Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 .
- 82Id. at 69 (“Case [a Supreme Court decision] . . . forged a link between the phrases ‘fair and equitable’ and ‘absolute priority,’ a link that lawyers, judges, and Congress have accepted ever since.”).
- 83See 11 U.S.C. § 1129(b)(2)(A).
- 8411 U.S.C. § 1129(b)(2)(B)(ii).
- 85See id.
- 86See Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 Stan. L. Rev. 69, 72 (1991).
- 87See, e.g., In re Toy & Sports Warehouse, Inc., 37 B.R. 141, 150 (Bankr. S.D.N.Y. 1984)
(explaining that “[t]he debtors’ equity shareholders in [the lowest class within the Absolute Priority Rule] are impaired under the plan because they will be wiped out and all of the stock of [the company] will be cancelled”).
- 88See 11 U.S.C. § 1129(b)(1) (“[T]he court . . . shall confirm the plan . . . if the plan . . . is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted the plan.”).
- 8911 U.S.C. § 507(a).
- 90Id.
- 9111 U.S.C. § 503(b)(1)–(9).
- 9211 U.S.C. § 503(b).
- 93Alec P. Ostrow, The Animal Farm of Administrative Insolvency, 11 Am. Bankr. Inst. L. Rev. 339, 340 (2003) (noting that unsuccessful Chapter 11 cases can result in the debtor being unable to pay in full the bills it accumulated during the proceedings—a nightmare scenario for professionals and lenders who risked their time and resources in the endeavor).
- 94See id. at 345.
- 95See 11 U.S.C. § 331.
- 96Id.
- 97Ostrow, supra note NOTEREF _Ref64228905 \h \* MERGEFORMAT 94 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320038003900300035000000 , at 346–48.
- 9811 U.S.C. § 726(b).
- 9911 U.S.C. § 503(b).
- 100See 11 U.S.C. § 365(a), (d)(4)(A)(i–ii).
- 101See Baird, supra note NOTEREF _Ref77610264 \h 41 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370037003600310030003200360034000000 , at 134.
- 102See In re Airlift Int’l, Inc., 761 F.2d 1503, 1508 (11th Cir. 1985).
- 10311 U.S.C. § 365(g).
- 10411 U.S.C. § 101(5).
- 10511 U.S.C. § 365(g) (“[T]he rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such . . . lease.”).
- 106See id.
- 107See 11 U.S.C. § 365(d)(4)(A)(i–ii), (B)(i–ii).
- 108Id.
- 109Pub. L. No. 98-353, 98 Stat. 333.
- 110In re Mr. Gatti’s, 164 B.R. 929, 932 (Bankr. W.D. Tex. 1994) (quoting 130 Cong. Rec. S8891, 599 (1984) (statement by Sen. Hatch)).
- 111Id.
- 112Id. at 933 (“As straightforward as newly added Section 365(d)(3) was regarding the obligation of the debtor-tenant to fully and timely perform, it was wholly lacking with regard to any expression of the remedies available to the lessor in the event of a default.”); see also 11 U.S.C. § 365.
- 113See CIT Comm. Fin. Corp. v. Midway Airlines Corp. (In re Midway Airlines Corp.), 406 F.3d 229, 235 (4th Cir. 2005) (“While it is clear that § 365(d)(10) and § 365(d)(5) impose on [the debtor-in-possession] the duty to perform all lease obligations in a timely manner, these sections do not specify a lessor’s remedy should the [debtor-in-possession] fail to perform.”).
- 114831 F.2d 848 (9th Cir. 1987).
- 115Id. at 854.
- 116Id.
- 117In re Westview 74th St. Drug Corp., 59 B.R. 747, 754 (Bankr. S.D.N.Y. 1986) (“[T]he appropriate remedy for such a failure is one which should be formulated by the court after a review of the facts of the particular case.”).
- 118In re DBSI, Inc., 407 B.R. 159, 164 (Bankr. D. Del. 2009).
- 119See, e.g., In re Mr. Gatti’s, 164 B.R. 929, 935–38, 946 (Bankr. W.D. Tex. 1994) (citing other courts that follow the minority approach and adopting the minority approach).
- 120See, e.g., In re Worths Stores Corp., 135 B.R. 112, 116 (Bankr. E.D. Mo. 1991) (holding that the lessor need not meet the requirements under § 503(b)(1)(A)); see also In re Mr. Gatti’s, 164 B.R. at 937–40 (identifying courts that follow the majority approach).
- 121See, e.g., In re Telesphere Communications, Inc., 148 B.R. 525, 531 (Bankr. N.D. Ill. 1992) (“Pursuant to the plain language of Section 365(d)(3), the trustee or debtor in possession has a duty, prior to assumption or rejection of a lease of nonresidential real property, to make timely payment of the full rent due, from any available funds (subject to Section 363(c)(2) of the Code), regardless of the administrative solvency of the estate.”).
- 122In re Mr. Gatti’s, 164 B.R. at 940–42.
- 123Ostrow, supra note NOTEREF _Ref64228905 \h \* MERGEFORMAT 94 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200320038003900300035000000 , at 347–48.
- 124See United States v. Energy Res. Co., 495 U.S. 545, 549 (1990) (“[Section 105(a)] [is] consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.”).
- 12511 U.S.C. § 105(a).
- 126See, e.g., Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1189–90 (9th Cir. 2003) (recognizing the bankruptcy court’s authority to sanction a party for civil contempt under § 105(a)); Bayer Corp. v. MascoTech, Inc. (In re Autostyle Plastics, Inc.), 269 F.3d 726, 748 (6th Cir. 2001) (explaining that “a bankruptcy court can consider whether to recharacterize a claim of debt as equity” using its authority under section 105(a)).
- 127Bayer Corp., 269 F.3d at 749 (allowing recharacterization of insider debt as equity). But see Unsecured Creditors Comm. Of Pac. Express, Inc. et al. v. Pioneer Com. Funding Corp. (In re Pacific Express, Inc.), 69 B.R. 112, 115 (B.A.P. 9th Cir. 1986) (explaining that because “there is a specific provision governing [recharacterization],” (Equitable Subordination under 11 U.S.C. § 510(c)) “it is inconsistent with the interpretation of the Bankruptcy Code to allow such determinations to be made under different standards through the use of a court’s equitable powers” under section 105(a)); In re CoServ, L.L.C., 273 B.R. 487, 497 (Bankr. N.D. Tex. 2002) (explaining that “it is only logical that the bankruptcy court be able to use Section 105(a) of the Code to authorize satisfaction of the prepetition claim in aid of preservation or enhancement of the estate”); In re Kmart Corp., 359 F.3d 866, 874 (7th Cir. 2004) (ruling that § 105(a) without another provision of the Code does not grant the court authority to issue payment of prepetition claims in what have become known as critical vendor orders).
- 128See Palmer v. United States (In re Palmer), 219 F.3d 580, 586 (6th Cir. 2000) (explaining that though “these equitable powers [under section 105(a)] are sufficient to toll the § 507(a)(8)(A)(i) look-back period if the facts of a given case require such an action,” they do not create an “automatic tolling provision that Congress expressly failed to include”); In re Lehigh & N. E. Ry. Co., 657 F.2d 570, 582 (3d Cir. 1981) (explaining that the court’s use of 105(a) to order payment of pre-petition creditors “is neither an expansive nor a broad [holding]” but is particular to “the general principles . . . in the Trust Fund cases” and “cannot control a situation where all funds have been dissipated”).
- 1292 Collier on Bankruptcy ¶ 105.01 (16th ed. 2020).
- 130See id.
- 131See Law v. Siegel, 571 U.S. 415, 421 (2014).
- 1322 Collier on Bankruptcy ¶ 105.01 (16th ed. 2020) (“The broad view currently prevails, and this tracks the power of district courts in equity receiverships.”).
- 133But see id. ¶ 105.01, n. 6 (“Section 105 of the Bankruptcy Code bestows on bankruptcy courts a specific equitable power to act in accordance with principles of justice and fairness. Bankruptcy courts have broad latitude in exercising this power.”) (quoting Sears, Roebuck & Co. v. Spivey, 265 B.R. 357, 371 (E.D.N.Y. 2001)).
- 134See id. ¶ 105.01.
- 135See In re Oi Brasil Holdings Cooperatief U.A., 578 B.R. 169, 201 (Bankr. S.D.N.Y. 2017), reconsideration denied, 582 B.R. 358 (Bankr. S.D.N.Y. 2018) (“Section 105(a) is understood as providing courts with discretion to accommodate the unique facts of a case consistent with the policies or directives set by the other applicable substantive provisions of the Bankruptcy Code.”); see also New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91–92 (2d Cir. 2003) (“The equitable power conferred . . . by section 105(a) is the power to exercise equity in carrying out the provisions of the Bankruptcy Code, rather than to further the purposes of the Code generally, or otherwise to do the right thing. This language suggests that an exercise of section 105 power be tied to another Bankruptcy Code section and not merely to a general bankruptcy concept or objective.”) (internal citations omitted); Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392, 403 (1st Cir. 2002) (“The authority bestowed [by section 105(a)] may be invoked only if, and to the extent that, the equitable remedy dispensed by the court is necessary to preserve an identifiable right conferred elsewhere in the Bankruptcy Code.”).
- 136359 F.3d 866 (7th Cir. 2004).
- 137Id. at 871.
- 138Id.
- 139808 F.3d 1186, 1188 (7th Cir. 2015).
- 140Id. at 1188.
- 141Lawrence Ponoroff, Whither Recharacterization, 68 Rutgers L. Rev. 1217, 1222 (2016).
- 142See In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003); see also Ponoroff, supra note NOTEREF _Ref73871579 \h \* MERGEFORMAT 142 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370033003800370031003500370039000000 , at 1222.
- 143United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986); see also In re Dairy Mart Convenience Stores, Inc., 351 F.3d at 92; S. Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir. 1985).
- 144Law v. Siegel, 571 U.S. 415, 421 (2014) (citing 2 Collier on Bankruptcy ¶ 105.01 (16th ed. 2020)).
- 14511 U.S.C. § 305(a)(1).
- 14611 U.S.C. § 305(c) (“An order under subsection (a) of this section dismissing a case or suspending all proceedings in a case . . . is not reviewable by appeal or otherwise by the court of appeals . . . .”).
- 147In re RAI Mktg. Servs., Inc., 20 B.R. 943, 945 (Bankr. D. Kan. 1982) (“[G]iven that an abstention order is not appealable, this Court finds that § 305 should be strictly construed.”); In re Artists’ Outlet, Inc., 25 B.R. 231, 232 (Bankr. D. Mass. 1982) (“As a dismissal under § 305 is not appealable, application of § 305 is not to be made indiscriminately.”); In re 82 Milbar Boulevard, Inc., 91 B.R. 213, 216 (Bankr. E.D.N.Y. 1988) (“[Section 305] should be used sparingly . . . .”).
- 148See In re Colonial Ford, Inc., 24 B.R. 1014, 1023 (Bankr. D. Utah 1982) (“Section 305(a)(1) permits ‘suspension’ as well as dismissal of a case, suggesting the possibility that efforts toward settlement may proceed on more than one front at the same time.”).
- 149See, e.g., Pennino v. Evergreen Presbyterian Ministries (In re Pennino), 299 B.R. 536, 538 (B.A.P. 8th Cir. 2003) (“The Code . . . permits a court to abstain and dismiss a case only when the best interests of both the debtor and his or her creditors are better served.”); GMAM Inv. Funds Tr. I v. Globo Comunicacoes E Participacoes S.A. (In re Globo Comunicacoes E Participacoes S.A.), 317 B.R. 235, 255 (S.D.N.Y. 2004) (“Courts that have construed Section 305(a)(1) are in general agreement that abstention in a properly filed bankruptcy case is an extraordinary remedy, and that dismissal is appropriate under that provision only where the court finds that both ‘creditors and the debtor’ would be ‘better served’ by a dismissal.”); In re Iowa Coal Mining Co., 242 B.R. 661, 671 (Bankr. S.D. Iowa 1999) (“[T]he statute requires only that the best interests of both the debtors and the creditors be served.”).
- 150See In re Trina Assocs., 128 B.R. 858, 867 (Bankr. E.D.N.Y. 1991) (“Although the tests are useful, in determining whether dismissal under § 305(a) is appropriate, courts must look to the facts of the individual cases.”); In re Birchall, 381 B.R. 13, 19 (Bankr. D. Mass. 2008) (considering “the particular facts of th[e] case” though they were “[n]ot included in the [ ] listed factors”); Farmer v. First Va. Bank, 22 B.R. 488, 491 (E.D. Va. 1982) (“[A]bstention is appropriate only if it will not impair the interests of any of the parties involved.”).
- 151See H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 325 (1977).
- 152Id.
- 153Id.; see also 11 U.S.C. § 304(c) (repealed) (“[T]he court shall be guided by what will best assure an economical and expeditious administration of such estate, consistent with—(1) just treatment of all holders of claims against or interests in such estate; (2) protection of claimholders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding; (3) prevention of preferential or fraudulent dispositions of property of such estate; (4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title; (5) comity; and (6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.”).
- 154H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 325 (1977).
- 155See In re 801 S. Wells St. Ltd. Pshp., 192 B.R. 718, 723 (Bankr. N.D. Ill. 1996) (“Had Congress intended the illustrative example in the legislative history to limit the factual scenarios under which abstention is authorized, it would have included such language in § 305(a) itself.”).
- 156See In re Spade, 258 B.R. 221, 230 (Bankr. D. Colo. 2001) (collecting cases) (“[T]he vast majority of cases applying § 305 . . . [v]iew[ ] their [the court’s] discretion to be . . . broad under § 305, these courts routinely use a wide variety of factors to evaluate the question of whether dismissal would better serve the interests of the creditors and the debtor.”).
- 157See In re Wine & Spirits Specialties, Inc., 142 B.R. 345, 347 (Bankr. W.D. Mo. 1992) (dismissing an involuntary petition filed by a single creditor where bankruptcy proceedings would disrupt an ongoing and profitable liquidation sale).
- 158See, e.g., First Conn. Consulting Group, Inc. v. Mocco (In re First Conn. Consulting Group, Inc.), 340 B.R. 210 (D. Vt. 2006), aff’d, 254 Fed. App’x 64 (2d Cir. 2007) (affirming the bankruptcy judges use of equitable discretion under § 1112(b) and § 305(a) to dismiss Chapter 11 case for bad faith filing); In re Long Bay Dunes Homeowners Ass’n, 246 B.R. 801, 806 (Bankr. D.S.C. 1999) (dismissing the case under § 305 “[b]ecause the issues . . . appear[ed] to be primarily between two parties with a long history of litigation in the state court and numerous orders ha[d] already been entered by the state court dealing with the issues”).
- 159See In re Spade, 258 B.R. 221, 235 (Bankr. D. Colo. 2001) (“There is no need for a federal court to resolve this two-party dispute that implicates purely state law issues.”).
- 160See In re Milestone Educ. Inst., 167 B.R. 716, 724 (Bankr. D. Mass. 1994) (ordering “relief from stay for cause and concomitant suspension of all activity in th[e] case pursuant to 11 U.S.C. § 305” to preserve the case and enable “the Massachusetts Appeals Court to review the Superior Court’s order and address novel and unsettled issues of receivership law”); In re Duratech Indus., 241 B.R. 283, 287 (E.D.N.Y. 1999) (affirming the bankruptcy court’s decision “to abstain from administering Duratech’s Chapter 11 case” because the outcome of ongoing litigation the debtor and one of its creditors “could substantially bear upon Duratech’s ability to confirm a plan of reorganization”).
- 161In re Duratech Indus., 241 B.R. 283, 287 (E.D.N.Y. 1999) (affirming the bankruptcy court’s decision “to abstain from administering Duratech’s Chapter 11 case” because the outcome of ongoing litigation the debtor and one of its creditors “could substantially bear upon Duratech’s ability to confirm a plan of reorganization”).
- 162In re Northshore Mainland Servs., Inc., 537 B.R. 192, 208 (Bankr. D. Del. 2015) (“Here, considerations of comity support abstention pursuant to § 305(a).”).
- 163H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 325 (1977).
- 164See, e.g., Andrus v. Ajemian (In re Andrus), 338 B.R. 746, 750 (Bankr. E.D. Mich. 2006) (“By its terms, § 305(a) applies to entire cases or all proceedings in a case, not particular proceedings in a case, such as this adversary proceeding.”); In re Bellucci, 119 B.R. 763, 771 (Bankr. E.D. Cal. 1990) (“[Section 305(a)] is applicable on an all-or-nothing basis to the bankruptcy ‘case,’ . . . . The court cannot rely on section 305 abstention to pick and choose proceedings within the case.”).
- 165March Suspension Hearing, supra note NOTEREF _Ref76920256 \h \* MERGEFORMAT 19 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003900320030003200350036000000 , at 62–63.
- 166Id. at 8.
- 16711 U.S.C. § 305(a)(1) (emphasis added).
- 16811 U.S.C. § 105(a).
- 169See March Suspension Hearing, supra note 19, at 60–65.
- 170Suspension Motion, supra note NOTEREF _Ref64231226 \h \* MERGEFORMAT 28 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600360034003200330031003200320036000000 , at Ex. 1.
- 171March Suspension Hearing, supra note 19, at 39–40.
- 172Id. (Judge Papalia: “When in my long life . . . have there been more extraordinary circumstances or would there be a better reason to at least put it off for the 60 days, the 365(d)(3)?”).
- 173See Fed. R. Bankr. P. 9006.
- 174Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305 at 3, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
- 175Order Further Suspending the Debtor’s Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. April 30, 2020), ECF No. 294 (scheduling status conference for May 20); Order Further Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.S.C. §§ 105 and 305 Through and Including June 15, 2020 and Setting Final Hearing on Cash Collateral Motion, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. June 5, 2020), ECF No. 371 (scheduling status conference for June 11).
- 176See Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305 at 4, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
- 177March Suspension Hearing, supra note NOTEREF _Ref76920256 \h \* MERGEFORMAT 19 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003900320030003200350036000000 , at 40.
- 178April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h \* MERGEFORMAT 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 100.
- 179Id. at 13.
- 180See id. at 37.
- 181Id. at 46–47.
- 182See id. at 33.
- 183571 U.S. 415 (2014).
- 184Id. at 37. See also Limited Objection of 498 Seventh LLC to Extension of Temporary Suspension of Debtors’ Chapter 11 Cases at 7, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. April 30, 2020), ECF No. 254.
- 185United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986); see also In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003); S. Ry. Co. v. Johnson Bronze Co., 758 F.2d 137, 141 (3d Cir. 1985).
- 186See April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 38–39 (Judge Papalia: “[T]hey have three million which is not even a - - as I see it, not even a half a month. But they need a million anyway to get started.”).
- 187See id.
- 188Id. at 57 (Judge Papalia: “[T]he order that we have in place says you can ask for relief . . . .”).
- 189Id.
- 190Id. at 56.
- 191Id. at 14.
- 192Id. at 56.
- 193See id. at 57–59.
- 194See Interim Order (I) Authorizing Use of Cash Collateral and Affording Adequate Protection; (II) Modifying Automatic Stay; (III) Scheduling a Final Hearing; and (IV) Granting Related Relief at 8, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 13, 2020), ECF No. 66.
- 195March Suspension Hearing, supra note NOTEREF _Ref76920256 \h \* MERGEFORMAT 19 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003900320030003200350036000000 , at 39–40; April Suspension Extension Hearing, supra note NOTEREF _Ref76659855 \h 30 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000D0000005F00520065006600370036003600350039003800350035000000 , at 100 (Judge Papalia: “There’s no question that it’s an extraordinary remedy, just as I said at the other hearing — at the previous hearing. There is no question that these are extraordinary times”).
- 196See, e.g., In re My Type, Inc., 407 B.R. 329, 337 (Bankr. C.D. Ill. 2009) (“Uncertainty, while it may be a boon to bankruptcy trustees, is the bane of commercial laws, whose primary purpose is to promote certainty in commercial transactions.”).
- 197Order Temporarily Suspending the Debtors’ Chapter 11 Cases Pursuant to 11 U.SC. §§ 105 and 305 at 4, In re Modell’s Sporting Goods, Inc., No. 20-14179-VFP (Bankr. D.N.J. Mar. 23, 2020), ECF No. 166.
- 198See, e.g., In re Bellucci, 119 B.R. 763, 771 (Bankr. E.D. Cal. 1990).
- 199Law v. Siegel, 571 U.S. 415, 421 (2014).
- 200Roche v. Evaporated Milk Ass’n, 319 U.S. 21, 26 (1943).
- 201See Mallard v. U.S. Dist. Court for the S. Dist. of Iowa, 490 U.S. 296, 309 (1989) (“To ensure that mandamus remains an extraordinary remedy, petitioners must show that they lack adequate alternative means to obtain the relief they seek.”).