What a Post-COVID-19 World: Debtors' Extraordinary Responses to COVID-19

Abstention and Inherent Power: The Suspension of Proceedings

In relevant part, section 305(a)(1) of the Bankruptcy Code provides that "[t]he court, after notice and a hearing, may … suspend all proceedings in a case under … [T]itle [11], at any time if — the interests of creditors and the debtor would be better served by such dismissal or suspension." Traditionally, courts have interpreted section 305(a) to apply to a suspension of all proceedings, rather than to certain proceedings. See, e.g., In re Rookery Bay, No. 95-04781 (Bankr. M.D. Fla. Nov. 17, 1995) (granting the debtor's motion for abstention, holding that it was "appropriate to suspend any further proceeding in the involuntary case" until the debtor's pending appeal of the creditor's judgment was resolved); In re Milestone Educ. Inst., No. 93-20747 (Bankr. D. Mass. May 25, 1994) (finding that a creditor's "motion for relief from stay for cause and concomitant suspension of all activity" would, among other things, permit the state appellate court to "address novel and unsettled issues of receivership law").

Modell's Sporting Goods, Inc. and its affiliated debtors and debtors in possession filed for protection under Chapter 11 on March 11, 2020, the same day that the World Health Organization declared the novel coronavirus outbreak a global pandemic. Less than two weeks following the filing, the debtors emergently sought to avail themselves of the protections afforded by section 305(a). Citing to the "unprecedented, exponential spread of Coronavirus disease … along with the resulting, state-imposed limitations and prohibitions on non-essential retail operations," the debtors requested, pursuant to section 305(a), the imposition of an "Operational Suspension," which, among other things, sought the entry of an order deferring the payment of all expenses other than those essential expenses set forth on a "Modified Budget" for a period of up to sixty days, subject to extension. See, In re Modell's Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. Mar. 23, 2020). The modified budget did not include certain post-petition rent obligations, notwithstanding the requirement of section 365(d)(3) of the Bankruptcy Code, which, in relevant part, provides that "[t]he trustee shall timely perform all of the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of … title [11]." That is — breaking with tradition — the contours of suspension were fashioned to meet the specific needs of the case.