Retail Bankruptcies: Key Issues for Debtors, Landlords and Vendors - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Retail Bankruptcies: Key Issues for Debtors, Landlords and Vendors THURSDAY, JUNE 15, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Felice R. Yudkin, Member , Cole Schotz , Hackensack, N.J. George M. Cheever , Of Counsel, K&L Gates , Pittsburgh, Pa. Jacob S. Frumkin, Cole Schotz , Hackensack, N.J. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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June 15, 2017

 Overview of Retail Bankruptcies/Recent Surge in Filings  Introduction of Model Case  Pre-Bankruptcy Planning  First Day Relief  Landlord/Tenant Issues  Creditor/Vendor Issues  Going Out of Business (GOB) Sales 6

 There have been a rising number of larger retailer bankruptcies since the beginning of 2017.  Studies show that consumers are making more online purchases and shifting their spending toward travel and other experiences.  Inventory in physical stores continues to outweigh shopper demand.  The number of stores on Moody’s distressed list is at the highest level.  Since the beginning of 2017, over 10 retailers including The Limited, Wet Seal, Eastern Mountain Sports, Bob’s Stores, BCBG Max Azria, Payless and Rue 21 have filed for bankruptcy. 7

 The debtor (XYZ LLC) is a specialty retailer of teen apparel and accessories.  The debtor sells its merchandise to customers in 48 states through its online store and 1,180 brick and mortar stores located in various strip centers, regional malls and outlet centers.  The debtor has 15,800 employees including 12,300 part-time employees.  The debtor has the following outstanding pre-petition liabilities:  $72 million on an asset based loan  $521 million on a secured term loan  $239 million of unsecured notes  $50 million trade debt  The debtor’s business performance has come under significant pressure in recent years including a decline in in-store transactions.  The debtor relies on vendors, shippers and warehousemen to ensure supply of goods to retail stores and customers. 8

 Retention of Advisors  Counsel  Investment Banker  Financial Advisor  Liquidator  Secure DIP Financing (if necessary)  Prepare Communications Plan 9

 Customer Programs Motion Attempt to maintain goodwill and customer relationships, and to attract new customers.  11 U.S.C. §§ 105(a), 363(b), 503(b)(1) and 1107(a); “doctrine of necessity”  Payment of administrative fees associated with running such programs.   Gift Cards Liabilities for unredeemed gift cards purchased prior to petition date.  E.g. , In re RadioShack Corp. , Case No. 15-10197 (Bankr. D. Del.) ($44 million); In re Am.  Apparel , Case No. 15-12055 (Bankr. D. Del.) ($5.1 million) 11 U.S.C. § 507(a)(7) - priority for unsecured claims relating to “customer deposits.”  Inconsistent treatment by bankruptcy courts  In re City Sports, Inc. , 554 B.R. 329 (Bankr. D. Del. 2016) (general unsecured claims)  In re BGI Inc., f/k/a Borders Grp. Inc. , 476 B.R. 812 (Bankr. S.D.N.Y. 2012) (no distributions  for untimely filed proofs of claim because holders were not “known” creditors) The Shaper Image Corp. , Case No. 08-10322, Dkt. No. 2243 (Bankr. D. Del.) (priority  subject to court-approved claims process) In re WW Warehouse, Inc. , 313 B.R. 588 (Bankr. D. Del. 2004) (claims filed by holders of  unused gift certificates entitled to priority) 10

 Refund/Return and Exchange Programs  GOB sales likely carved out.  Credit Cards  Includes setoff of processing obligations (fees and chargebacks) against amounts remitted to debtor.  Spending, Promotional, Coupon and Customer Loyalty Programs  E.g. , coupons upon spending set dollar amounts; seasonal and item specific sales  Extended Service Contract and Warranty Programs 11

 Critical Vendor Motion Seeks authority to pay prepetition claims of certain vendors essential to the debtors’  operations. 11 U.S.C. §§ 105(a), 363(b), 503(b)(9), 1107(a) and 1108  Subject to a set limit/cap for all such claims.   Critical vendor criteria include whether: Vendor is a sole or limited source or high volume supplier;  Debtors can find an alternative vendor;  Vendor is holding/fulfilling a large order that is at risk of loss upon nonpayment; and  Vendor is able or likely to refuse to perform services or to ship products if prepetition  balances are not paid.  Examples American Apparel – component and raw materials suppliers, yarn and fabric suppliers,  contract knitters Gander Mountain – IT, data and retail website services, retail operations services  12

 Trade Agreements  Payment conditioned upon the vendor’s execution of a trade agreement including the following terms, among others:  Continuance of the parties’ existing relationship on terms at least as favorable as prepetition practices and programs.  Release of goods/assets owned by the debtors in the vendor’s possession.  When the critical vendor has executed a trade agreement and thereafter ceases providing products or services under the agreement, payments to that vendor may be deemed unauthorized postpetition transfers under 11 U.S.C. §§ 549 and the debtors may, among other things:  Seek to recover the payments in cash.  Apply the payments against any administrative claim of the vendor.  Authorizes banks to process and honor checks presented for the payment of, and transfers related to, such obligations. 13

 Employee Wages Motion Maintain employee goodwill and ensure continuation of their services  11 U.S.C. §§ 105(a), 363(b), 507(a)(4), 507(a)(5), 541(b)(7), 541(d)  E.g. , accrued wages and salaries, employee benefits (such as vacation and sick time,  employee expenses Banks authorized to process checks/ electronic transfers drawn on the debtors’ bank  accounts to pay such obligations. Administrative processing costs included.   Retail-Specific Aspects Employee bonuses  E.g. , sales goals for periods of time  Employee commissions  14

As explained in the legislative history to Code Section 502(b)(6): “[T]he phrase ‘lease of real property’ applies only to a ‘true’ or  ‘bona fide’ lease and or interests therein, and does not apply to financing leases of real property or interests therein, or to leases of such property which are intended for security”  Financing “leases” are in substance installment sales or loans. The “lessors” are essentially sellers or lenders and should be treated as such for purposes of bankruptcy law.  “The distinction between a true lease and a financing transaction is based on the economic substance of the transaction and not, for example, upon the locus of title, the form of the transaction or the fact that the transaction is denominated as a lease.” 15

 The stay applies to all of a landlord’s default remedies under an unexpired real property lease, including actions to terminate the lease and eviction proceedings.  The stay does not apply to “any act by a lessor to the debtor of nonresidential real property that has terminated by the expiration of the stated term of such lease before the commencement of or during [the case] to obtain possession of such property.” Code Section 362(b)(10).  The automatic stay does apply to lease terminations initiated because of the tenant-debtor’s default. The landlord will need relief from the stay to complete the eviction process and recover possession. 16