Have Retail Reorgs Gone the Way of the Dodo?

In the past two months, four retailers have filed bankruptcy cases. RadioShack is rumored to be preparing a chapter 11 filing, and other retailers certainly appear to be struggling (see Stephen Lubben’s post here). But if you were counseling any of these retailers, would you recommend a chapter 11 filing? Okay, put aside the professional fees you might earn—would filing really be in the best interests of your retail client? (For a discussion of fees and costs in chapter 11, see Part IV.A.8 of the ABI Commission Report.)

Consider this: from 2006-2013, the number of retailers liquidating in chapter 11 increased significantly. Although no data are perfect, the various data we have on chapter 11 filings are quite telling. For example, according to the UCLA-LoPucki Bankruptcy Research database, during 2006-2013, 41.2% of large public retailers (excluding eating and drinking places) emerged from chapter 11 and 58.8% liquidated while, during 1980-2005, 60.5% of large public retailers emerged from chapter 11 and only 39.5% liquidated. Likewise, a quick look at the New Generations Public and Major Private Companies database suggests a similar trend for 2006-2013: approximately 62% of retail cases in the database ended in a liquidation (36 of 58). A chapter 11 filing has, quite literally, become a “bet the company” decision for retailers.

Notably, a similar theme emerged during the almost three years of public field hearings before the ABI Commission to Study the Reform of Chapter 11. (To watch a hearing before the ABI Commission focused on leases and executory contracts, see here; for testimony from a Congressional hearing on similar issues, see here.) Several witnesses before the Commission spoke to the challenges facing many companies trying to reorganize under chapter 11, including retailers. They suggested that the period for a retail debtor to elect to assume or reject commercial real property leases under section 365(d) was too short, and that such period was made even shorter by the terms of the debtor’s postpetition financing facility. According to the testimony, these facilities often set milestones well before the section 365(d) deadline to allow the lender to call a default prior to the debtor losing its rights to assume or reject leases. Witnesses cited other issues impacting retail reorganizations, which they largely attributed to the 2005 amendments to the Code, including the debtor’s inability to capitalize on lease designation rights and liquidity issues caused by administrative priority claims granted to trade creditors under section 503(b)(9). Many of these witnesses also highlighted the more widespread issue of debtors filing with such excessive leverage that there is no equity in the company to support a reorganization.

As you might expect, the Commission also received testimony on the other side of these issues. Some witnesses asserted that chapter 11 is working just fine as currently structured, and others refuted the suggestion that the changes implemented by the 2005 amendments to the Code were having a negative impact on retail cases. All perspectives represented by the testimony, as well as the Commission’s related recommendations on postpetition financing and adequate protection in chapter 11, the section 365(d) deadlines, and section 503(b)(9), are set forth fully in the ABI Commission Report (see Parts IV.B and V.A, E ). The primary objective of the recommendations is to make chapter 11 a better bet for distressed companies (including retailers) and all of their stakeholders.

*Note: The views expressed in this post are those of the author and are intended to spark a meaningful dialogue about chapter 11 reform. They are not attributable to the American Bankruptcy Institute or the ABI Commission to Study the Reform of Chapter 11.

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Comments

[Adam Levitin]

Was there ANYTHING good to come out of BAPCPA? The consumer provisions stink, and the business provisions, if less commented on, are just as bad.