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Retail Bankruptcies Cut a Wide Swath; Protect Yourself

Retail Bankruptcy

By Kimberly S. Winick, Esq.

The newspapers are awash with headlines about retailers that have filed bankruptcy (Gymboree, BCBG, American Apparel, The Limited, Wet Seal) or are expected to in the near future (Sears, J. Crew, True Religion). Some retailers use bankruptcy as a tool to shed surplus stores and stale inventory, and reboot operations.  Others sell their intellectual property to on-line vendors and liquidate their brick and mortar operations entirely.  Retail bankruptcy filings affect a number of interests, who may want to tailor their conduct accordingly.

Landlords.  As we’ve discussed in previous blog posts, landlords are intimately affected by bankruptcy filings.  They are entitled to collect rent during the case, but stand to lose a tenant in the long term.  Some retailers in bankruptcy assume their leases, but increasingly they reject them outright or seek to renegotiate their leases and assign them to new tenants.  Landlords need to assess their particular situations, including requirements and restrictions in reciprocal easement and operating agreements or CC&Rs that govern their shopping centers.  They may seek to encourage a quick departure by the debtor tenant, or to maintain occupancy while exploring ways to enhance the long-term value of their property.  Many mall owners are expanding the non-retail uses of their spaces to include businesses that offer new experiences and entice improved foot traffic. See prior blog posts on landlord rights.

Employees.  Retailers employ personnel to work the floors and behind the scenes.  Employees should keep an ear to the ground and be alert for the need to look for new jobs.  However, they do have some protections, including the right to receive 60 days’ notice of a shut down if the retailer employs a large number of people.  Employees also are entitled to full wages and benefits to the extent that they work during the bankruptcy case.  Wages and benefits earned before bankruptcy are entitled to priority in payment up to levels set by the Bankruptcy Code (currently $12,850), and many debtors obtain an order from the bankruptcy court allowing them to pay wages and honor benefits of employees (other than top level management) up to the statutory level as if no bankruptcy filing had occurred.  However, each employee should be aware of accrued benefits and earned but unpaid wages, and should be prepared to file proofs of claim for such benefits and earnings within the time limits provided in the notices that the bankruptcy court sends them.

Customers. Customers may be affected in a number of ways. The good news is that inventory consolidation, going out of business and liquidation sales offer shoppers great savings opportunities.  But a retail bankruptcy also presents risks. The downside of great sales is that they may be final, with no possibility of returning the bargain goods.  Shop carefully, and plan on retaining all purchases.

            Gift Cards.

During the preliminary stages of a bankruptcy case, a retailer may continue to honor gift cards, but there is no assurance that they will.  Even if a retailer does honor gift cards at the outset of the proceedings, they may change their policy to fit the changing circumstances of the case.  A customer holding gift cards, should use them sooner rather than later.  If a retailer makes headlines as ailing, a customer shouldn’t invest in new gift cards with them.

            Deposits.

Customers often make deposits with a retailer in connection with the purchase of custom items, rentals (such as for party needs) or even to buy special goods on layaway. Like gift cards, retailers who are doing business while in bankruptcy may give full credit for such deposits, but they are not required to.  If they cease to do business or honor the credit, each customer has a priority claim (which must be paid in full before the retailer can reorganize, but may not be paid in full if the business is simply liquidated or the bankruptcy case is dismissed) for deposits made before the bankruptcy filing of up to $2,850 per customer.  As with gift cards, customers should think twice before making new deposits with apparently troubled retailers, and might consider collecting on existing deposits as soon as they can.

            Warranties.

Warranties are another area of concern for customers. Customers who have already purchased products may want to investigate whether warranty coverage is provided by the retailer or by a different company, such as the manufacturer.  Warranties offered by a retailer may have very limited value after the retailer files bankruptcy, particularly if they ultimately do not reorganize.  Special consideration should be given to whether to purchase new or extended warranties from retailers on the troubled list.  If the warranty is given by the retailer, there is a real risk that those warranties will simply be a waste of money.  Don’t avoid dealing with warrantied items that are acting up.  Customers must take steps to enforce the warranty while the retailer is still viable.

We all should heed the warning signs that our favorite stores are in trouble. Empty shelves, tired inventory, closed registers, and scarce sales staff are indicators of trouble that are at least as reliable as the business section of your favorite newspaper or blog.  When you see trouble coming, get ready.  If you are not sure what to do, contact a bankruptcy professional.


Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interest relating to the subject matter covered by the blog.  If you have any questions about retail bankruptcy cases, or about other bankruptcy-related issues, please feel free to email Kimberly S. Winick at kwinick@clarktrev.com or to call her at 213.629.5700.

 

 

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Foiled by Bankruptcy Filing? Maybe Not!

Bankruptcy

By Kimberly S. Winick, Esq.

Every creditor faces the risk that someone who owes them money will file for bankruptcy relief. Whether the debtor is planning to liquidate or reorganize, the initial filing invariably delays creditor recoveries.  Upon the filing, an automatic stay takes effect, generally preventing actions to enforce then-existing claims or rights against the debtor or any of the debtor’s property.  Creditors eventually may receive some or even all of what they are owed, with secured creditors (eg: lenders, parties holding security deposits) and priority creditors (eg: employees, consumers who have made deposits) having the best recovery prospects.  General unsecured creditors (eg: vendors, contract parties) run a greater risk of non-payment.  However, not all general unsecured creditors face identical risks of loss.

A fundamental philosophical underpinning of our bankruptcy laws is that a debtor should be given a fresh start.  Another is that all like creditors should receive equal treatment in the debtor’s case. An individual debtor generally will receive a discharge of all pre-bankruptcy unsecured debt, without the need to actually pay it off.  Unsecured creditors who timely file proofs of claim (or whose claims have been properly scheduled in a Chapter 11 case) are likely to share pro rata in a modest pool of assets and recover far less than they are owed.  An attentive creditor may be able to take advantage of exceptions to these rules.

Excepting the Claim from Discharge

Not every obligation of an individual debtor is subject to discharge.  Creditors who file and prevail on appropriate “non-dischargeability” complaints get to have their claims share in the general pool, and also are permitted to continue to assert and collect on those same claims against the debtor and his/her post-bankruptcy assets as if the bankruptcy filing had not occurred.  Generally claims arising from fraud, embezzlement or larceny are not dischargeable.  Similarly, while judgments for post-marital property division may be subject to discharge, claims for domestic support obligations are not.  The grounds for denial of discharge as to a particular creditor’s claim must be alleged in a timely-filed complaint and proven in the bankruptcy case.

A creditor who obtained a judgment before the bankruptcy filing may still have to prove that the claim evidenced by the judgment is not dischargeable.  Oftentimes, a judgment will not clearly be based on non-dischargeable grounds, such as a judgment for damages on a complaint alleging fraud in the inducement and breach of contract.  Similarly, a stipulation settling a lawsuit that included claims about false pretenses or false representations likely will not be enough to establish that the stipulated claim cannot be discharged.  By timely filing a complaint to prevent discharge, a creditor holding a pre-bankruptcy judgement or stipulated judgment will be given the opportunity to submit evidence and argue against discharge of the claim.  The window for filing such a case is short, 30 days after a notice of the deadline is mailed, often within the first three months of the case.  Clearly it is important for a creditor to evaluate its potential rights promptly upon receipt of information about a bankruptcy filing.

Excepting the Debtor From a Fresh Start

Some debtors don’t deserve a fresh start, and the Bankruptcy Code makes that clear.  Where a court finds that a bankruptcy case was not filed in good faith, the case may be dismissed, denying the debtor all bankruptcy relief.  Alternatively, the court may retain the case so that creditors share in the available assets, but deny the debtor its fresh start.  This means that the debtor is not permitted to discharge any debts – all claims are treated as non-dischargeable.  Under this scenario, creditors share in whatever assets have come under the control of the court, and retain the right to continue to pursue the debtor until they have been paid all they are owed.  Debtors who have lied to the court about their assets, hidden assets, hidden records, or cannot explain major losses of assets or information are most likely to suffer this sanction.  While it may feel like vindication, this is generally not the best result for any given creditor, as all claims, not just the particular creditor’s, will survive to be asserted against the debtor after the bankruptcy case.

Pursuing Co-obligors and Guarantors

As a general rule, only an identified debtor is protected by the stay in a bankruptcy case. In individual cases, a co-debtor may be protected for a brief time, if the court finds cause.  A creditor who has claims against third parties should take care to monitor the case and oppose the imposition of any “co-debtor stay.”  Apart from this limited exception, guarantors and co-obligors are fair targets during the pendency of a debtor’s bankruptcy case, unless they are debtors in their own bankruptcy cases.  A creditor who initially opted to enforce its judgment against the debtor, should avail itself of all reasonable recovery opportunities.  Moreover, these co-obligors may not be responsible for paying the claims of the debtor’s other creditors, and so may provide a recovery source that has fewer claims against it.

Conclusion

Each bankruptcy case has its own twists and turns, but an alert creditor may be able to turn the debtor’s case to the creditor’s benefit, and thus avoid being foiled by a bankruptcy filing.  An experienced creditors’ rights lawyer can help you develop and implement effective strategies when the people who owe you money file bankruptcy.


Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interest relating to the subject matter covered by the blog.  If you have any questions about the treatment of creditors’ claims in bankruptcy, or about other creditors’ rights in bankruptcy, please feel free to email Kimberly S. Winick at kwinick@clarktrev.com or to call her at 213.629.5700. For more information about Clark & Trevithick’s Commercial Law and Insolvency practice, please visit our website at www.ClarkTrev.com

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Westinghouse in Bankruptcy! Do they owe you money?

Westinghouse Electric Bankruptcy

By Kimberly S. Winick, Esq.

Westinghouse Electric Company LLC and thirty of its affiliates filed for bankruptcy relief on March 29th – they are calling it a strategic restructuring.  The companies design, manufacture and maintain nuclear power plants.  In the course of their business they hire employees and independent contractors, buy and lease equipment and real estate, contract for casualty, liability, workmen’s comp, and a myriad of other forms of insurance, buy materials and supplies, and store and move them.  They hire catering services and buy food for work teams.  In short, thousands of other businesses and individuals across the USA, and across the world, will be affected by this filing.  We don’t know who, yet, because Westinghouse hasn’t filed the requisite lists and schedules of creditors, asset, contracts, and liabilities.  But those creditors, landlords, contract parties, and others have rights that are being affected now.  The Bankruptcy Court today held hearings on Westinghouse’s requests for special procedures and modifications of Bankruptcy laws and procedures.

The cases were filed in the Southern District of New York (New York City). However, lawyers from all around the country will be representing affected parties and participating in the case.  If you are doing or have done business with Westinghouse or an affiliate, now is the time to review your records, contact a business bankruptcy lawyer, and prepare to protect yourself.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum. Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about the content in this legal alert, please feel free to contact the author by email at kwinick@ClarkTrev.com, or by telephone at 213-629-5700.

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Commercial Landlords in Bankruptcy – More Ways to Protect Payment Rights

Bankruptcy Payment

By Kimberly S. Winick, Esq.

When a commercial tenant files for relief under the Bankruptcy Code, its landlord may have both prepetition and post-petition claims. Prepetition claims, including unpaid rent as of the petition filing date, and claims for rent that would have been paid if the lease were not rejected in bankruptcy, are often paid at pennies on the dollar.  Post-petition claims, for rent coming due under the lease during the bankruptcy case and prior to lease rejection, are entitled to payment priority as “administrative claims,” and usually must be paid dollar for dollar before the debtor tenant’s chapter 11 plan of reorganization (or liquidation) can be confirmed.

Claims for damage to the rental property may arise before or after the bankruptcy filing. These claims are not always covered by insurance.  Unless a landlord can show that the damage occurred after the petition date, the damage claim likely will be treated as a prepetition claim and the landlord will absorb the brunt of any uninsured loss.

A diligent landlord will conduct a thorough inspection of leased premises, and create a photographic record of the inspection, as soon as practicable after learning that a tenant has filed bankruptcy. Any post-petition damage caused in connection with the operation of the tenant’s business, such as damage to loading docks and bay doors, should then give rise to an administrative claim, payable in full in connection with confirmation of the debtor tenant’s plan of reorganization.

It is always worthwhile for a landlord to preserve and make the most of its administrative claims. Even if the case is filed as or converted to a liquidating case under chapter 7 of the Bankruptcy Code, a landlord’s administrative claims will still enjoy payment priority, although they will not necessarily be paid in full.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions relating to the blog article, please feel free to contact Kimberly Winick by email at kwinick@ClarkTrev.com or telephonically at (213) 629-5700.