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.
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.
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 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 firstname.lastname@example.org or to call her at 213.629.5700.