Kenneth Rosen, chair of the bankruptcy and financial reorganization practice at Lowenstein Sandler

“They say timing is everything. But thanks to Bankruptcy section 365(d)(4), which was added to the Code in 2005, the required timing for retailers in chapter 11 to make decisions whether to keep or terminate a lease is forcing many companies into liquidation.” That is according to Kenneth Rosen, chair of the bankruptcy and financial reorganization practice at Lowenstein Sandler. According to Rosen, Section 365 (d)(4) provides that debtors in chapter 11 only get 120 days to make a decision to reject (terminate) or assume (affirm) real estate leases. Rosen takes a close look on the subject in the commentary below.

The views expressed below are Rosen's own.

Debtors can ask for another 90 days (giving them 210 total), but any extension beyond that must be with landlord, who can't be compelled to take action by the bankruptcy court. And for retailers with many stores and a diverse landlord base, the likelihood of getting all or almost all landlords to agree to an extension beyond 210 days is remote.

The amendment to the Bankruptcy Code was largely at the request of shopping mall owners who often saw debtors seek repeated extensions of time before making a decision – which would leave the landlord with uncertainty and with risk of not getting back a store at a time of year that might assure it of having a “dark hole” during an important season, such as Christmas. It was true that debtors often strung out their landlords and used the threat of further extensions to extract concessions from property owners — in the form of reducing a damage claim for an immediate exit or else reducing the ongoing rental obligation under the lease to induce the tenant to remain on the premises during a critical season or for the property owner to avoid having to re-let the space.

So the amendment had its intended effect — but, at what cost? Traditionally, a retailer would commence chapter 11, reject leases of underperforming stores, close warehouses and distribution centers, exit unprofitable markets, remerchandise stores and THEN see the results of operations during a season or two in order to assure itself and creditors that the “fix” was successful.

But with the reduced time that a debtor now has to decide whether to retain leased premises, traditional reorganizations are more difficult — not to mention far fewer in number. Among retailers that have filed chapter 11, liquidations are the rule. To varying degrees, all of the following retailers dealt with these issues: Circuit City, Sports Authority, Cache, Deb Shops, Dots, Ashley Stuart, Coldwater Creek, Anna's Linens, etc. The chief reason? Lenders know it is unlikely that substantially all landlords will extend the time to make a decision on assumption or rejection or that the debtor can achieve that result within a relatively short time period. Consequently, given that the debtor must vacate premises within 210 days of the petition date, absent convincing evidence that the debtor can confirm a plan of reorganization, the secured lender will (justifiably) insist that a liquidation begin within about 90 days of the petition date. This is because a going out of business and liquidation sale typically takes about 120 days. And, it is much more economical to run a liquidation program for all stores rather than piecemeal.

As a result, absent demonstrating to the lender within about 60 days after the petition date that a reorganization is highly likely, the lender will insist that its collateral be liquidated in time to vacate all stores by the 210th day.

Consequently, a debtor that could have reorganized with fewer but better-performing stores, instead is liquidated. The debtor simply does not have an opportunity to downsize, remerchandise and test whether the new operation is working. Opportunities for landlords to retain a newly profitable tenants (albeit tenants with fewer locations) are lost. Instead, the good stores are liquidated along with the bad stores.

Of course, a response is that a debtor should and can begin the reorganization and restructuring process in advance of filing a bankruptcy petition so that it, effectively, has a longer runway. But, this counterargument fails to recognize that a retailer simply may be unable to surrender leases outside of bankruptcy.

Chapter 11 is intended to facilitate reorganization of companies, but Section 365(d)(4) too often leads to liquidations. Landlords should be protected from being leveraged and they also have the interests of other tenants to protect. But, 210 days simply is too short to determine if a reorganization is feasible.

Lowenstein Sandler

The views expressed below are Rosen's own.

Instant Insights /

Bankruptcy Code Timing Too Tight for Some Retailers

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