2005 Bankruptcy Code Amendments Continue to Impact Retailers

In our October 12th and November 8th, 2010 blog posts, “Anatomy of a Retail Bankruptcy” Part I & Part II, respectively, we discussed specific issues in retail bankruptcies related to amendments to the U.S. Bankruptcy Code in 2005 that have reduced the likelihood that retailers will successfully reorganize while in bankruptcy. This blog post will look at some retail bankruptcy filings since November 2010 and discuss how these 2005 amendments have continued to adversely impact bankrupt retailers as they struggle to reorganize.

More often than not, due in large part to these 2005 amendments, most bankrupt retailers since November 2010 have wound up either: 1) selling the company through a Section 363 sale, 2) liquidating, or 3) doing a deal with noteholders or secured lenders to convert their debt to equity, as you can see by the following examples:
  • Joseph Beth Booksellers – 11/11/10 – Books (363 asset sale)
  • Orchard Brands – 01/20/11 – Clothing (pre-packaged plan with secured lenders)
  • Ultimate Electronics – 01/26/11 – Electronics (liquidation)
  • Borders Group – 02/16/11 – Books (liquidation)
  • Robb & Stucky – 02/21/11 – Furniture (liquidation)
  • No Fear – 02/24/11 – Clothing (363 asset sale)
  • Harry & David – 03/28/11 – Food & gift (pre-arranged plan with noteholders)
  • Metropark – 05/02/11 – Clothing (liquidation)
  • Jackson Hewitt Tax – 05/24/11 – Tax preparation (pre-arranged plan with secured lenders)
  • Nebraska Books – 06/27/11 – College bookstores (pre-arranged plan with noteholders)
  • Perkins-Marie Calendar – 06/13/11 – Restaurant chain (pre-arranged plan with noteholders)

Although not the sole driving forces, the following BAPCPA amendments have made it increasingly difficult for bankrupt retailers to use the bankruptcy process to complete a traditional operational and/or financial restructuring:
  • Shortened 210-day maximum timeframe to assume or reject leases
  • The increase in adequate protection payments to utilities
  • The addition of the Section 503(b)(9) provisions, which grant the seller of goods an administrative priority claim for goods received 20-days prior to the bankruptcy filing
  • The 18 to 20-month limited time periods available for the bankrupt retailer to exclusively file and solicit plan acceptances

Although it is still possible for retailers to successfully restructure, such examples are few and far between. This trend is likely to continue for the foreseeable future as long as the economy remains tenuous. Whether this trend will change in the future, when the economy picks up steam, remains to be seen.

Do you think the chances of bankrupt retailers reorganizing will improve in the near term?