Obstacles to Store Closing Sales in Bankruptcy

In Part I of this blog, we discussed the decision whether to use outside liquidators to assist with GOB sales and the need to obtain bankruptcy court approval before sales can begin.  In the second part, we will discuss “obstacles” set forth by landlords and vendors as well as discuss certain state and local government issues that a retailer may have to face in conducting GOB sales.

Landlords typically structure their leases to include provisions that either allow GOB sales with certain restrictions and landlord consent, or prohibit GOB sales altogether.  Bankruptcy courts will generally not enforce prohibitive or restrictive lease provisions and usually allow bankrupt retailers to commence GOB sales if it is in the best interests of the bankruptcy estate.  Therefore, a bankruptcy filing by a retailer shifts the balance of control over the GOB sales issue from the landlord to the retailer.

However, landlords do have the opportunity to place reasonable limitations or constraints on such sales.  Among other things, the landlord may be able to obtain restrictions on sale signs and banners.  Landlords may also have a say in the manner of advertising, sale timeframe, store hours of operation, merchandise sold, and condition and turnover of the premises at the end of the GOB sale.

Objections to a GOB sale motion by a retailer may also be raised by vendors of merchandise the retailer proposes to include in the GOB sales. Sometimes vendors will object based upon asserted security interests in the inventory.  Vendors are generally concerned with the deep discounting that typically occurs later in the GOB sale process. GOB sales typically reduce the sales of competing retailers who, in turn, will buy less stock from its vendors.  If the retailer is only closing some of its stores, vendors must balance these concerns with the ability to continue to sell new goods to the retailers’ continuing stores.

Most states and local governments have laws governing or regulating GOB sales.  However, many of these government prohibitions on GOB sales go out the window when a retailer files for bankruptcy protection.  For example, most authorities regulate the time and manner GOB sales are conducted, often requiring a license or permit.  The primary governmental interest in this area is to protect competing retailers and the consumer from GOB sales which constitute unfair or deceptive trade practices.

In short, retailers must recognize that GOB sales impact various parties.  The retailer that is prepared to accept a fair balancing of these interests will stand the best chance of obtaining court approval for the GOB sales and minimize disputes with landlords, vendors and other creditors, and state and local regulatory authorities.