Implications of a Retail Bankruptcy for Key Stakeholders

When a retailer files for bankruptcy, there are implications for the key stakeholders of the business including investors, employees, executives and management, creditors and customers.  In this blog post, we will briefly discuss how a retailer’s bankruptcy filing can potentially impact these key stakeholders.

Investors

The owners of the business may be the most impacted by the bankruptcy filing as there is a very good chance that they will lose the full value of their investment in the retailer.  Investors will generally not retain any interest even if the retailer reorganizes as they are the last constituent to receive any value in the order of priority of distribution, relative to the other stakeholders.

Employees

All employees of the retailer may be unsecured creditors at the time of the bankruptcy filing if they are owed money for wages, commissions, benefits, business expenses and related items.  Under Section 507(a)(4) of the Bankruptcy Code, employee claims can be given priority status, subject to the statutory cap of $11,725 per employee, meaning that employees will get paid up to the statutory cap amount before general unsecured creditors are paid.

Executives and Management

In addition to the treatment of rank and file employees, executives and management personnel may have employment contracts or be eligible for bonus programs, either pre-petition, or post-petition.  If the individual is under an employment contract that provides for severance in the event of termination, or if a bonus is earned for work performed pre-petition, the amount owed to the individual would qualify as a priority claim up to the same statutory cap mentioned above.  Any remaining amount would remain a general unsecured claim.
Certain executives and management personnel are also frequently included in post-petition bonus plans, typically called Key Employee Incentive Plans (KEIPs).  The rationale for these bonuses is that the retailer needs to incentivize certain key employees to remain with the bankrupt company during all or part of the bankruptcy process, as losing these key employees could potentially jeopardize the reorganization process or reduce the success of a liquidation.  Under the 2005 amendments to the Bankruptcy Code, these individuals need to create value for the enterprise to justify the bonus.

Creditors

Anyone that is owed money by the bankruptcy retailer when it files for bankruptcy is a creditor.  Secured creditors refer to lenders that have loaned money to the retailer and have received collateral for the amounts funded.  Unsecured creditors refer to all other vendors, landlords, employees, and governmental entities that are owed money for goods or services provided to the retailer.  In accordance with the Bankruptcy Code, secured creditors are paid first, then priority unsecured creditors (generally governmental entities and employees), and then generally unsecured creditors receive a pro-rata distribution with whatever is left over.

Customers

The retailer’s customers can be impacted by a bankruptcy filing  generally if they have gift cards, store credits, deposits or if there are other customer programs in use by the retailer.  The continuance of retail customer programs in bankruptcy helps to preserve the bankruptcy estate during the reorganization process by maintaining valuable relationships with customers, which frequently take many years to build. The loyalty and continued patronage of the bankrupt retailer’s customers is critical to its financial survival and ability to successfully reorganize as a going concern. See our January 18, 2012 blog post “Retail Customer Programs in Bankruptcy” for a more detailed discussion on customer programs.

Are there any other key stakeholders of the retailer that you have seen impacted by a bankruptcy filing?

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