Predictions that retailers would increasingly find themselves filing bankruptcy, whether for the first or second time, are proving true mid-year. See January 2017 Alix Partners Survey at p. 2. In the first three months of 2017, Bloomberg reported that 14 retail chains intended to seek court protection. Thus far in 2017, first-time bankruptcy filers include recreation stores such as Gander Mountain and apparel chains such as Wet Seal, American Apparel and Payless Shoe Stores. Most notable among repeat filers is RadioShack. Commentators and analysts attribute the rising retail bankruptcies to competition with online retail-behemoth Amazon, as well as massive debt loads dating back to solvency efforts during the recent recession.

Parties involved in retail bankruptcies should be aware of certain key legal and practical issues that arise under chapter 11 of the Bankruptcy Code. These issues include:

  • Leases. Retail stores only have an initial 120 days, with possible extension to a maximum 210 days, to assume or reject non-residential leases, absent consent of the landlord otherwise. 11 U.S.C. § 365 (d)(4).
  • Reclamation Rights. A seller who sells goods that the debtor receives within 45 days of the bankruptcy filing can reclaim the goods, or demand payment for the goods, if the debtor was insolvent at the time of receipt, the goods were sold in the ordinary course of the debtor’s business, and the seller makes demand within the proper time period. 11 U.S.C. § 546(c). The seller has an administrative claim (preferable to general unsecured claim) for that portion of the goods received by the debtor within the 20 days before bankruptcy. 11 U.S.C. § 503(b)(9).
  • DIP Financing. If the debtor isn’t facing down certain and rapid liquidation, then a loan to help finance the bankruptcy and operations throughout the case (DIP Loan) is most likely necessary. Imagine the more common scenario where a lender who entered into a loan and security agreement with the debtor to fund its operations years before bankruptcy (the “Pre-Bankruptcy Secured Loan”) then gives the debtor a secured loan after bankruptcy to fund its operations and the bankruptcy costs (the “DIP Loan”). Usually the DIP Loan lender wants certain conditions that improve its position with regards to payment of the Pre-Bankruptcy Secured Loan and wants absolute priority as to the DIP Loan. Courts are not in agreement, however, as to whether the rights of the DIP Loan lender can effectively relate back to the Pre-Bankruptcy Secured Loan and prime intervening reclamation rights, discussed above. This can make it extremely difficult to secure a DIP Loan. See Ryan J. Works and Amanda M. Perach, Holding On to Reclamation Rights Under In re Reichhold Holdings, ABI Journal, January 2017, p. 14.
  • Shipping Issues. If the debtor receives goods, like apparel, from overseas shipments and doesn’t pay for the freight, its agreements with the shipping company or freight forwarders often responsible for these shipments may provide the freight forwarders and/or shipping company with what the author refers to as a ‘sprawling lien.’ In other words, the shipping company and/or freight forwarders lien for the unpaid freight could attach not only to the specific shipment of goods, but also on other goods of the retailer being transported by the shipping company to the debtor. See In re World Imports, 820 F.3d 576 (3d Cir. 2016).

Retail bankruptcies are expected to continue and even increase throughout 2017. According to Moody’s Investment Services, no less than 22 retailers are at risk of filing. Moodys Retail Announcement. On the front-end, landlords are having a difficult time negotiating lease terms with uncertain tenants and keeping their commercial spaces occupied. Because of the harsh deadlines and massive number of stores involved, what seems most necessary for debtors, landlords, and other creditors alike is to identify and prepare for issues as early as possible.