Could Bankruptcy Amendments Be on the Horizon as Pressure Mounts on Retailers?
COVID-19 shutdown orders have had a devastating effect upon retailers. As those shutdown orders are lifted, retailers as large as J.C. Penney, Nieman Marcus, J. Crew and Pier 1 Imports have filed for bankruptcy protection in order to implement plans to restructure their debt as they restart operations. However, those retail debtors hoping to restructure their businesses are faced with the stark reality that the filing of bankruptcy in of itself might not provide the adequate breathing room necessary to pursue a plan of reorganization. Statewide government shutdown orders have been devastating to many retailers’ cash flows and there is real concern that retailers may not see steady cash flows until well after the reopening of their businesses. The lack of or uncertainty maintaining adequate cash flows to support a Chapter 11 reorganization has caused many retailers to hold off on filing for bankruptcy.
Retail debtors that have already filed for Chapter 11 bankruptcy have been forced to seek extraordinary relief from bankruptcy courts to effectively place temporary pauses on the bankruptcy case due to the impact of COVID-19 on business operations. For example, Pier 1 Imports Inc. and its affiliated debtors successfully obtained, over the objection of a group of landlords, relief from the Eastern District Virginia Bankruptcy Court to defer rent payments for April and May, despite Bankruptcy Code Section 365(d)(3), which requires that the debtor “timely perform all the obligations” under the lease that arise during the case. The bankruptcy court found that Pier 1 “cannot operate as a going concern and produce the revenue necessary to pay rent because they have been ordered to close their business.” Notably, however, Pier 1 was required to continue to pay for insurance, utilities and security systems, and Pier 1 had already committed to cure all arrears in July.
Lenders, landlords and other creditors may be facing a new normal as bankruptcy courts begin to consider granting such relief. Indeed, on April 28, 2020, the U.S. Judicial Conference sent a letter to both chambers of Congress requesting, among other things, legislative amendments to statutory bankruptcy code deadlines. Specifically, the letter requests for courts to have the authority to extend and toll statutory deadlines and time periods during the COVID-19 national emergency. In effect, such authority would allow bankruptcy courts to extend or otherwise toll deadlines for retail debtors to fulfill certain post-petition payment obligations, including the payment of rent, and extend the time required for debtors to assume or reject leases and other executory contracts. Bankruptcy courts could also further extend the exclusivity period within which only the debtor can file a Chapter 11 plan. Debtors would also welcome other changes to the Bankruptcy Code, including expanded opportunities for equity holders to retain their businesses as has been accomplished for certain small businesses under the Small Business Reorganization Act.
Even additional debtor-friendly relief from bankruptcy courts or Congress might not be enough. Pier 1 recently announced that it was abandoning its efforts to reorganize and will instead close down all of its stores and pursue a liquidation of its inventory. If the lifting of shutdown orders does not result in a rebound in retail sales, even the changes to the Bankruptcy Code requested by the U.S. Judicial Conference may not be enough to allow retailers the opportunity to reorganize under Chapter 11. In any event, retailers and their lenders, landlords and other creditors must give special consideration to their respective risks, costs and benefits associated with the potential filing of a Chapter 11 bankruptcy in the wake of COVID-19.
The Workouts & Restructuring Group at KMK Law is here to provide you with advice and guidance in connection with these business reorganization issues.
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