Client Alert: Retail Bankruptcy in 2023 / Secured Lending
- Outlook. 2023 appears poised for increased distress in the retail sector, given the Federal Reserve’s recent interest rate increases, continued international supply chain issues, the end of Paycheck Protection Program and other federal funding, and decreased consumer spending.
- Party City Bankruptcy; BBB Financial Distress. On January 17, 2023, Party City commenced a voluntary chapter 11 case in the U.S. Bankruptcy Court for the Southern District of Texas, citing acute liquidity issues caused by economic disruptions resulting from the COVID-19 pandemic as the primary reason for its decision to file for bankruptcy. Additionally, Bed Bath & Beyond (“BBB”) also appears to be experiencing significant financial distress that may result in it commencing a voluntary bankruptcy proceeding in early 2023. Such retailers typically have a large and diverse creditor base, including suppliers, landlords, and secured lenders.
- Syndicated Secured Facilities. Large retailers commonly have syndicated secured loan facilities in which numerous banks or other financial institutions may participate as holders of a portion of the facility. Following a borrower bankruptcy, individual holders may wish to review with counsel the underlying credit agreement to determine what actions are likely to be taken by the administrative agent on behalf of the lenders and what actions may need to be taken individually. Likewise, holders may also wish to contact the administrative agent to obtain regular updates about the status of the bankruptcy case.
- Proofs of Claim. It is typically advisable for creditors of all types to prepare and file a proof of claim in a chapter 11 bankruptcy case for purposes of, among other things, plan voting and distributions. Creditors may have more than one claim or their claim may have different components (i.e., one portion is given priority while another portion is not), which require affirmative action during a bankruptcy case.
- Bankruptcy Litigation. Creditors also may need to defend against preference and other litigation where the bankruptcy estate seeks recoveries of payments creditors received before the filing.
Considerations for Secured Lenders in Retail Bankruptcy Cases
- Large public companies like BBB and Party City typically have syndicated term loans and/or revolving loans on their balance sheets.
- For example, in 2021, BBB closed on a refinancing and upsizing of its preexisting asset-based revolving loan facility.
- Party City also has an existing asset-based revolving loan facility that was most recently amended in April of 2019.
- Holders of syndicated debt typically delegate substantial authority to the administrative agent under the applicable credit agreement.
- It is common for the administrative agent of a syndicated loan facility to file a single proof of claim on behalf of the individual holders of the syndicated debt. The bar date order is likely to address the claims filing procedures for holders of this type of debt.
- Holders of syndicated debt may wish to establish regular contact with the administrative agent of a syndicated debt facility after the borrower files for bankruptcy.
- Holders of syndicated debt may also wish to review their rights under their specific credit agreement to determine what voting rights they may have in connection with, among other things, accepting or rejecting proposed treatment under a plan of reorganization.
- Although the administrative agent under a large commercial credit agreement may be authorized to take certain actions without soliciting votes from the lenders, such credit agreements often have a variety of thresholds that must be met (such as the majority of lenders, a supermajority of lenders, or, in rare cases, all lenders) in order to for the administrative agent to be authorized to take action.
Considerations for Suppliers in Retail Bankruptcy Cases
- The most common claims that a supplier to a retail debtor will have are general unsecured claims, administrative claims under section 503(b)(1)(A) of the bankruptcy code, administrative claims under section 503(b)(9) of the bankruptcy code, and reclamation claims under section 546(c) of the bankruptcy code.
- Whereas general unsecured claims typically receive only a very small recovery, administrative claims typically receive a larger recovery and may even see a full recovery.
- Section 503(b)(1)(A) of the bankruptcy code states that there shall be an allowed administrative claim for the “the actual, necessary costs and expenses of preserving the estate. . .” In the context of a retail bankruptcy, a supplier to provides a debtor with necessary goods and services on a post-petition basis typically has an administrative claim that must be paid in full during the bankruptcy case and, in any event, by any administrative claims bar date established if the creditor files a timely claim.
- Section 503(b)(9) of the bankruptcy code affords an administrative claim in the amount of “the value of any goods received by the debtor within 20 days before the date of commencement of a case. . . in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.” This is a specific type of administrative claim available only to suppliers to delivered goods to the debtor in the 20-days before the debtor filed for bankruptcy.
- Section 546(c) of the bankruptcy code governs a supplier’s reclamation rights. Under that section, a supplier may make a written demand for reclamation of delivered goods “(A) not later than 45 days after the date of receipt of such goods by the debtor; or (B) not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.”
- From a practical standpoint, reclamation rights can be difficult to enforce in large chapter 11 cases because such rights are often junior to the super-priority liens of the debtor’s debtor-in-possession financing lender that are often approved on the first day of the bankruptcy case.
- Suppliers may also be the subject of preference actions in retail chapter 11 cases. Section 547 of the bankruptcy code allows the debtor-in-possession or bankruptcy trustee to recover certain transfers made on account of existing debt within the 90-days prior to bankruptcy (or one year for statutory insiders). In large chapter 11 cases, preference actions are commonly litigated after plan confirmation.
Considerations for Landlords in Retail Bankruptcy Cases
- When a debtor files for bankruptcy, a stay under section 362 of the bankruptcy automatically applies to prevent any creditor attempts to collect pre-bankruptcy claims, both formal (e.g. eviction lawsuits) and informal (e.g. default/demand letters). The stay also applies to a common remedy of “setoff” where parties apply mutual claims and debts against each other to settle an account.
- Setoff against a security deposit is typically prohibited by the automatic stay, while drawing on a letter of credit provided by the debtor to the landlord typically is not. Consultation with counsel on this point is critical to avoid potential sanctions by the bankruptcy court.
- Approval of the bankruptcy court is required before taking actions prohibited by the stay, and willful violations of the stay can result in damages and court sanctions being assessed against the offending party.
- Debtor tenants of non-residential real property have an initial 120-day period in which they must decide whether they want to assume (e.g. continue performing under), assume and assign, or reject (e.g. breach) a lease. This period may be extended up to 90-days for cause and after such 90-day day extension concludes any further extension must be consented to in writing by the landlord.
- In order to assume a lease, the debtor must cure any existing defaults and provide adequate assurance of its future performance under the lease. To assume and assign a lease, the cure requirement applies, but the debtor must provide adequate assurance of the proposed assignee’s ability to perform under the lease.
- To reject a lease, the debtor must typically only show that the decision was made based on the reasonable exercise of the debtor’s business judgment. Accordingly, it is often very difficult to contest lease rejection.
- When a lease is assumed, the landlord typically has a prepetition general unsecured claim for any unpaid rent and other costs owing under the lease and may also have an administrative claim to the extent the debtor does not timely pay post-petition rent.
- When a lease is rejected, the landlord typically has a prepetition general unsecured claim for unpaid rent and other costs owing under the lease and a rejection damages claim that is the amount of rent due for the greater of (i) one year or (ii) 15 percent of the remaining lease term (which cannot exceed three years). Rejection damages claims are typically treated as general unsecured claims and recover only a small fraction of the face value of such claim.
We Can Help You
Barack Ferrazzano's Bankruptcy & Creditor Rights Group has 80 years of combined experience representing parties in bankruptcies, business reorganizations, and non-judicial workouts of debtors throughout the U.S. We represent large national companies in all of their significant bankruptcy disputes, including negotiation of pre- and post-bankruptcy claims, counseling on extending credit to bankruptcy entities, adversary proceedings related to preference and fraudulent transfer actions, assumption of contracts, and critical vendor status. Our Group has represented an array of creditors and litigation targets in many recent retail and other large, national chapter 11 bankruptcies, including, the J.C. Penney, Neiman Marcus, Pier 1, Chuck E. Cheese, Shilo Industries, Stein Mart, Buyk, RGN, and GNC cases. We have also represented supply agreement contract parties in some of the largest auto parts maker bankruptcies, and regularly represent OEM clients in dealer bankruptcies.