In its first-day hearing in New York bankruptcy court on Thursday, which took place over a phone conference as the COVID-19 pandemic continues to surge around the country, the U.S. operations of the Italian accessories brand secured customary approvals to keep its business running during the proceedings.
U.S. Bankruptcy Judge Shelley Chapman granted motions to pay employees’ wages and salaries, and to maintain employee benefits; to keep the company’s liability, casualty, property and other insurance policies intact, and to pay any pre-bankruptcy premiums; to pay requisite taxes, including roughly $39,500 in sales taxes, and to maintain its current bank account and customer programs.
In a mark of the expedited pace, Chapman granted final approval to all those motions. The company has no secured debt, and won’t require the traditional debtor-in-possession financing that retailers often seek on their first day in court, and which usually results in conflicts over the course of the case with other creditors over how the terms of the DIP financing deprive others of recoveries.
In this case, the company has enough funds to get through the case, and, where it’s needed, it can receive financial assistance from its Italian corporate parent, Furla USA’s attorney Joseph Moldovan, who chairs the business solutions, restructuring and governance practice at Morrison Cohen LLP, told the court. The corporate parent isn’t part of the bankruptcy, and the debtor company has a current cash balance on hand of roughly $464,000, which is not subject to security interests and which can be used to make payments during the bankruptcy, its advisers said.
“Our goal is to exit bankruptcy as a niche boutique style luxury goods company with a healthy balance sheet, focusing on better margins instead of volume of sales,” Moldovan said at the hearing.
Furla USA, which filed for Chapter 11 on Nov. 6, is moving through the proceedings quickly because it is taking place under subchapter V of Chapter 11, a relatively new bankruptcy format meant to speed up the process for small companies. The format, which was created by the Small Business Reorganization Act of 2019, went into effect in February and originally applied to companies with debt up to roughly $2.73 million.
As the COVID-19 pandemic hit the U.S. in March, Congress temporarily raised the debt level to $7.5 million under the Coronavirus Aid, Relief and Economic Security Act, allowing more small companies to qualify for this expedited bankruptcy treatment. That debt threshold increase is meant to last just a year since the CARES Act passed in March, and is expected to expire in the spring of 2021, though Congress could extend it again.
The subchapter V of Chapter 11 format doesn’t require a creditors’ committee to be formed, and calls for the debtor company to file a Chapter 11 plan within 90 days from filing for bankruptcy. Furla USA’s advisers have indicated plans to move a lot sooner. The company has already vacated four of its stores and handed the keys to the landlords, and it is in talks with landlords about other leases, Moldovan told the court Thursday.
The company is also already in the process of finalizing a plan of reorganization, he told the court.
“Although we believe our core business model is sound, and we expect that sales volume will increase as the COVID-19 pandemic recedes, after looking down the road at a pandemic that showed little sign of abating, [and] the general retail landscape, we concluded that the stopgap measures we were utilizing were not sustainable,” Moldovan told the court.
“And that a more comprehensive restructuring of our business that could only be accomplished by seeking relief under the bankruptcy code was needed to preserve and maximize value for all stakeholders,” he said.