August 08, 2020: An overall view of a Mid-Town street corner with a person holding a store closing sign as business struggle to stay in business in Manhattan, New York. Mandatory credit: Kostas Lymperopoulos/CSM (Credit Image: © Kostas Lymperopoulos/CSM via ZUMA Wire) (Cal Sport Media via AP Images)

As bankruptcy courts attempt to ensure companies’ survival, the dynamics of a fast-paced process designed to prioritize secured lenders — which in the case of many large apparel retailers include banks and hedge funds — pose considerable challenges to the interests of rank and file store employees.

Often, store associates, and even store managers, don’t learn of their company’s bankruptcy filing until just before it happens, and even then, how they’ll fare in the proceedings can largely remain unclear. That uncertainty has been heightened by the COVID-19 pandemic that resulted in the furloughs of tens of thousands of apparel retail employees, and kept non-essential stores closed for months.   

The dynamic overall has left workers unsure of whether their company will be successfully sold, or reorganized, or simply wind up liquidating, and if they’ll still have a job on the other side, said Michael Duff, professor at the University of Wyoming College of Law, who teaches labor law and bankruptcy. 

“In theory, there’s supposed to be equal treatment outside of the domain of secured creditors,” he said. “[But] not enough questions are asked about how the system operates after that because the folks who are harmed, let’s be perfectly clear, don’t have a seat at the table when discussions are being held regarding bankruptcy policy.” 

When a court is asked to weigh the competing interests in a retail bankruptcy, it often reminds its supplicants that its ultimate concern is the fate of the company’s employees. 

In the ongoing J.C. Penney bankruptcy, for instance, where more than 70,000 employees’ jobs depend on the retailer’s ability to execute a complex restructuring sale in the next month or so, the Texas bankruptcy judge presiding over the case put it this way: “I’m trying to balance the concerns of everyone involved,” U.S. bankruptcy Judge David Jones said at a hearing Monday. “I have 70,000 people who need a job, I have stores in small towns that don’t have alternatives, I have shareholders who believe that they’re entitled to value.”

Bankruptcy for the employee

In a corporate bankruptcy, employees are generally considered unsecured creditors, lower in the bankruptcy code’s priority scheme for who gets repaid first. 

In that category, employees are technically more or less on equal footing as vendors, landlords and others. But unless they have a union representing them, store staff don’t necessarily get a formal role on bankruptcy creditors’ committees that help direct the process, which usually include other large unsecured creditor groups. In 2019, just 6.2 percent of private sector employees belonged to a union, according to data released in January by the Bureau of Labor Statistics.  

For employees losing their jobs as a result of bankruptcy, labor experts say it can also be challenging to navigate questions about features like severance and payment for unused benefits. While those questions are typically governed by federal and state workplace laws, such protections may be suspended during a bankruptcy. 

“Bankruptcy law changes a lot of the law that exists, and that governs employees and others outside of bankruptcy,” said Richard Seltzer, partner at Cohen Weiss and Simon LLP, who has represented the Workers United union in the bankruptcies of Barneys New York last fall, and Brooks Brothers this year. “And it’s sometimes a very hard adjustment to realize that what you depended on normally doesn’t necessarily exist.”  

But employees may have some leverage during high profile bankruptcy proceedings that draw public scrutiny, particularly when they are staying on to do things like conduct store closing sales.  

As retailers use the Chapter 11 process to re-evaluate leases, close less profitable stores and renegotiate rent on those they plan to keep open, such sales are a valuable source of revenue and a way to offload excess inventory. But they are time-sensitive, even during a pandemic, as they must take place within tight deadlines dictated by the terms of the retailer’s debtor-in-possession loans and any restructuring agreement with lenders. 

J.C. Penney, which has reopened hundreds of stores around the country during the pandemic in order to facilitate its quick exit from bankruptcy, has made an acknowledgement of employees’ work in conducting going-out-of-business sales. The retailer, which had paid out roughly $10 million to a group of top executives including a $4.5 million cash incentive to chief executive officer Jill Soltau before its bankruptcy filing in May, has since obtained a Texas bankruptcy court’s approval for additional payments to other employees in its 70,000-strong staff. 

In June, Penney’s outlined payments for associates at its closing stores in the form of retention, severance and incentive bonus programs, at a time when those employees were still furloughed after pandemic-related lockdowns in March and April.

The company sought a total of up to $14.5 million in severance for some 2,200 employees, including some hourly associates and all salaried associates including general managers, supervisors, designers and others. It also sought up to $2.5 million in retention bonuses for roughly 9,100 employees including certain groups of managers or hourly associates, and an additional store-closing bonus program to provide a total of up to $250,000 to a group of eligible employees. Penney’s also sought to pay up to $4.3 million for unused paid time off for more than 4,800 eligible employees, according to court filings. 

“It is necessary to do so because today those stores are closed and those employees today are on furlough,” James Mesterharm, managing director at AlixPartners LLP, a financial adviser for J.C. Penney, told the court at a bankruptcy hearing in June. “In order for us to reopen those stores for the going-out-of-business processes and to have store employees help us with that process, to maximize the value of inventory, sales, it is important for us to have an engaged workforce and one that is assisting the company through that process in a productive manner.” 

Penney’s, which entered its bankruptcy with some 846 physical stores, has indicated in its Texas bankruptcy court filings this summer that it plans to close more than 240 locations. In June, as soon as some states began to lift lockdowns on non-essential businesses, the retailer began the process of closing some 154 stores, estimating that each store closing sale would take roughly 10 to 16 weeks to complete in order to “maximize the value of the inventory,” as its advisors have told the court. 

Life after liquidation

In the case of a liquidation, and particularly in the context of the COVID-19 pandemic, retail employees face conditions that can be grueling and often unsafe.

Two former sales employees at the now shuttered Art Van furniture chain described to WWD how, during the store’s bankruptcy sales, they had faced throngs of irate customers crowding stores beyond capacity and demanding to know why they wouldn’t receive their orders. The employees also said they were concerned about having to face large numbers of angry customers in close proximity inside their stores during the COVID-19 outbreak, and losing their health insurance during Art Van’s bankruptcy in March. 

“You had people in your face, and they were yelling at you, calling out your name, and you’re trying to explain, ‘You know, I’m sorry, at this point, all I can tell you is to either try and pick something else or we’ll give you something else for the money,” said Shirley Smith, a former sales manager at Art Van’s Taylor, Mich., location, who had worked at the company for 23 years. Smith is also a member of the worker group United for Respect, and also spoke as an organizer for retail workers. 

“And when people are angry, spit flies, and they’re in your face,” she added. “We were very much at risk, and didn’t know it.”

Laura Virgo, a former Art Van store manager at another Michigan location, described daylong efforts at crowd control, even fielding threats from customers. 

“I hadn’t even had a sip of water or used the bathroom all day,” Virgo said of her first day handling a store closing sale in March. “I mean, just like, it didn’t stop. It was overrun, unsafe, there was no regard about our health or safety and putting us in that position.”

“The timing of it, where the liquidation takes place just as the pandemic is coming through, it really diluted the accountability that they should have, to what they did,” Virgo said. 

A representative for Thomas H. Lee Partners, an investment company that had acquired Art Van’s assets in 2017, declined to comment. 

In June, Democratic lawmakers including Senator Dick Durbin of Illinois introduced “The Protecting Employees and Retirees in Business Bankruptcies Act,” targeted at some of the inequalities built into the process. The bill sought to prioritize paying employees severance, and restricting the kind of bonus payments that bankrupt retailers often seek for their top leadership, according to a statement by Sen. Durbin at the time. 

Neiman Marcus, whose bankruptcy is ongoing since May, had paid out some $4 million in bonuses to its chief executive officer Geoffroy van Raemdonck in February, in what the company’s advisers have told the court were performance related bonuses. In addition, the company had also paid out pre-bankruptcy retention bonuses to other executives within a month before it filed for Chapter 11, at a time when it had furloughed the vast majority of its roughly 13,200 employees. 

In July, the retailer also won the Texas bankruptcy court’s approval for a Key Employee Incentive Plan that would provide up to $10 million in bonuses to a group of executives. And its proposed reorganization plan, which is subject to a confirmation hearing scheduled for this week, also includes a management incentive plan, one of its advisers said in court.  

Neiman Marcus has brought back most of its furloughed employees at this point, and has currently opened 43 Neiman Marcus stores, two Bergdorf Goodman stores, and five Last Call stores. But most of its Last Call locations will be shuttered as part of the bankruptcy, and full-time associates of those closed stores were offered “severance and access to job placement services,” a company representative said.  

While the Democrats’ bill isn’t expected to gain traction in a Republican-controlled Senate, and is generally viewed as more of a symbolic gesture, it still plays a role in articulating the inequities of the bankruptcy process, said Duff, the University of Wyoming law professor. 

“I almost don’t care whether it’s political theater or not,” he said, of the bill. “The fact that somebody took the time to craft an alternative vision of what bankruptcy could look like, I think is important.”

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