The retail bankruptcies that have taken place during the COVID-19 pandemic, an event that accelerated the decline of tourism and mall traffic, have highlighted the importance of planning and documentation, bankruptcy attorneys said.
The Chapter 11 process, an expensive and potentially lengthy ordeal that often ends in store closures and liquidations, requires planning on the part of companies to re-emerge as a going concern, as a number of retailers have managed to do during the pandemic, attorneys said at the Federal Bar Association’s virtual fashion law conference on Thursday.
Retailers including J. Crew Group Inc., Neiman Marcus Group, J.C. Penney Co. Inc., Brooks Brothers and more went through the process having entered into it with fairly detailed reorganization agreements that involved debt-for-equity transactions with lenders, or targets for asset sales that would preserve their business.
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In many cases, they found audiences with bankruptcy courts that were sympathetic to the unusual circumstances of their stores having to temporarily close as the coronavirus spread around the country, and allowed retailers’ requests to delay rent payments during the bankruptcy proceedings.
Ultimately, their cases underscore the importance of planning an exit strategy in advance, attorneys said.
“When we talk about filing a bankruptcy, we must know, when we do it, exactly how we’re going to get out. We don’t file a bankruptcy and say, ‘Let’s see what happens,’” Joseph Moldovan, who chairs Morrison Cohen LLP’s business solutions, restructuring and governance practice, said at the panel.
“This isn’t the spaghetti on the wall — you have a plan, you know what that plan is going to look like, you implement that plan during the course of the case, and then you figure out how you’re going to get out,” he said. “This plan is a contract between a debtor and its creditors. It’s a blueprint so the debtor can emerge from bankruptcy as a stronger and more viable entity.”
Moldovan recently represented Furla USA, the subsidiary of the Italian luxury leather goods brand, in its own unique pandemic restructuring process that took place under Subchapter 5 of the Chapter 11 process. The provision of the bankruptcy code allows smaller companies with lower debt loads to emerge quickly from the process without having to navigate negotiations with many of the traditional constituencies of Chapter 11 cases, such as official unsecured creditors committees.
The process takes place under the watch of a Subchapter 5 trustee, and involves devising a reorganization plan that requires the approval of creditors and the trustee, and ultimately, the court. Furla USA, which had filed for Chapter 11 in November, had its own plan approved in January.
Another question in corporate bankruptcies is the issue of whether companies and their executives or directors are liable for losses to creditors. Attorneys said corporations and their officers and directors may not necessarily owe a direct fiduciary duty to their corporate creditors, but that courts have nonetheless allowed creditors facing losses to band together to target them in court for alleged breaches of duty to the corporation.
“So the question can be raised, ‘Does this liability exposure exist when corporations are merely operating in the zone of insolvency?’” said Adine Momoh, partner at Stinson LLP, who co-chairs the firm’s estates and trusts litigation practice group, at the panel.
“To avoid some of the issues and to limit the liability exposure, document everything,” she said. “Make sure that when you’re deciding if you’re going to be filing for a Chapter 11 or contemplating some other restructuring option, that you explain in your minutes why you’re making those decisions,” she added. “Because that will help answer the question, ‘Did a board consider its fiduciary duties to the company’s creditors as it approached insolvency?’”