Virtually every business—regardless of its size, nature (manufacturing, service, professional, tech) or particular industry—is currently suffering significant distress as a result of the unprecedented shutdown of huge portions of the U.S. (and global) economy. It is therefore clear that the number of businesses (and individuals) who will seek bankruptcy protection in the coming months will be enormous. Among the hardest hit will be bricks and mortar retailers, who were already experiencing a years-long downturn for a variety of reasons, with e-commerce frequently being the most referenced negative disrupter. Now that e-commerce is virtually the only form of commerce that is functioning in large portions of the U.S. (aside from grocery stores and other “essential” businesses), both the near and long-term implications for physical store-based retailers is especially grim. Iconic retail names such as JCPenney, Lord & Taylor, Macy’s, Neiman Marcus and Nordstrom are all either on the verge of a chapter 11 filing or on a “dead-man-walking” watch list as to when they might have to file. In the short term, those retailers who had already entered chapter 11 before the Covid-19 outbreak saw their exit strategies either materially delayed or destroyed, whether their strategy was a sale or a liquidation, the two most frequent outcomes for those types of businesses in recent years. Now, with entire malls and a huge number of freestanding retail stores shuttered, any potential buyer has no way to accurately gauge performance on a going forward basis. Moreover, even in a liquidation, the country’s leading retail liquidators—who can often precisely predict what will be realized in “going out of business” sales—are currently either effectively or actually precluded from conducting such sales in large portions of the country.
Bankruptcy is intended to provide the proverbial “breathing spell,” during which a company will either successfully reorganize, be sold, or be liquidated in the most value-maximizing manner. Today, however, at best a retail chapter 11 filing is likely to be a judicially induced coma until some clarity is brought to the currently bleak economic outlook. Several courts—including those presiding over the chapter 11 cases of large retailers Modell’s, Logan’s Roadhouse, Pier 1 Imports and Forever 21—have formally authorized the mothballing of their chapter 11 cases and/or authorized those debtors to disregard the Bankruptcy Code’s requirement that a chapter 11 debtor remain current on its post-petition rent obligations. Effectively, courts have allowed entire chains of retail stores that were to be sold or liquidated to take a “time out” until such businesses return to some sort of “new normal” operations, or at least until such time as there are customers willing and permitted to show up and buy merchandise—even at liquidation level prices.
While these steps have been authorized on an ad hoc basis and only by a few courts so far, we are now in a time, perhaps unlike any other in modern history, when Congress has shown a willingness to consider—and quickly enact—significant and previously unthinkable new legislation, including the outlay by the federal government of trillions of dollars almost as quickly as the money can be printed. Public policy experts have advised that Congress is currently amenable to considering “any good idea”—both large and small—that will help stabilize the economy and alleviate the devastating economic impact of the global pandemic. Therefore, while legislation regarding bankruptcy-geek-centric ideas may not generate much public attention, such legislation could help alleviate what is likely to be a calamitous year or more of either hopeless, or highly compromised and/or litigious, chapter 11 cases.
While it might be preferable to craft an entirely new Bankruptcy Code section which would specifically address all of the many complex changes that might allow any company—particularly retailers—to survive a chapter 11 filing under the current exigent circumstances, that is undoubtedly too big of an idea given the multitude of issues facing Congress, even if the majority of its members were on the same page as to how to address them (admittedly a bit of fantastical thinking). Instead, proposing a relatively small set of specific and temporary Bankruptcy Code changes that Congress could more easily consider enacting immediately seems far more practical. Below is a list of some such ideas, hopefully at least some of them “good ideas,” to temporarily address the economic impact of Covid-19. Many are focused on the particular needs of retailers and their landlords, but a few more general, yet equally important, potential emergency “wish list” changes are included:
- Tolling the time to assume or reject leases and executory contracts for any retail business in a location under a “shelter in place order,” or any other federal, state of local governmental health authority mandated or recommended closing guidance stemming from the pandemic.
- Tolling or suspending the requirement to pay post-petition rent for any retail business in a location that is under a “shelter in place order,” or any other federal, state of local governmental health authority mandated or recommended closing guidance stemming from the pandemic; provided, however, that (a) the unpaid rent would constitute a superpriority administrative expense claim against the debtor’s bankruptcy estate, and (b) to the extent the debtor’s estate is or becomes administratively insolvent, any portion of the unpaid rent that cannot be paid by the debtor would be paid through a carve-out from any collateral, or the proceeds from the disposition of any collateral, securing the debtor’s obligations to any pre- or postpetition lender.
- Permitting a debtor that wishes to sell all, or substantially all, of its assets in a section 363 sale to file a notice, as early as the first day of the case, setting forth that it intends to sell its assets in accordance with what would be generic, pre-approved and simple guidelines. The guidelines would provide for an expedited timeline for the sale, and the debtor would be permitted to proceed with the sale unless an objection is filed within a limited number of days from the date of filing. Any such objections would only be considered to the extent that the proposed sales procedures deviated materially from the guidelines and the objector would need to demonstrate a compelling reason why the sales process should not be pursued as proposed using a heightened evidentiary standard. Objections based solely on an insufficient or expedited marketing process would not be considered, provided that the debtor can demonstrate, on an evidentiary basis, that in its reasonable business judgement the value of its secured debt exceeds the value of its assets.
- Tolling all of the debtor’s monetary obligations under its executory contracts and unexpired leases during the sale process, subject to the same provisos with respect to the deferral of rent as set forth in number “2” above, with the counterparties reserving all of their rights.
- In a section 363 sale where the pre-petition/DIP lender will be credit-bidding for substantially all of the debtor’s assets, the lender/purchaser would be required to provide, or leave behind, sufficient funds to cover the estate’s court-approved administrative expenses, including funding for a limited-role creditors’ committee.
- In the above scenario, the creditors’ committee’s role would be limited to (a) performing a lien analysis, and (b) conducting no more than a 30 day investigation into any claims or causes of action against the lender/purchaser, following which the committee could commence a “challenge” based on the results of the investigation. The committee would have automatic standing to commence a “challenge,” which would be governed by rules requiring that it first be mediated, and if not resolved, litigated on a highly expedited basis. However, the prosecution of a “challenge” would not serve to halt the conduct of the sale.
- The following “first day” motions would be eliminated and replaced with the filing of straightforward informational notices that are in material conformance with approved guidelines:
- motion for joint administration;
- motion to file a consolidated list of creditors;
- motion to extend time to file schedules of assets and liabilities, schedules of current income and expenditures, schedules of executory contracts and unexpired leases, and statements of financial affairs;
- motion to pay employee wages;
- motion to maintain existing bank accounts, cash management system and business forms;
- motion for authority to maintain insurance coverage;
- motion to continue customer programs;
- motion prohibiting utilities from discontinuing service; and
- motion to pay certain prepetition taxes.
No order would be required in connection with the informational notices, however any party-in-interest could move for relief in the event that the informational notices materially deviate from the approved guidelines.
- Motions to pay critical trade vendor claims would only be considered under a heightened evidentiary standard; presumptively, no vendor would be considered critical.
- Unlike what has been ordered in a few cases to date, any motion or application which is otherwise permitted under the Bankruptcy Code or Bankruptcy Rules may still be filed, but any deadlines for their adjudication—including the deadline under section 362(e)(1) of the Bankruptcy Code for adjudication of motions for relief from the automatic stay—would be extended in the court’s discretion.
- U.S. Trustee fees would be waived for corporate debtors for the first three months of the chapter 11 case, which period could be extended upon motion for “good cause” shown.
- Filing fees for all consumer debtors would be waived through the end of 2020, subject to reconsideration at that time.
Clearly, there will be countervailing views with respect to each of these proposed temporary changes (some of which, after more fulsome consideration, might appropriately be made permanent) and other restructuring professionals will have different ideas that will very well be worth considering. Indeed, even these temporary above-suggested changes will undoubtedly be subject to rigorous debate. Nevertheless, we need to begin somewhere and not let this extraordinary time pass us by. As Rahm Emanuel famously said: “You never want a serious crisis to go to waste … it’s an opportunity to do things that you think you could not do before.” To the extent that consensus can be reached within the restructuring community, enactment of even a few of the above-posited changes would be far better than standing by and doing nothing as the bankruptcy tsunami approaches. While the restructuring community may see tremendous opportunity approaching by way of an increase in business bankruptcy filings, any such “benefit” may be illusory if most of those chapter 11 filings are destined to end in conversion to chapter 7.
*The views and suggestions set forth in this article are not indicative of any position that the author or his law firm may take or advocate on behalf of any particular client in any actual proceeding.