What to Do If You Are Impacted by a Retailer Bankruptcy Part 2

Over the past year, brick-and-mortar stores have closed their doors at a record pace. Fluctuating consumer preferences, the rise of online shopping platforms, and ongoing economic uncertainty continue to put pressure on the retail industry.

When a retailer seeks bankruptcy protection, a myriad of other businesses are often impacted. Whether you are a supplier, customer, or service provider, there are steps that you can take to protect your rights and mitigate the potential financial repercussions.

Step 1 – Gather Information

To protect your rights as a creditor, it is important to gather as much information as possible. To start, what type of bankruptcy proceeding did the retailer file?

When facing financial distress, a business can file a bankruptcy petition under either Chapter 7 or Chapter 11 of the Bankruptcy Code. In a Chapter 7 business bankruptcy, all business assets are liquidated by the bankruptcy trustee and used to pay as many creditors as possible. In most cases, the business is closed at the end of the proceedings. 

Meanwhile, in a Chapter 11 business bankruptcy, the debtor is allowed to restructure as a means to pay down debt. The debtor’s reorganization plan, which must be approved by the court, may involve modifying the payment terms for existing debts, restructuring financial obligations, and/or selling assets to pay debts. The business remains operational throughout the bankruptcy process, usually by the debtor itself.

Once a debtor files for either type of bankruptcy, the automatic stay provisions of Section 362(a) of the Bankruptcy Code take effect. The stay is intended to provide a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. 

Step 2- Assess the Impact on Your Business

The impact of a retailer bankruptcy is often determined by the type of relationship you have with the retailer, as well as the terms of your legal agreements. You can find a detailed discussion of landlord rights and remedies in bankruptcy here.

For suppliers, it is important to check the status of all recent transactions. If the debtor has not yet received physical possession of the goods, you have the right to stop the goods in transit notwithstanding a retailer’s bankruptcy filing. Even if the goods have been delivered, you may still be able to retrieve them or obtain a priority claim within the bankruptcy estate (see more on this below).

For service providers and other creditors, you should check the status of your contract to determine what obligations are still outstanding. If your business has no further obligations under the agreement, and the retailer only has an obligation to make payment, then you will likely simply have a claim in the bankruptcy case. If both parties have ongoing obligations, the retailer generally has the option to reject the contract, assume the contract, which includes curing any defaults and providing assurances it will be able to perform going forward, or assign it to a third party.

Customers are also frequently impacted by retailer bankruptcies. If you have an outstanding order, you should contact the company as soon as possible. Many retailers will also publish information about how they plan to handle outstanding gift cards, unfulfilled orders, warranties, and other issues.

A customer’s rights and remedies are also dictated by the type of bankruptcy. When a retailer undergoes a restructuring under Chapter 11, it will often still redeem gift cards, fulfill services, and deliver goods. In a Chapter 7 case, if you have a claim for a refund, return, or deposit, you must file a claim with the bankruptcy court. However, customers, which are considered unsecured creditors, are generally at the back of the line in terms of who gets paid from the bankruptcy estate.

Step 3- Seek Legal Guidance

There are many issues that a business must consider when a business partner files for bankruptcy protection. To ensure that you fully understand your rights and to determine the best strategy moving forward, it is always advisable to consult with an experienced bankruptcy attorney.

One of the first actions your attorney will take is to determine if the bar date for filing claims has been set and review the docket to see if there are any court orders or pending motions that impact your rights. Depending on the size of your claim, you may also want to attend the meeting of creditors and serve on the official committee of unsecured creditors (if one is formed).

Step 4- Take Action

No matter what your relationship is with the retailor, prompt action is generally required to preserve your rights as a creditor. This is particularly important for suppliers that have recently delivered goods to the retailer.

Under Section 546(c)(1), a seller can reclaim goods that it had sold in the ordinary course of its business on credit to the debtor that the debtor had received within 45 days prior to bankruptcy. A seller must make a written demand for the return of the goods no later than 45 days after the date of delivery; if the 45-day period expires after the bankruptcy filing, the demand must be made no later than 20 days after the commencement of the bankruptcy case. While reclamation can be a valuable tool, creditors should understand that these rights are generally subordinate to the prior liens of secured creditors on the debtor’s inventory. 

Another provision, Section 503(b)(9), grants suppliers the right to assert an administrative expense claim for the value of any goods sold and delivered to a bankrupt retailer within 20 days of the retailer’s filing. This is advantageous because administrative expense claims have higher priority than general unsecured claims.

If you plan to continue your relationship with a retailer during the bankruptcy process, you can also take steps to mitigate your risks, such as obtaining court approval for future transactions and establishing clear payment terms. Businesses should also keep detailed records of all communications, invoices, and transactions with the bankrupt retailer.

Step 5 – Closely Monitor the Bankruptcy

It is important to closely monitor the bankruptcy case as it progresses to ensure that your claim is being treated consistently with the requirements of bankruptcy law. If the retailer is pursuing a Chapter 11 restructuring, you should also make sure the debtor’s plan is feasible and does not negatively impact your rights, i.e. include third-party releases involving entities against which you have separate claims). You should also consider voting on the plan if you have the ability to do so.

Given the increased risk of insolvency, businesses should also closely monitor all retail partners for signs of financial distress by conducting ongoing analysis of the retailer’s creditworthiness and payment history. Businesses should also be mindful of the ongoing challenges for the retail industry when negotiating and structuring legal agreements.

Partner With an Experienced Bankruptcy Lawyer

If you have been impacted by a retailer bankruptcy, we strongly recommend retaining  experienced counsel in an effort to fully protect your interests. Many of your available remedies require prompt action to avoid an unintended waiver.

At Scarinci Hollenbeck, our Bankruptcy & Creditors’ Rights Group is widely respected for its vast experience and excellent client service. Our bankruptcy attorneys guide clients through the turmoil surrounding financially troubled and bankrupt companies, providing comprehensive representation in both transactions and litigation involving distressed and insolvent entities. Contact us today for a free consultation.