Retail Bankruptcies: Key Issues for Debtors, Landlords and Vendors - - PowerPoint PPT Presentation

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Retail Bankruptcies: Key Issues for Debtors, Landlords and Vendors

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, JUNE 15, 2017

Felice R. Yudkin, Member , Cole Schotz, Hackensack, N.J. George M. Cheever , Of Counsel, K&L Gates, Pittsburgh, Pa. Jacob S. Frumkin, Cole Schotz, Hackensack, N.J.

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June 15, 2017

• Overview of Retail Bankruptcies/Recent Surge in Filings
• Introduction of Model Case
• Pre-Bankruptcy Planning
• First Day Relief
• Landlord/Tenant Issues
• Creditor/Vendor Issues
• Going Out of Business (GOB) Sales

6

• There have been a rising number of larger retailer

bankruptcies since the beginning of 2017.

• Studies show that consumers are making more online

purchases and shifting their spending toward travel and

• ther experiences.
• Inventory in physical stores continues to outweigh

shopper demand.

• The number of stores on Moody’s distressed list is at the

highest level.

• Since the beginning of 2017, over 10 retailers including

The Limited, Wet Seal, Eastern Mountain Sports, Bob’s Stores, BCBG Max Azria, Payless and Rue 21 have filed for bankruptcy.

7

• The debtor (XYZ LLC) is a specialty retailer of teen apparel and

accessories.

• The debtor sells its merchandise to customers in 48 states through its
• nline store and 1,180 brick and mortar stores located in various strip

centers, regional malls and outlet centers.

• The debtor has 15,800 employees including 12,300 part-time

employees.

• The debtor has the following outstanding pre-petition liabilities:
• $72 million on an asset based loan
• $521 million on a secured term loan
• $239 million of unsecured notes
• $50 million trade debt
• The debtor’s business performance has come under significant

pressure in recent years including a decline in in-store transactions.

• The debtor relies on vendors, shippers and warehousemen to ensure

supply of goods to retail stores and customers.

8

• Retention of Advisors
• Counsel
• Investment Banker
• Financial Advisor
• Liquidator
• Secure DIP Financing (if necessary)
• Prepare Communications Plan

9

• Customer Programs Motion
• Attempt to maintain goodwill and customer relationships, and to attract new customers.
• 11 U.S.C. §§ 105(a), 363(b), 503(b)(1) and 1107(a); “doctrine of necessity”
• Payment of administrative fees associated with running such programs.
• Gift Cards
• Liabilities for unredeemed gift cards purchased prior to petition date.
• E.g., In re RadioShack Corp., Case No. 15-10197 (Bankr. D. Del.) ($44 million); In re Am.

Apparel, Case No. 15-12055 (Bankr. D. Del.) ($5.1 million)

• 11 U.S.C. § 507(a)(7) - priority for unsecured claims relating to “customer deposits.”
• Inconsistent treatment by bankruptcy courts
• In re City Sports, Inc., 554 B.R. 329 (Bankr. D. Del. 2016) (general unsecured claims)
• In re BGI Inc., f/k/a Borders Grp. Inc., 476 B.R. 812 (Bankr. S.D.N.Y. 2012) (no distributions

for untimely filed proofs of claim because holders were not “known” creditors)

• The Shaper Image Corp., Case No. 08-10322, Dkt. No. 2243 (Bankr. D. Del.) (priority

subject to court-approved claims process)

• In re WW Warehouse, Inc., 313 B.R. 588 (Bankr. D. Del. 2004) (claims filed by holders of

unused gift certificates entitled to priority) 10

• Refund/Return and Exchange Programs
• GOB sales likely carved out.
• Credit Cards
• Includes setoff of processing obligations (fees and chargebacks) against

amounts remitted to debtor.

• Spending, Promotional, Coupon and Customer

Loyalty Programs

• E.g., coupons upon spending set dollar amounts; seasonal and item

specific sales

• Extended Service Contract and Warranty Programs

11

• Critical Vendor Motion
• Seeks authority to pay prepetition claims of certain vendors essential to the debtors’
• perations.
• 11 U.S.C. §§ 105(a), 363(b), 503(b)(9), 1107(a) and 1108
• Subject to a set limit/cap for all such claims.
• Critical vendor criteria include whether:
• Vendor is a sole or limited source or high volume supplier;
• Debtors can find an alternative vendor;
• Vendor is holding/fulfilling a large order that is at risk of loss upon nonpayment; and
• Vendor is able or likely to refuse to perform services or to ship products if prepetition

balances are not paid.

• Examples
• American Apparel – component and raw materials suppliers, yarn and fabric suppliers,

contract knitters

• Gander Mountain – IT, data and retail website services, retail operations services

12

• Trade Agreements
• Payment conditioned upon the vendor’s execution of a trade agreement

including the following terms, among others:

• Continuance of the parties’ existing relationship on terms at least as

favorable as prepetition practices and programs.

• Release of goods/assets owned by the debtors in the vendor’s possession.
• When the critical vendor has executed a trade agreement and thereafter

ceases providing products or services under the agreement, payments to that vendor may be deemed unauthorized postpetition transfers under 11 U.S.C. §§ 549 and the debtors may, among other things:

• Seek to recover the payments in cash.
• Apply the payments against any administrative claim of the vendor.
• Authorizes banks to process and honor checks presented

for the payment of, and transfers related to, such

• bligations.

13

• Employee Wages Motion
• Maintain employee goodwill and ensure continuation of their services
• 11 U.S.C. §§ 105(a), 363(b), 507(a)(4), 507(a)(5), 541(b)(7), 541(d)
• E.g., accrued wages and salaries, employee benefits (such as vacation and sick time,

employee expenses

• Banks authorized to process checks/ electronic transfers drawn on the debtors’ bank

accounts to pay such obligations.

• Administrative processing costs included.
• Retail-Specific Aspects
• Employee bonuses
• E.g., sales goals for periods of time
• Employee commissions

14

As explained in the legislative history to Code Section 502(b)(6):

• “[T]he phrase ‘lease of real property’ applies only to a ‘true’ or

‘bona fide’ lease and or interests therein, and does not apply to financing leases of real property or interests therein, or to leases of such property which are intended for security”

• Financing “leases” are in substance installment sales or loans. The

“lessors” are essentially sellers or lenders and should be treated as such for purposes of bankruptcy law.

• “The distinction between a true lease and a financing transaction is

based on the economic substance of the transaction and not, for example, upon the locus of title, the form of the transaction or the fact that the transaction is denominated as a lease.”

15

• The stay applies to all of a landlord’s default remedies under an

unexpired real property lease, including actions to terminate the lease and eviction proceedings.

• The stay does not apply to “any act by a lessor to the debtor of

nonresidential real property that has terminated by the expiration of the stated term of such lease before the commencement of or during [the case] to obtain possession of such property.” Code Section 362(b)(10).

• The automatic stay does apply to lease terminations initiated

because of the tenant-debtor’s default. The landlord will need relief from the stay to complete the eviction process and recover possession.

16

• An unexpired lease may not be terminated or modified during a

case “solely because of a provision in such … lease that is conditioned on:

• The insolvency or financial condition of the debtor at any time

before the closing of the case;

• The commencement of the case…; or
• The appointment or taking possession by a trustee … or a

custodian” before the case is filed. Code Section 365(e)(1).

17

An ipso facto clause will be enforceable if “(i) applicable law excuses a party, other than the debtor, to such … lease from accepting performance from or rendering performance to the trustee or to an assignee of such … lease, whether or not such … lease prohibits or restricts assignments of rights or delegation of duties: and (ii) such party does not consent to such assumption or assignment….” Code Section 365(e)(2)(A).

• Ipso facto defaults need not be cured as a precondition to lease

assumption.

18

What “assumption” means:

• The debtor or its assignee gets all the benefits of the lease,

including the right to remain in possession for the remainder of the lease term.

• In return, the debtor or its assignee must assume all the burdens of

the lease, including the cure of existing payment defaults and performance of the tenant-debtor’s ongoing obligations under the lease for the remainder of its term.

19

What “rejection” means:

• The debtor is deemed to have breached the lease.
• The debtor must surrender possession.
• The debtor is relieved from its ongoing performance obligations

under the lease.

• The landlord’s claim for damages resulting from the tenant-

debtor’s breach (including damages for breach of future performance obligations) is treated as a pre-petition claim, subject to a statutory cap.

20

• Assumption requires court approval. It’s not enough to simply tell the

landlord.

• Rejection likewise requires court approval, unless a statutory deadline

for approval passes.

• Assumption or rejection may be provided for in the tenant-debtor’s

Chapter 11 Plan.

• To obtain court approval for assumption or objection prior to plan

confirmation, the tenant-debtor must proceed by motion. See Bankruptcy Rule 6006.

21

• “ [A]n unexpired lease of nonresidential real property under which the

debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of

(i) the date that is 120 days after the date of the order for relief; or

(ii) the entry of an order confirming a plan.

• The court may grant an extension for 90 days “for cause.”
• Further extensions require “prior written consent of the lessor in each

instance.” Code Section 365(d)(4).

22

Code Section 365(d) requires the tenant-debtor to “timely perform all

• f the obligations of the debtor…arising from and after the order for

relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected … .”

• There is an exception for obligations as to which a breach would

be an ipso facto default of the sort described in Code Section 503(b)(2), e.g., financial covenants. The tenant-debtor need not perform these obligations.

23

• Performance under Code Section 365(d)(3) is required

notwithstanding Code Section 503(b)(1)(providing for the allowance

• f administrative expenses after notice and hearing).
• “The court may extend the time for performance of any such
• bligation that arises within 60 days after the order for relief, but the

time for performance may not be extended beyond such 60 day period.”

24

• Tenant-debtor’s obligation is to pay the full amount specified in the

lease--not just the reasonable value of its actual use and

• ccupancy.
• When does an obligation “arise” for purposes of Code Section

365(d)(3)?

• The “billing date” or “performance date” approach: “An obligation arises when one

becomes legally obligated to perform.” So, for example, real property tax reimbursement obligations coming due post-petition must be paid in full, even though some of the taxes were assessed for pre-petition periods. In re Montgomery Ward Holding Corp., 268 F.3d 205, 209 (3d Cir. 2001).

• The “proration” approach: e.g., real property taxes for a period that spanned the

petition date and billed post-petition must be pro-rated as of the petition date. In re Handy Andy Home Improvement Ctrs., Inc., 144 F.3d 1125 (7th Cir. 1998). 25

Courts have used several different approaches:

• The “breakpoint” approach--the “breakpoint” is the date when the

tenant’s sales reach the minimum amount necessary to trigger the accrual of percentage rent. If the breakpoint occurs on or after the petition date, all the percentage rent accruing during the lease year is payable under Section 365(d)(3). If the breakpoint occurs prior to the petition date, only post-petition sales will be taken into account in determining the percentage rent payable under Section 365(d)(3). Any percentage rent accruing after the breakpoint but before the petition date will not have any priority.

26

• The “billing date” approach--Courts looks to date on which

percentage rent becomes due, irrespective of when the percentage rent accrued. So, for example, if the due date occurs after the petition date, all the percentage rent is a Section 365(d)(3) expense, even if the lease year ended prior to the petition date.

27

• The “sales volume” approach-- Percentage rent payable as a priority

item under Code Section 365(d)(3) determined by pro-rating total percentage rent accrued for the lease year based on post-petition sales.

• The “calendar” approach--Percentage rent payable as a priority

item under Code Section 365(d)(3) determined by pro-rating total percentage rent accrued for the lease year based on portion of lease term elapsing after the petition date. For a good summary of these different approaches see 4 Collier Bankruptcy Practice Guide ¶ 68.05[2][c][iii] (2016).

28

• A motion for approval of the assumption or rejection of an

unexpired lease should be evaluated under the “business judgment” test. See In re G Survivor Corp., 171 B.R. 755, 757-8 (Bankr. S.D. N. Y. 1994).

• Factors that courts have considered include:
• Whether the lease burdens the estate financially;
• Whether rejection would result in a large claim against the estate;
• Whether the movant has shown real economic benefit from rejection; and
• Whether balancing the equities, rejection will do more harm to the lessor

than to the estate if the lease is not rejected.

29

• The fundamental overriding question is whether the proposed

assumption or rejection will benefit the estate. Id. at 758; see also In re Exide Techs., 340 B.R. 222 (Bankr. D. Del. 2006); In re Helm, 355 B.R. 528 (Bankr. S.D.N.Y, 2006) (holding that a mere showing that rejection will benefit the estate is sufficient to satisfy the business judgment test).

30

If the tenant-debtor is in default under the lease but the lease has not been terminated, the tenant-debtor can assume the lease if the following conditions are satisfied:

• The tenant-debtor must cure all payment defaults and other

defaults that are capable of complete cure, or provide “adequate assurance” that it will “promptly cure” all such defaults.

31

• Non-payment defaults that are inherently incapable of being

completely cured because they are historical facts (e.g., violation of lease provisions barring the tenant from “going dark” or requiring the tenant to maintain the lease premises) will be deemed cured by “performance at and after the time of assumption in accordance with such lease” and “pecuniary losses resulting from such default shall be compensated” like payment defaults (i.e., immediate or “prompt” payment in full and ”adequate assurance of future performance”). Code Section 365(b)(1).

• Ipso facto defaults need not be cured as a condition to lease
• assumption. Code Section 365(b)(2).

32

Code Section 365(b)(3) provides some specific criteria for determining ”adequate assurance of future performance” under a shopping center lease. In this context the concept includes adequate assurance:

• “of the source of rent and other consideration due under such

lease,”

• “that the financial condition and operating performance of” any

proposed assignee and its guarantors (if any) will be “similar to the financial condition and operating performance “of the original lessee and its guarantors (if any);”

33

• “that any percentage rent under such lease will not decline

substantially;”

• “that assumption or assignment of such lease is subject to all the

provisions thereof,” including (for example) “radius, location, use, and exclusivity provisions” and “will not breach any such provision contained in any other lease , financing agreement, or master agreement relating to such shopping center;” and that

• “assumption or assignment of such lease will not disrupt any tenant

mix or balance in such shopping center.”

34

• A tenant-debtor may assign the debtor’s rights under an unexpired

lease only if the debtor assumes the lease and “provides adequate assurance of future performance by the assignee … whether or not there has been a default in such … lease.” Code Section 365(f).

• Contractual provisions and provisions in applicable law that prohibit
• r restrict lease assignments by tenant-debtors are generally
• unenforceable. Code Section 365(f)(1) and (3).
• This may include provisions requiring the tenant to share the

proceeds of the assignment with other parties, and use restrictions that are actually designed to inhibit lease

• assignment. See, e.g., In re Standor Jewelers W., Inc. , 129 B.R.

200 (BAP 9th Cir. 1991); In re U.L. Radio Corp., 19 B.R. 537 (Bankr. S.D.N.Y.1982).

35

• Prior to the enactment of the BAPCPA amendments to the

Bankruptcy Code in 2005, retailor-debtors sometimes disposed of large portfolios of potentially valuable but unwanted store leases by selling “designation rights” to brokers or other potential buyers who thereby acquired the right to designate which leases would be assumed and assigned to the buyer or other new lessees and which leases would be rejected. The buyer would pay a premium to the tenant-debtor, and undertake to pay the carrying cost of the leases during the marketing/review period. See In re Ames Dept. Stores,

• Inc. , 287 B.R. 112 (Bankr. S.D.N.Y. 2002) (holding that designation right

are property that can be sold in case under the Bankruptcy Code and that the sale of such rights does not involve an impermissible delegation of the trustee’s duties).

• The tighter time limits on lease assumptions introduced by BAPCPA

have made this technique harder to use without the cooperation of the landlords involved.

36

• A tenant-debtor’s rejection of a lease is deemed a breach of the

lease immediately prior to the commencement of the case. Code Section 365(g).

• Rejection does not necessarily mean the lease is terminated. See In

re Teleglobe Commc’ns Corp., 304 B.R. 79 (D. Del. 2004)(“Rejection”

• f a lease does not constitute “termination” of the lease; since

“termination “ did not occur prior to “rejection,” the debtor-lessee’s contractual repair and removal obligations arising on termination were not within the scope of Code Section 365(d)(3)).

• The tenant-debtor’s deemed breech of the lease means that, unless

the damages fall within the scope of Code Section 365(d)(3), any claim of the landlord for damages due to any breach of the lease will be a general, non-priority claim.

37

A “claim of a lessor for damages resulting from the termination of a lease of real property” will be disallowed to the extent “such claim exceeds—

• (A)

the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of -- (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed or the lessee surrendered, the leased property; plus

• (B)

any unpaid rent due under such lease, without acceleration, on the earlier of such dates.” Code Section 502(b)(6).

38

• Prior to the BAPCPA amendments, a tenant-debtor’s assumption of a

lease committed the debtor-tenant to pay in full all future obligations arising under the lease--a potentially crushing burden if the lease assumption proved improvident.

• Subsequent rejection of an assumed lease offered no relief from this

burden.

• The BAPCPA amendments added Code Section 503(b)(7), which

mitigated this risk by capping the lessor’s claim for damages suffered by reason of post-rejection defaults by the tenant-debtor who rejected a previously assumed lease.

39

• The cap limits the portion of the lessor’s claim entitled to

administrative expense priority to “a sum equal to all monetary

• bligations due, excluding those arising from or relating to a failure to
• perate or a penalty provision, for the period of 2 years following the

later of the rejection date or the date of actual turnover of the premises, without reduction or setoff for any reason whatsoever except for sums actually received or to be received from an entity

• ther than the debtor,…”
• The lessor’s “claim for remaining sums due for the balance of the

term of the lease” is not eliminated. Instead, it is treated as “a claim under section 502(b)(6),” that is, a general unsecured claim subject to the cap imposed by that statutory section.

40

 Arrangement where vendor delivers goods to buyer/consignee, but

retains title to goods pending a sale of the goods to a third party.

 Consignee often has the right to return the consigned goods if the consignee is unable

to sell or use the goods

 U.C.C. §§ 9-102(a)(20), 9-103(d), 9-317(a), 9-319, 9-324

 Free and clear sales  In re Sports Authority Holdings, Case No. 16-10527 (Bankr. D. Del.)

 Consignment vendors opposed proposed sales on the basis that they

retained title to the consigned goods under their consignment agreements with the debtors (i.e., the consigned goods were not property of the bankruptcy estate).

 Ownership issues ultimately not decided due to a settlement.  Highlights need for consignment vendors to satisfy UCC Article 9

requirements notwithstanding language in underlying consignment agreement.

41

• The BAPCPA amendments to the Bankruptcy Code, enacted in 2005,

included Code Section 503(b),which created a new category of “administrative expenses” entitled to priority under Code Section 507(a)(2).

• This new administrative expense category encompasses “the value
• f any goods received by the debtor within 20 days before the date
• f commencement of a case under this title in which the good have

been sold to the debtor in the ordinary course of the debtor’s business.”

42

• Issue: Does a creditor that delivers goods to a third party in a

“drop shipment” transaction qualify for Section 503(b)(9) treatment?

• Received by the debtor element of Section 503(b)(9): “the

value of any goods received by the debtor in which the goods have been sold to the debtor … .”

• The term “received” is not defined in the Bankruptcy Code.
• Courts look to the Uniform Commercial Code definition of

“receipt” which focuses on physical possession.

43

• Courts have consistently held that goods received by a

debtor’s customers in a “drop shipment” transaction are not compensable under Section 503(b)(9).

• In re Plastech Engineered Prods., Inc., No. 08-42417, 2008 WL 5233014 (Bankr. E.D. Mich.
• Oct. 7, 2008) (sustaining debtors’ objection to 503(b)(9) claim for goods delivered to a

debtor’s customer)

• In re Momenta, Inc., Case No. 11-cv.479-SM, 2014 WL 3765171 (D.N.H. 2014) (affirming

bankruptcy court’s denial of 503(b)(9) claim for goods that were shipped directly to the debtor’s customers)

• In re World Imports, 516 B.R. 296 (Bankr. E.D. Pa. 2014) (holding goods shipped directly

to the debtor’s customers were not “received” by the debtor for purposes of Section 503(b)(9)

• In re SRC Liquidation Co., Case No. 15-10541 (BLS) (Bankr. D. Del. Oct. 15, 2015)

(transcript of bench ruling) (“[W]hile it may be a business relationship developed of long practice and, frankly, for the benefit and at the direction of the Debtor, nevertheless, the circumstances of that business relationship and the way product was moved from one party to another is such that it take it outside the scope of Section 503(b)(9).”) 44

U.C.C. Section 2-702 provides in part:

• (2) Where the seller discovers that the buyer has received goods on credit

while insolvent he may reclaim the goods on demand made within ten days after the receipt , but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.

• (3) The seller’s right to reclaim under subsection (2) is subject to the rights of a

buyer in the ordinary course or other good faith purchaser under this Article (Section 2-403). Successful reclamation of goods excuses all other remedies with respect to them.

45

Code Section 546(c) provides in part:

• (1)[S]ubject to the prior rights of holder of a security interest in such goods or

the proceeds thereof, the rights and powers of the trustee under section 544, 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller’s business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such a seller may not reclaim such goods unless such seller demands in writing reclamation of such goods--

• (A) not later than 45 days after the date of receipt of such goods by the

debtor; or

• (B) not later than 20 days after the date of commencement of this case, if

the 45-day period expires after the commencement of the case.

46

• (2) If a seller of goods fails to provide notice in the manner

described in paragraph (1), the seller still may assert the rights contained in section 503(b)(9).

47

• Shippers
• Facilitate the shipment/movement of goods via land, air and water.
• E.g., common carriers, freight forwarders, customs brokers, logistics providers.
• Warehousemen
• Store goods in transit.
• E.g., Bailees, storage facilities, distribution centers.
• Possessory Liens
• These parties may holds liens against property of the debtors that is in their

possession for which payment has not been rendered.

• As a result, they may refuse to release goods in their possession unless their

prepetition claims are paid (see 11 U.S.C. 362(b)(3)).

• Based on state laws and the UCC.
• E.g., UCC § 7-307
• May be entitled to adequate protection under 11 U.S.C. § 363(e).

48

• First Day Relief
• 11 U.S.C. §§ 105(a) and 363(b)
• Often contain requirement that shippers/warehousemen execute a

trade agreement similar to critical vendors (e.g., continuation of past practices, release of goods for payment).

• Related claims for the payment of customs duties may be entitled

to priority under section 507(a)(8)(F) of the Bankruptcy Code.

49

• Retail debtors often choose to liquidate inventory at

unprofitable locations through Bankruptcy Court approved going out of business sales (known as “GOB Sales”).

• GOB Sales are also conducted outside of bankruptcy and are

highly regulated by state and local authorities. State statutes and local regulations often limit a merchant’s ability to conduct such sales in an effort to protect consumers from deceptive practices and protect other businesses from unfair competition.

• State and local authorities require a license and a fee to hold a

GOB Sale.

• Certain state and local laws have regulations that limit, among
• ther things, the length of the GOB Sale, advertising and

repeated GOB Sales in certain period of time.

50

• Merchant – The retailer/debtor who engages an

Agent to conduct the GOB Sale

• Agency Agreement: The agreement between the

Merchant and Agent

• Agent: The third party who enters into the Agency

Agreement and conducts the GOB Sale

51

• An Agent is usually selected through a competitive

bidding process similar to a 363 sale process.

• Stalking horse Agent
• Bidding Procedures
• Bidding Protections such as break-up fee
• Highest and best offer is selected after an auction.

52

• The Agency Agreement is the agreement that

governs the rights and obligations between the Agent and Merchant.

• The Agency Agreement identifies:
• Consideration the Merchant will receive
• Methodology for a physical inventory
• Inventory subject to the GOB Sale
• Conditions Precedent
• Guaranteed Amount
• Threshold
• Sharing
• Augmentation

53

• Efficient
• Experience and expertise of Agent in conducting

GOB Sales.

• Agent typically assumes any costs associated with

the operation of stores during the GOB Sale Process including lease expenses, payroll and advertising costs.

54

• Leases often prohibit or limit GOB Sales.
• Section 365(d)(3) requires the debtor to “timely perform all the
• bligations” under a lease that arise on and after the petition date.
• Majority of courts allow GOB Sales to go forward notwithstanding

restrictions in leases.

• Landlords often raise the following issues key issues with respect to

GOB Sales:

• Duration
• Hours of Operation
• Mall/Shopping Center Regulations
• Compliance with the Law
• Signage and Advertising
• Merchandise
• Rent and Lease Obligations
• Maintenance of Premises

55

• Fair Advertising – Bankruptcy courts require that in conducting

GOB Sales, debtors must be honest in their advertising and cannot violate regulations that affect public safety.

• Augmentation of Inventory
• What is augmentation? GOB Sales supplemented with goods not

present at the store.

• Local and state authorities dislike augmentation. Authorities require

prominent disclosure of augmented goods and assurances that augmentation will not extend the term of the GOB Sale.

• Bankruptcy courts are more lenient in allowing augmentation if the

inventory is from the Merchant’s other stores.

• Bankruptcy courts are more inclined to prohibit augmentation where the

augmentation is excessive and in the interests of the Agent rather than the estate.

56

• State Statutes
• Some GOB Sale statutes and regulations are not applicable if the

sale is conducted pursuant to a Bankruptcy Court order.

• Supremacy Clause
• Bankruptcy Courts have the authority to approve sale that may
• therwise be prohibited by state and local statutes, based on

general Supremacy Clause theories.

• 28 U.S.C. § 959(b)
• 28 U.S.C. § 959(b) requires trustees and debtors to comply with

state law when managing property in a bankruptcy proceeding.

• Certain courts have held that 28 U.S.C. § 959(b) does not apply to

debtors or their Agents liquidating assets.

• Bankruptcy Courts’ authority to preempt state and local

regulations, however, is not unfettered.

57

George M. Cheever Of Counsel, K&L Gates LLP T: +1.412.355.6544 george.cheever@klgates.com Jacob S. Frumkin Associate, Cole Schotz P.C. T: +1.646.563.8944 jfrumkin@coleschotz.com Felice R. Yudkin Member, Cole Schotz P.C. T: +1.201.525.6261 fyudkin@coleschotz.com