On September 26, 2008, my partner Lawrence Gottlieb, the Chair of the Bankruptcy & Restructuring Group at Cooley Godward Kronish LLP, testified before the Subcommittee on Commercial and Administrative Law of the United States House of Representatives Committee on the Judiciary. Joining him at the hearing were Professor Jay Westbrook of the University of Texas Law School and Professor Barry Adler of the New York University School of Law. The subject of the hearing was "Lehman Brothers, Sharper Image, Bennigan’s, and Beyond: Is Chapter 11 Bankruptcy Working?" You can access their testimony and watch the full hearing by clicking on the link in the prior sentence.
In his testimony, entitled "The Disappearance of Retail Reorganization In The Post-BAPCPA Era," (a copy of which is available by clicking on its title), he discussed the major impact the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") has had on retail reorganizations. One of his main observations involves the 2005 amendment limiting the time within which a debtor may assume or reject commercial real estate leases to a total of 210 days (if a 90-day extension is granted). He testified that this change, in combination with other BAPCPA provisions that reduce a retailer’s liquidity, has had a devastating effect on a retailer’s ability to reorganize. Among his comments are the following:
BAPCPA has left retailers without adequate time and money to effectuate operational initiatives and cost cutting measures needed to resuscitate their businesses. Retailers now enter the Chapter 11 arena with little choice but to narrowly tailor their strategy to ensure that their lenders are not deprived of the substantial benefits and protections conferred by section 363(b) of the Bankruptcy Code, which authorizes the use, sale or lease of estate property outside the ordinary course of business upon court approval. Section 363(b) offers the unique ability to cleanse the assets of a distressed company by permitting debtors to convey assets “free and clear,” thereby maximizing value by removing the uncertainty of such stigmas as successor liability, fraudulent transfer claims and lien issues that often accompany asset purchases. Prepetition lenders, cognizant of this powerful liquidating tool and mindful of the numerous liquidity hurdles that the debtor must clear as a result of BAPCPA, have little to gain by risking their collateral in pursuit of a reorganization process now widely perceived as hopeless.
Indeed, the constricted time frames and liquidity problems created and imposed by BAPCPA have effectively eliminated the need for existing lenders to provide any more financing than necessary to position the debtor to liquidate its assets in the first few months of the case. Today, the debtor is no longer “in possession” of its assets or its future upon the commencement of its Chapter 11 case. BAPCPA’s constrictive liquidity provisions and the enormous leverage handed to secured lenders as a result thereof have eliminated the ability of retailers to control the Chapter 11 process as a “debtor-in-possession.” Rather, the process is now controlled almost exclusively by prepetition lenders, who have essentially assumed the role of "creditor-in-possession."
The Cooley Bankruptcy & Restructuring Group, which Lawrence Gottlieb chairs, is representing official committees of unsecured creditors in high-profile national and regional retail bankruptcies such as Steve & Barry’s, The Bombay Company, Hancock Fabrics, Lillian Vernon, The Sharper Image, Mervyns, Shoe Pavilion, Boscov’s and Goody’s. His testimony, drawing on experience in these recent cases as well as many others in the past, underscores how BAPCPA’s key changes have transformed Chapter 11 bankruptcy from a process by which retailers could reorganize into one where almost all face an early liquidation. Retailers, creditors, and insolvency professionals will find his full testimony on the disappearing retail reorganization both timely and informative.