The words “fashion” and “bankruptcy” in the same sentence is something we do not see often. However, in view of the recent pandemic created by the novel coronavirus, we are seeing those two words appearing often in the same story. In a recent article entitled, “Can Fashion Survive a Second Wave of COVID-19?” the American Bankruptcy Institute stated, “Fashion retailers have been the worst hit by the COVID-19 pandemic, with many already on the verge of administration or making significant cuts to their store network and workforce.”
As time goes on, we will see more and more bankruptcy proceedings of small and large fashion retailers. We will also see others using every means at their disposal to stay alive. Many are closing their doors, liquidating their assets and choosing some other form of business. Those smaller fashion retailers who wish to remain in business are clinging to the hope that there will be a vaccine and that business will return to normal — if they can stay alive long enough.
We have experienced major apparel retailers file Chapter 11 bankruptcy proceedings in an effort to either reorganize, find a buyer or go through an orderly liquidation. Those that have recently filed Chapter 11 include JCPenney, Neiman Marcus, Brooks Brothers, Ann Taylor (Ascena) and Lucky Brand, to name a few. Hundreds of smaller retailer have followed suit. Some filed Chapter 7 bankruptcy, which results in a total liquidation or an Assignment for the Benefit of Creditors under state law. Some simply closed their doors and went out of business. Others, determined to stay in business, obtained loans from the Small Business Administration or took advantage of other government loan programs.
On February 19, the Small Business Reorganization Act (SBRA) became effective. It was a new chapter in the bankruptcy code. The American Bankruptcy Institute referred to it as “a better road to reorganization for main street businesses.” One month later, the world was faced with a pandemic that brought business in the United States and all over the world to a halt.
SBRA is referred to as Chapter 5. SBRA would allow a small business to reorganize in a process that is less costly, less time-consuming and without the pressures often created by creditors committees. A plan of reorganization under SBRA is filed within 90 days — not the 300 days under Chapter 11. There is no creditors committee, which is a major benefit to the debtor because committees often create situations that can drag a Chapter 11 filing out for several years. In a Chapter 5 filing, the debtor remains in control. It does include a trustee, and the debtor can spread the trustee commission over the life of the reorganization. Payments to creditors can be over a three to five year period. There are other provisions which make SBRA a highly-simplified Chapter 11.
An example is Mary’s Fashions, a small retail store on a street with many other small businesses. The store carried fashionable clothing geared toward mature women. Because of the COVID-19 pandemic, retail stores were closed. In Los Angeles, they reopened and then closed again. Some stores were later allowed to open again with very strict guidelines, requiring customers to wear masks and stand six feet apart. Stores could allow only two people in at a time, and garments had to be sanitized if they were tried on by customers. The owner’s bills were piling up, and due dates were sometimes missed. Although her faithful clientele continued to shop in the store, the volume dropped considerably, so she decided to see a reorganization lawyer. Since she insisted on remaining in business, all liquidation options were off the table. They discussed government loans, obtaining a rent reduction from the landlord and seeking extended due dates from suppliers. After exploring all options, the decision was made to file under SBRA.
Shifting gears, we look at larger fashion retailers and how they have made use of Chapter 11 proceedings. Brooks Brothers filed Chapter 11, closed some stores and found a buyer. Others have filed Chapter 11 and could not reorganize, so they ended up in liquidation. There is no perfect answer to keeping fashion alive as we knew it in pre-pandemic days. Fashion has changed; the only time some people dress is if they are going to attend a Zoom meeting. Sweat pants on the bottom and shirt and tie on top is now the norm for men, and a nice blouse with sweats or shorts on the bottom is standard for women.
Although predictions have been many that hundreds of small retailers will file for bankruptcy, we do not see that becoming a fact. Even with the cost savings available in SBRA, smaller retailers fear that profitability is months or even years away, so they have chosen to liquidate.
Benjamin S. Seigel, Esq. is of Counsel to the firm of G&B Law, LLP. He can be reached at bseigel@gblawllp.com.
