Creditor Exposure in Retail Bankruptcies
Rejection of Leases
Bankruptcy Code 365 provides that subject to court approval, the debtor may assume or reject any executory contract or unexpired lease. This gives the debtor the power to pick and choose amongst their executory contracts and leases. In the retail context, this allows the debtor to shed the leases for its underperforming locations, while keeping the leases for its profitable locations. When used properly, rejection of leases can slim down a retailer to a core of profitable locations and increase its prospects post-bankruptcy. However, not all retailers take full advantage of their power to reject leases.
Preference Exposure
In any large retail bankruptcy case, there is a strong possibility that creditors will be sued by the debtor’s estate to avoid preferential transfers. The preference period is defined as the 90 days prior to a bankruptcy filing.
The Bankruptcy Code permits the debtor to recover from creditors payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would receive through the bankruptcy process. The preference statutes are simply an attempt to achieve equity between creditors. Creditors are almost always better off attempting to get payment of their claims and then dealing with any efforts to recover the money when, and if, such attempts are made in bankruptcy.
Bankruptcy Code 547 defines a preference as
- Payment on an antecedent (as opposed to current) debt;
- Made while the debtor was insolvent;
- To a non insider creditor, within 90 days of the filing of the bankruptcy;
- That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.
Defenses to the recovery of a preference are found in Bankruptcy Code 547(c). They include:
- Contemporaneous exchanges;
- Amounts of subsequent credit extended and unpaid;
- Payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms; and
- Security interests that secure debts that bring new value to the debtor.
These defenses need to be raised in an answer to a preference complaint. The burden of proof lies with the creditor to establish that despite the elements of a preference; the transfer is protected by one or more of these defenses.
Ronald Page, Jr. of Ronald Page, PLC has extensive experience representing lenders, landlords, vendors, and other creditors in retail bankruptcy cases. His offices are located outside of Richmond, Virginia and he is able to advise you regarding the Movie Gallery Bankruptcy.
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