A Look at Retail Restructurings:
Forever 21

Kramer Levin continues to be a leader in the retail restructuring space. Building off significant recent representations in, among other retail matters, Nine West, Payless, Neiman Marcus, Toys “R” Us and Gymboree, Kramer Levin was selected as counsel to the Official Committee of Unsecured Creditors of Forever 21 and its affiliates, which filed for Chapter 11 protection in Delaware on Sept. 29, 2019. Forever 21 is a specialty fashion retailer of women’s and men’s apparel and accessories, which, as of the Petition Date, operated approximately 800 stores in more than 40 countries.

Upon being retained by the Committee, Kramer Levin promptly focused on the term of the debtor-in-possession (DIP) financing and related operational issues necessary for the company’s go-forward business and restructuring plan. While many recent retail cases have featured an expedited sale process or liquidation, Forever 21 intends to confirm a standalone plan of reorganization. 

For retail companies contemplating filing for Chapter 11 protection, not only is the time of year of the filing important, but also the expected time frame the case will last. This is particularly important given that the 2005 amendments to the Bankruptcy Code modified Section 365(d)(4) to provide that Debtors must assume or reject unexpired leases of nonresidential property within 120 days of the filing. This period can be extended by an additional 90 days (i.e., up to 210 days following the petition date), but any further extension beyond 210 days requires the written consent of the applicable landlord. It is somewhat ironic that this 2005 amendment was viewed in part as a mechanism to help prevent Debtors from dragging their feet and languishing in Chapter 11; now, it is sometimes viewed as a contributing factor in forcing companies to liquidate prematurely, particularly retail debtors with a significant number of store leases. Such debtors now must make numerous decisions regarding their entire lease portfolio within 210 days of filing, which can include critical tasks such as analyzing each store’s performance, implementing efforts to improve store profitability, and reduce expenses and merchandising decisions, all while simultaneously negotiating with the various parties, not to mention potentially marketing the leases.

With respect to Forever 21, even though all parties are working expeditiously toward a successful reorganization in advance of the 210-day deadline, the statutory deadline is still a relevant backdrop — for example, the timeline and milestones contained in the DIP financing were formulated by the lenders with that deadline very much in mind; the DIP lenders wanted to ensure that if the plan of reorganization is not implemented by 150 days following the petition date there would be enough time to liquidate their collateral through going-out-of-business sales in all stores prior to expiration of the 210-day period. 

Accordingly, any company in bankruptcy — particularly retailers — should engage in discussions with their landlords as early in the restructuring process as practicable (and ideally prepetition), as companies need adequate time to evaluate store operations as part of an overall restructuring process. It is critical that a debtor not be forced to make premature decisions about store closures and lease rejections. The statutory deadline may also be particularly relevant in cases that may take longer than 210 days (particularly those not supported by a restructuring support agreement or 363 sale process).