Bankruptcy Issues in the Retail Sector

By: Russell L. Munsch (Co-speaker) and Lynn Chuang Kramer (Co-speaker)
27th Annual Jay L. Westbrook Bankruptcy Conference
November 13-14, 2008

AIG bailed out by the Government! September Numbers for Job Losses the Worst in Five Years! WAMU put into Receivership! $750 Billion Bailout Package Approved! Consumer confidence levels at an all-time low! While the current downturn in the economic market has riveted the public in recent weeks, retailers have been feeling the negative ripple effects of growing consumer pessimism for some time. The contraction in consumer spending and the credit markets has pushed several large retailers, including Linens ‘N Things and Sharper Image, to seek bankruptcy protection even as the retail industry gears up for its busiest quarter. The purpose of this paper is to discuss retail bankruptcies, the market factors leading to retail bankruptcies and other issues which the practitioner involved in a retail bankruptcy should be aware.

I. Introduction
Since the end of 2007, predictions have abounded that a new wave of retail bankruptcy cases were on the horizon.1 The bubble surrounding the residential real estate market had finally burst, and consumers were becoming concerned about the value of the homes they had purchased. As the residential housing market slowed, retailers that relied on the sale of furnishings for homes (such as furniture, appliances, or décor), as well as home improvement stores, began to run into problems (i.e., bankruptcy filings of Bombay Company, Levitz, Sofa Express, Inc. and the slowdown in revenue of Home Depot and Lowes).2 The lower value of homes coupled with rising costs in fuel, food, and energy, caused consumers to begin to “buy down” in 2008. As a result, many retailers in the causal dining, fashion, furniture and home goods industries began to feel the negative effects. Department stores such as Dillard’s and J.C. Penney’s experienced double-digit declines in sales as compared to September of 2007.3 Even high end retailers are beginning to feel the pinch.4 The downward trend in sales in the retail industry is bound to continue as negative economic news continues to play across headlines. Retailers hoping for a holiday rebound are facing the reality that this could be the worst Christmas season in decades.

With the ongoing disheartening economic news and the corresponding difficulties faced by retailers, the question the bankruptcy practitioner must consider is: What effects will the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have on the upcoming surge of retail bankruptcy filings?

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