Bankruptcy Rules' Effect on Retail

Business Week has an excellent analysis up of how the bankruptcy rules put in place in 2003 will affect the current round of retail bankruptcies.

But the final nail in the coffin for Sharper Image came three years earlier, when U.S. bankruptcy law was revised to add cash payments to utilities and other suppliers, and place a 210-day cap on the amount of time bankrupt companies have to decide whether to keep a lease.

The rapid dissolution of Sharper Image took many in the bankruptcy industry by surprise. But that chain isn't alone. Several retailers that have filed for Chapter 11 protection since the economy started swooning have unraveled just as quickly: Wickes Furniture closed down its 36 stores. Friedman's is in the process of selling off jewelry and is closing its 377 stores, while Whitehall Jewelers is liquidating its 300 stores. All these companies filed for bankruptcy reorganization in 2008. And in December 2007, Bombay Co. and Levitz closed all their stores.

The new provisions in the bankruptcy law—pushed primarily by mall owners, suppliers, and utility companies, and signed by President George W. Bush in 2005—were intended to shorten the time that a company stays under court supervision. The point was to protect creditors, who sometimes had to wait years for payments while lawyers racked up hefty fees and managers collected big pay packages. "There was a pattern in some bankruptcy courts of granting extensions for as long as the debtor wanted, and that had to be stopped," says Lynn LoPucki, a professor at the University of California at Los Angeles School of Law and author of Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts.

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