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Edison, Service file bankruptcy as Congress hammers out reforms

By Jon Springer

Even as both houses of the U.S. Congress proceed toward long awaited bankruptcy reform, two more major shopping center tenants filed for Chapter 11 protection.

At press time, St. Louis-based Edison Bros.
was trying to sell its stores, which include 5-7-9.

St. Louis-based Edison Bros. Stores and Brentwood, Tenn.- based Service Merchandise both filed for Chapter 11 bankruptcy protection in March.

Edison Bros. said its landlords are partly to blame for its filing, which is expected by many to kill the chain for good. Service Merchandise was forced to file after five of its vendors sought a petition seeking court supervision of the chain's restructuring. A week later, on March 27, Service converted to a voluntary filing after finalizing a $750 million debtor-in-possession financing package.

Edison Bros., which operates mall-based specialty apparel and shoe stores, filed for the second time in four years, suggesting that, among other things, mall managers were to blame for the stores' disappointing performance.

"In certain cases, mall managers were unable or unwilling to give the stores as good a rate, or as good a location, as would be expected," said Beth Randolph, a spokesperson for Edison, following the chain's bankruptcy filing March 9. The chain also cited severe competition, interruptions in merchandise flow, and plummeting sales in January 1999.

In the end, however, it may not matter who was at fault. Experts expressed doubt that Edison -- which at press time was trying to sell its stores -- would be able to recover a second time.

"Their first trip through bankruptcy [from November 1995 to September 1997] stripped all the real assets of the business," said Peter Chapman, who follows bankruptcies for Bankruptcy Creditors' Service, Princeton, N.J. "They were left with inventory, enough cash to carry on and the trade names of the stores. Their real estate and pension plans have already been spun off to creditors."

Edison made no secret of its desire to sell its assets, which include apparel stores 5-7-9, Riggings, JW, Coda and Repp Ltd. and the Bakers and Wild Pair footwear chains.

"This will not be a traditional Chapter 11 proceeding," Edison counsel Harvey R. Miller of Weil, Gotshal & Manges, New York, told creditors in a March 22 meeting. "The debtors have filed for relief under Chapter 11 to permit them to operate in a protected environment to protect and preserve asset values while searching for buyers."

Ron Tucker, an attorney for Simon Property Group, Indianapolis, agreed the filing is somewhat unusual, "but don't forget, it's a second filing." Tucker, who represents Simon on the creditors committee of the Edison case, said "there is concern on the part of the creditors that [Edison] will be able to meet its post-petition administrative obligations," including rent.

In late March, Edison was seeking approval of a $100 million debtor-in-possession financing plan. Edison has until May 10 to assume or reject leases, though Tucker said in late March he expected that deadline would be extended.

Chapman, who publishes newsletters following bankruptcy cases, said Edison's suggestion that rents were too high was "silly."

"If they could hijack the merchandise off the back of a truck, their margins would be great too."

Service Merchandise, in the midst of a restructuring and revamping of its store format, filed for Chapter 11 protection after five of its vendors filed a petition seeking court supervision of the chain's restructuring.

The move came as little surprise. Since January, the once profitable retailer has defaulted on a loan and announced plans to close 134 of its 347 stores. The vendors, including Samsonite and Remington, said Service Merchandise owes them more than $8 million. Service has struggled in recent years, but has not escaped despite an effort to turn the chain from its original catalog showroom strategy to a focus on home products, jewelry and gift items.

CEO Bettina M. Whyte said Service Merchandise plans to use the Chapter 11 process to create "a stronger, more focused and healthier chain," and that stores would continue to operate.

Amid this uncertainty, shopping center owners were applauding Sen. Chuck Grassley (R-Iowa), who in March reintroduced legislation to change the bankruptcy code.

Saying his legislation was in part a swipe at "lax bankruptcy laws and lawyer-run bankruptcy mills," Grassley's bill includes revisions to Section 365 of the Chapter 11 Bankruptcy Code governing shopping center leases. Specifically, Grassley's bill would expedite the timeline for the assumption or rejection of leases by bankrupt shopping center tenants to 120 days, with no extensions without the consent of the landlord. This is a major improvement from the current law, which allows tenants 60 days but in practice has been extended indefinitely by judges.

The new law would discourage retailers from using Chapter 11 as a tool to break leases and restructure their firms, while leaving consumers, co-tenants and landlords to deal with dark spaces in centers.

Rep. George Gekas (R-Pa.) has introduced similar legislation in the House, though his bill calls for 180 days. At press time it was unclear when a compromise would be worked out between the two bills, said ICSC consultant Mark Disler of Black Kelly Scruggs and Healey, Washington, D.C.

Sens. Robert Torricelli (D-N.J.) and Joe Biden (D-Del.) joined Grassley as co-sponsors of the bill, the Bankruptcy Reform Act of 1999.

Bankruptcy reform bills in both Houses overwhelmingly passed in 1998, but a final version of the legislation was tied down in disagreements between the Clinton Administration and Congress on portions of the bill pertaining to consumer issues. The differences weren't settled by the time the 105th Congress adjourned.

The Grassley bill addresses some of the issues perceived as sticking points in last year's legislation, including greater protections for child support.

"The goal is common-sense reform that secures a safety net to protect those who deserve a fresh start, while closing the loopholes that too many now exploit to walk away from debt they can repay," Grassley said in a statement.