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The Upside of Bankruptcy

By Kevin Kenyon

“It seems that every week the list of retailers going into Chapter 11 grows larger and larger … bringing opportunities as well as challenges.” — John Barton, senior vice president, Staples Inc.

Retail bankruptcy, while obviously not a pleasant experience for those going through the process, can create opportunities for others.

Some companies, such as office superstore giant Staples, have benefited from other retailers’ misfortunes. “It seems that every week the list of retailers going into Chapter 11 grows larger and larger — that’s bringing opportunities as well as challenges,’’ said John Barton, senior vice president of Staples Inc., Framingham, Mass.

Staples, for example, acquired 30 Rickel Home Center stores in New Jersey last year as the result of Rickel going out of business. Twenty of the units are now open under the Staples name.

“It allows you to penetrate markets much faster than you could if you had to build stores from scratch,” said Barton, who spoke about bankruptcy issues during a panel session at ICSC’s New England Idea Exchange in Boston this summer.

The firm, Barton added, also acquired three former Rich’s Department Stores in New England.

But no matter what side of the bankruptcy fence you are on, all parties — whether retailer, lender or developer — must learn to navigate through the often complicated Chapter 11 process.

That process, however, has improved greatly over the past several years, say industry insiders.

But for those who have never taken part in a bankruptcy proceeding, the process can be difficult to read, according to William Weinstein, principal of The Ozer Group, a Needham, Mass.-based bankruptcy liquidation firm.

“Bankruptcy court, from my experience, is nothing like Perry Mason; it’s much more like Judge Wapner,” he said, alluding to the idea that the process is more like reality than high drama.

Judge Wapner, Weinstein explained, rulings in a bankruptcy proceeding can be wildly unpredictable.

“The judge has a great deal of discretion, which creates uncertainty,” he explained. “The reality in bankruptcy court is that rulings can change from day to day and from courtroom to courtroom.”

To assist in the battle against the unknown, Weinstein said the first piece of information landlords should determine is where the bankruptcy is filed.

“At that point you start determining how that particular courtroom has ruled in the past, and then you do anything and everything to gain as much local knowledge as possible,” he said.

The process as a whole, including inventory liquidation, has improved greatly over the years, according to Weinstein, who made his comments along with other bankruptcy professionals at ICSC’s New England Idea Exchange, held in July at the Seaport Hotel in Boston.

“The whole bankruptcy marketplace was grossly inefficient just 10 years ago,” he explained. “Now debtors can sell assets, convert them to cash, and borrow against them much more efficiently than they could in the past.”

Venue is a big issue in the bankruptcy process, said Stewart Cohen, CEO of Paragon Capital, a Needham, Mass.-based retail lender.

“Retailers in the region generally file in two jurisdictions, Wilmington, Del., and Southern New York, mainly because those courts have historically been retailer friendly,” he explained, noting that the sanctity of retail leases is generally not respected in those venues.

From a lender’s perspective, however, Cohen agreed that the most significant problem with bankruptcies is that they create uncertainty.

“Lenders always strive for certainty, and for that reason the bankruptcy process creates a lot of anxiety.”

One way to avoid uncertainty is to take the decision out of the judge’s hands, according to Richard Kaitz, an attorney with the firm of Goldstein, Kaitz & Fellman, Waltham, Mass.

By forging their own deals, all involved parties can avoid putting their fate in the hands of judges or subjecting themselves to retail auctions, he said.

“I think everybody wants to avoid auctions,” he explained.

“I recently had a bankruptcy transaction where we had 12 leases and made deals on 11 of them, and the only bad deal went to landlord number 12.”

Based on his experience in bankruptcy court, Kaitz also noted that judges generally prefer to have the parties make deals on their own.

“The No. 1 phrase judges like to hear is ‘we have discussed and agreed to the following.’”

Landlords have a reputation for expecting too much from the bankruptcy process, according to Ronald Pastore, a director at AEW Capital Management, a Boston-based real estate firm.

“The biggest rap on landlords is that they are not realistic,” he said.

“Bankruptcy is a well-oiled machine, and we shouldn’t try to reinvent the wheel.”