Lessons Learned From Barneys’ Bankruptcy – by Sara Bagley and Michael Norton
The ramifications of Barneys’ bankruptcy petition filing rippled throughout the retail world. Barneys New York has been a staple in the New York City luxury retail community for decades, expanding nationwide in the early 1990s. The general decline in the retail industry overall has led to decreased sales numbers, prompting more competitive sales and promotions, which ultimately results in reduced profit margins for retailers. The declining popularity of brick-and-mortar stores combined with Barneys’ overbearing lease obligations for their national network of flagship stores and warehouses lead to its demise because declining profit margins made it difficult to meet increasing rent obligations. The United States Bankruptcy Court for the Southern District of New York approved Barneys’ Joint chapter 11 Bankruptcy Plan on February 5, 2020, which provides for projected recovery of less than one percent (YES < 1%!!) for general unsecured claims. This recovery is abysmal for creditor vendors who will barely receive one cent on the dollar for their latest product invoices. With all of the stress and anguish surrounding Barneys’ bankruptcy and attempting to turn lemons into lemonade, here are five lessons that we can learn from this iconic retailer’s bankruptcy.
- BE AWARE OF DEADLINES — missing deadlines can result in a complete forfeiture of rights.
Proof of Claim — Properly filing a proof of claim before the deadline is the first step towards obtaining a distribution from the debtor’s bankruptcy estate. All creditors who wish to be paid out from the bankruptcy funds must file a proof of claim with the Bankruptcy Court. The proof of claim tells the bankruptcy trustee the important information about a creditor’s claim; including what type of claim a creditor has, the basis for that claim, and the money value that the creditor is owed. A creditor will lose its right to any recovery in the bankruptcy proceeding if a proof of claim is not timely filed.
Reclamation Demands — Reclamation is one of the most desirable alternatives methods of recovery from an insolvent buyer. Reclamation demands result in the vendor being able to reclaim the goods that have been sold to the buyer while insolvent. If the buyer received a vendor’s goods within 45 days of filing the petition for bankruptcy, it is possible to reclaim those goods. To reclaim the goods sold to a buyer while insolvent, the vendor has 20 days from the petition date to file a written demand for reclamation. Instead of receiving a discounted payment, the creditor vendor will be able to recover all goods sold within that 45 day period as long as they have not yet been sold and are still in the debtor’s possession.
Administrative Expense Claims — Administrative claims are a type of post-petition claim with priority status. Administrative expenses are costs necessary to preserve the estate, such as wages, salaries, court costs, and fees for the lawyers, accountants and trustees. Administrative claims refer to the debt incurred by the debtor after the bankruptcy petition was filed. If a creditor has delivered any goods to the debtor after the filing of the bankruptcy petition, those claims qualify as administrative expenses and are given the highest priority status in the distribution of the estate assets. Administrative claims will be paid out from the bankruptcy estate distribution before other types of claims and have a higher recovery percentage than other types of unsecured claims.
Preference Actions — Be cautious of payments made by the debtor during the preference period! The Bankruptcy code allows the bankruptcy trustee to recover payments made to creditors within the preference period. This policy helps to prevent aggressive creditor collection activities that often result in forcing debtors into bankruptcy and allow for equal recovery throughout the classes of creditors. These claims which were paid before the petition date were given “unfair” or “voidable” preference over other alike claims that were not also paid. For any payments made to creditors within the preference period, which is the period of 90 days prior to the bankruptcy petition date, the trustee can transfer all of these payments made to creditors back into the bankruptcy estate for equal distribution to all qualified creditors. While attempting to level the playing field for all alike creditors, this process can severely disrupt and mislead those creditors who were paid and now have to return money that they were rightfully owed.
- DON’T IGNORE RED FLAGS — don’t ignore signs that a buyer is struggling.
Financial Condition of Buyer — Don’t expect a buyer to give its vendors updates on its financial condition. Vendors should take it into their own hands to stay informed on the creditworthiness of their debtors. For public companies, their financial information is available in the public record. While private companies might have secretive financial information, there are credit reporting services are still available. Staying informed on the financial condition of a debtors can put a vendor on notice of any potential financial concerns which may arise, meaning that creditors can preemptively try to protect their interests when things start to head downhill. Vendors can simply try to ask buyers for a written statement concerning their financial condition. Bankruptcy Code section 523(a)(2) provides that debts obtained by written statements by debtor “respecting the debtor’s financial condition” can be prevented from being discharged by bankruptcy. These debts obtained by this type of statement won’t be cancelled due to the bankruptcy proceeding because these statements can serve as a basis for a creditor to successfully object to the discharge of a particular debt.
Late Payments and High Inventory — Don’t ignore when buyers make late payments on their invoices. If there are definitive payment terms included in a vendor’s invoices and the buyer routinely pays late, that could be a huge red flag of financial trouble. Responsible and financially secure buyers make timely payments on their debts. In the same vein, if you notice that a buyer has heightened inventory or is offering a lot of promotions and sales, it might mean it is having trouble selling their goods. Decreasing sales, without an accompanying similar decrease in payment obligations, presents a clear path towards a declining financial condition.
Rumors — If you hear rumors or notice signs of bankruptcy… beware. Sometimes there can be a little truth to rumors. Filing a petition for bankruptcy is not a decision that a company makes overnight and typically, this decision is accompanied with much prior discussion or even possible attempts at reorganization. Rumors can alert a vendor to pay closer attention to their buyer. Watch for patterns of poor cash flow or unusual financial activity. CreditRiskMonitor measures public companies’ financial risk by assigning them a FRISK scores. A FRISK score on the FRISK Stress Index indicates the probability of a company’s chance of bankruptcy within 12 months. With 96% accuracy, FRISK scores have predicted 139 of 145 recent bankruptcies and this free tool might be worth looking at before getting deeply financially involved with a buyer. CreditRiskMonitor also offers options for obtaining FRISK scores for private companies if financials are provided.
- DON’T TRUST BUYERS TO KEEP VENDORS INFORMED — motivations aren’t aligned.
Don’t Rely on Legal Advice from Non-Lawyer Representatives of Debtor — Employees and other representatives of debtors have different motivations than creditor vendors. Debtor’s employees are not bankruptcy experts and, most likely, are just trying to keep their jobs, which results in them often saying or doing anything to dismiss an inquiring creditor. Some of Barneys’ employees told creditors, after the bankruptcy petition had been filed, that they could take their goods from the store if they just “sent an email” or “filled out a form”, while in reality that type of self-help could have exposed the creditor to sanctions from the bankruptcy court. Don’t rely on any promises made by the debtors or their non-legal representatives; they are often misinformed or have misaligned motivations. Don’t assume that any agreement entered into with the debtor regarding their insolvency will be upheld in the bankruptcy court. Many contract provisions that are triggered by insolvency or bankruptcy petition filings will not be upheld in Bankruptcy Court because they are considered contrary to public policy.
No Self-Help — It is important for creditors to remember not to engage in self-help after the bankruptcy petition has been filed. Once a bankruptcy petition is filed, the judge issues an automatic stay, which is essentially a court ordered injunction halting the actions of creditors to collect debts from the debtor. This means that there are potential sanctions for anyone who violates this injunction, which includes creditors who attempt to collect their debts by means of self-help. An automatic stay is issue to attempt to put all creditors on equal footing and to provide a temporary relief from aggressive creditor collection activities regarding pre-petition debts. All attempts at debt collection are best handled with the help of a bankruptcy attorney.
- TRY NEW ARRANGEMENTS — step outside of the brick-and-mortar retail vendor box.
Structure Deals as Consignment Arrangements — Instead of dealing with buyers in the traditional invoice method, it might be worth a try to get your buyer to enter into a consignment type of relationship. A consignment relationship intends that the seller still owns title in the goods “sold” to the buyer. Goods “sold” on consignment should not be included in the debtor’s bankruptcy estate. Because title in the goods on consignment has not passed to the debtor, the consignment relationship should be respected, and unsold property should be able to be recovered and returned to the creditor. It’s a whole other issue as to what the bankruptcy court will count as a consignment agreement, so it is best to consult with a bankruptcy attorney to maximize chances of the consignment relationship being respected throughout the bankruptcy process.
Diversify Retail Presence —Retail has been shifting away from traditional brick-and-mortar department stores and transitioning to direct-to-consumer methods like online retail. The saying goes don’t put all of your eggs in one basket; so don’t put all of your goods into one type of retail environment. Try having showcase stores, like kiosks and pop-up shops where shoppers can gain awareness of and familiarity with your products without vendors committing to long-term financial obligations such as long-term leases. The key is to make products easily accessible and attractive. Today, shoppers care about more than just the products themselves, they care about the overall shopping experience and the retailer from which they get their goods. Companies that are committed to being environmentally responsible or ensuring that they embrace inclusion and diversity are gaining more traction with modern shoppers. While retail may be dying, experiences are not and retailers that cater to the overall shopping experience are gaining more popularity.
- THE #1 LESSON — CONSULT A BANKRTUPCY ATTORNEY.
Bankruptcy is complex, lengthy, and extremely technical. This is a special area of law that even many lawyers are only vaguely familiar with. Many of the mistakes made by creditors during bankruptcy proceedings can be avoided with the help of a bankruptcy attorney to assist throughout the bankruptcy process. Consulting a bankruptcy attorney is the best way to maximize potential recovery.