Neiman Marcus’ Impending Bankruptcy
This week, there have been reports of Neiman Marcus Group Inc. having final discussions with its creditors about attempting to restructure their almost five billion dollars in debt. Many major retailers have been struggling long before the global pandemic hit with the rise of e-commerce. The quarantine lifestyle during the COVID-19 pandemic has hit retail businesses hard and the evolving reality is that consumers are continuing to change their shopping habits. Online shopping for athleisure and casual clothing is dominating the retail sphere and fewer customers are purchasing noncausal styles during this never-ending work-from-home phase. While Neiman Marcus still isn’t sure if they’ll consider just closing some store locations or if they’ll just completely sell the business outright, Neiman Marcus is expected to file for bankruptcy in the upcoming week.
Potential bankruptcy filings fill the air with a looming sense of stress and anxiety. Taking lessons from previous bankruptcy situations, here are a few things to keep in mind if you are a creditor of a potentially bankrupt retailer:
BE AWARE OF DEADLINES — missing deadlines can result in complete forfeiture of rights.
- 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. Before the debtor actually files for bankruptcy, if you know the debtor is insolvent (the knowledge of which will most likely come in the form of a rumor) you should request the reclamation of your unpaid for goods under UCC 2-702. If you are in this situation with Neiman Marcus, you should reach out to them and request to reclaim your goods and try to get a confirmation in writing that they will honor such a request. If the bankruptcy petition has already been filed, then the reclamation can only be achieved through the bankruptcy process under U.S.C. 546(c). Under this provision of the bankruptcy code, 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. Any vendors who have sold the product to Neiman’s within the past 45 days should file a reclamation demand as soon as possible.
- 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. Be cautious towards the security of any payments Neiman Marcus has recently or will soon make, as they could become recoverable if they end up being in the preference period.
- 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 once bankruptcy has been declared. 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. While Neiman has not yet filed for bankruptcy, creditors can begin preparing their documentation needed to prove their claim. Vendors should gather evidence of all unpaid invoices and related communications so that when the potential debtor files for bankruptcy they are ready to timely file their proof of claim.\
- Administrative Expense Claims — While Administrative claims towards Neiman Marcus shouldn’t be in anyone’s mind yet, they are important to know about when bankruptcy is filed. Administrative claims refer to the debt incurred by the debtor after the bankruptcy petition was filed. 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. 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. However, because Neiman Marcus has yet to file for bankruptcy, no one should have any administrative claims against Neiman Marcus… for now.
DON’T IGNORE RED FLAGS — don’t ignore signs that a buyer is struggling.
- 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. Do not continue to ship new products unless those you’ve already sent have been paid for. 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 by much prior discussion or even possible attempts at reorganization. Rumors can alert a vendor to pay closer attention to their buyer. Don’t continue to sell products to retailers who are rumored to be insolvent. Try to condition sending new products upon the retailer’s commitment to pay upfront or within a very short period of time. Watch for patterns of poor cash flow or unusual financial activity. Rumors of bankruptcy might trigger a less relaxed approach to business with your retailer. Once you’ve been notified of the potential insolvency of your debtor, you should attempt to get your ducks in a row. Determine what has not yet been paid for and demand stricter payment terms for future shipments of products. While a rumor may just be a rumor, it shouldn’t hurt to be careful and tread lightly when doing business with a potentially insolvent retailer.
DON’T TRUST THE RETAILER’S ADVICE — your 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. If an employee of Neiman Marcus makes any promises regarding payment or your ability to retrieve your goods, try to get it in writing. Even so, 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 issued to attempt to put all creditors on equal footing and to provide 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.
THE #1 PIECE OF ADVICE — CONSULT A BANKRUPTCY ATTORNEY.
If you have unpaid products being held with a potentially insolvent retailer… consult a bankruptcy 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.