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Impact of Chapter 11 Change on Retailers Debated

By V. Dion Haynes
Washington Post Staff Writer
Thursday, March 12, 2009

Legal experts debated before a House Judiciary subcommittee yesterday whether a 2005 change to U.S. bankruptcy law tends to force large retailers such as Circuit City out of business because they have less time to reorganize their debts.

Some bankruptcy lawyers and experts testifying before the Judiciary subcommittee on commercial and administrative law said the shorter 210-day window to restructure operations is sufficient, while others argued that troubled companies need the year or more provided before the change was made.

Congress amended the Chapter 11 provision of the bankruptcy law to shorten the time frame for companies to decide whether they will keep leases with their landlords. The law was changed to protect landlords from the drag on mall traffic when troubled anchor retailers maintain their leases while their businesses are in a sharp decline.

But critics argue that the provision does not give the retailers enough time to try to raise debt financing to operate their businesses or find a seller -- necessary steps that could help them decide which stores to keep and which ones to close. Richmond-based Circuit City Stores, which filed for bankruptcy protection in November, went out of business earlier this month after failing to get buyers to purchase all or parts of the company.

The amendment has "kept businesses empty and prevented them from reorganizing," said Ilan Kayatsky, spokesman for Rep. Jerrold Nadler (D-N.Y.). Kayatsky said Nadler, a member of the House Judiciary Committee, plans this week to introduce legislation that would lift the 2005 amendments.

Bankruptcy lawyers and legal experts testifying before the subcommittee agreed that the recession -- which tightened credit for companies and their customers -- was a leading cause of Circuit City's demise. More than 560 stores were closed by the nation's No. 2 electronics retailer and 34,000 jobs lost.

Doug Foley, a lawyer handling Circuit City's bankruptcy, said yesterday that company executives did not attend the hearing. He declined to comment further.

In supporting a lifting of the 2005 amendment, bankruptcy lawyer Harvey R. Miller told subcommittee members that companies "need time to get back to financial vibrance." If the company had filed bankruptcy under the old rules, it "would have had a much better chance."

But Todd J. Zywicki, a professor at the George Mason University school of law, said Montgomery Ward hurt business in the malls where it operated when it was in bankruptcy protection several years ago. The malls, he said, were only able to thrive again once the retailer closed and other anchor retailers moved in.

By using the prolonged Chapter 11 process, "we tried to save a store that shouldn't be saved," Zywicki said.

Chapter 11 bankruptcy filings nearly doubled to 9,272 in 2008 from 5,736 in 2007, according to the American Bankruptcy Institute. Last year, 27 major retailers filed for bankruptcy protection, the most since 2001, experts said. They include Wickes Furniture, Sharper Image and Linens 'n Things.

So far, eight major retailers -- including Ritz Camera -- have filed for bankruptcy protection this year. Experts say they expect this year's bankruptcies to surpass last year's totals.

Rep. Trent Franks (R-Ariz.), a subcommittee member, asked the experts whether the government should use money from the Treasury Department's Troubled Assets Relief Program to help companies in bankruptcy protection obtain debt financing.

Daniel B. Hurwitz, president and chief operating officer of Developers Diversified Realty, which held numerous Circuit City leases, said that plan would be "throwing good money after bad. That would force the government to make a decision on who is and isn't a good merchant. I don't think that's a position the government should be in."

But Zywicki disagreed, saying a government bailout could help troubled companies "get over the hump."

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