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The Bankruptcy Bubble: Has It Finally “Burst”?

By Adina Pollan, Pollan Legal

Originally published in The Bar Bulletin in the Jacksonville Daily Record

On August 11, 2020, Stein Mart announced it had filed for bankruptcy under Chapter 11, following an extensive list of prestigious retail brands that had done the same in 2020: Tailored Brands, Lord & Taylor, Neiman Marcus, Brooks Brothers, to name a few. However, unlike most of the retail bankruptcies of 2020, Stein Mart is closing most of its almost 300 stores.[1]

While changing consumer habits initiated the decline of many brick-and-mortar brands in 2019 (i.e., Payless and Gymboree), the unprecedented demise of many brands in 2020 can surely be blamed on the coronavirus pandemic. Even with increased reopenings, numbers still are stagnating (see, e.g., Disney’s third quarter earnings, showing a net loss of $4.72 billion, resulting from almost a billion dollars less in expected revenue). And retail is not the only market suffering, as many restaurants are on the brink of permanent closure as well.[2]

What does this mean for Jacksonville? With any large Chapter 11 case, there are often “trickle-down” effects with local impacts. For example, Stein Mart employed more than 8,000 people pre-bankruptcy. But on August 11, 2020, Stein Mart announced it had laid off nearly 200 employees from its Jacksonville headquarters alone.[3] There are also the landlords that counted on Stein Mart’s rent, as well as vendors that supplied merchandise and services. With the loss of income that accompanies the loss of employment or of a large client, the next round of bankruptcies may start.

For lower income individuals, Chapter 7 may be the perfect vehicle for shedding excess debt to regain a fresh start. But what about the landlords and local vendors? Fortunately, there is a new tool that was serendipitously made available by Congress right before the pandemic hit. The Small Business Reorganization Act (“SBRA”),[4] signed into law by President Trump on August 23, 2019, became effective February 2020, just one month before Jacksonville was impacted by the pandemic.

Under the SBRA, a new Subchapter V was created under Chapter 11. The many changes were implemented to make bankruptcy a more viable option for small businesses and high net worth individuals. Particularly, the goal of the SBRA was to facilitate the development of a consensual plan of reorganization, with the process streamlined and costs reduced. The Subchapter V trustee acts more like a mediator, aiming to get the debtor and creditors to agree to a plan that works, and then ensures the debtor makes timely payments under the plan, similar to a Chapter 13 trustee. There is no payment of quarterly fees to the United States Trustee, which can often push a teetering business just over the edge. A debtor is required to file a plan of reorganization within 90 days of the petition date (filing date). And lastly, a small business owner’s personal assets can be protected in Subchapter V.

According to the statistics published by the United State Bankruptcy Court for the Middle District of Florida, in July 2020, Jacksonville only had 292 new filings, as compared for 468 new filings in July 2019. There does appear to be a downward trend in local filings, as the gap in year to date filings for calendar year 2020 appears to be increasing with each month. But coming off a record-shattering eleventh year of expansion, coupled with the fastest recession in American history, the bankruptcy bubble may be prepared to burst. As with any trickle-down effect, the results may be slow, but without new employment opportunities for those laid off, and without fresh sources of revenue for vendors, bankruptcy may be a forthcoming conclusion.

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[1] Valinsky, Jordan, “Stein Mart files for bankruptcy and will close most of its 300 stores,” CNN Business, CNN, accessed August 13, 2020 (available at https://www.cnn.com/2020/08/12/business/stein-mart-bankruptcy/index.html).

[2] See Andrews, Colman, “Restaurants closing: 35 of the most popular that won’t reopen after the coronavirus pandemic,” 24/7 Wall Street, Money Section, USA Today, Aug. 13, 2020 (available at https://www.usatoday.com/story/money/2020/08/13/the-35-most-popular-restaurants-that-wont-reopen-after-the-pandemic/42198639/); Taylor, Kate, “The largest fast-food franchisee in America, which owns 1,600 Pizza Hut and Wendy’s locations, files for bankruptcy,” Business Insider, July 1, 2020 (available at https://www.businessinsider.com/pizza-hut-wendys-franchisee-npc-international-files-for-bankruptcy-2020-7#:~:text=The%20largest%20fast%2Dfood%20franchisee,Wendy’s%20locations%2C%20files%20for%20bankruptcy&text=NPC%20International%20%E2%80%94%20the%20largest%20franchisee,11%20bankruptcy%20protection%20on%20Wednesday.).

[3] Micolucci, Vic, “Stein Mart files for bankruptcy, lays off hundreds of employees: Jacksonville-based retailer expects to close a significant number, if not all, of its brick-and-mortar stores,” WJXT News4Jax, Aug. 11, 2020 (available at https://www.news4jax.com/news/local/2020/08/12/daily-record-stein-mart-lays-off-substantial-number-of-employees-in-jacksonville/).

[4] The Small Business Reorganization Act of 2019, Pub. L. No. 116-54 (2019).

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