Thursday, October 25, 2018

9:00 – 10:15 AM

Seminar 5

Retail Chapter 11s – Quick Moving Cases and First Day Hazards

Presented to

2018 U.S. Shopping Center Law Conference JW Marriott Orlando Grande Lakes

Orlando, FL October 24-27, 2018

by:

Robert L. LeHane Partner

Kelley Drye & Warren LLP 101 Park Avenue

New York, NY 10178 rlehane@kelleydrye.com

Kevin M. Newman Partner

Barclay Damon LLP 125 East Jefferson Street

Syracuse, NY 13202 knewman@barclaydamon.com

Retail Chapter 11s – Quick Moving Cases and First Day Hazards

I. Introduction

As widely expected, 2018 has been another busy year for retail chapter 11 bankruptcy cases. This year the iconic Toys “R” Us and the upper Midwest department store chain Bon Ton both liquidated their operations, while several apparel, shoe, and grocery store chains used the many tools and options available to retailers in chapter 11 to restructure their debt, right-size their real estate platform, attempt to tackle operational issues, and, ultimately, reorganize. This article attempts a brief overview of the main participants, the dynamics, and significant events in recent typical chapter 11 cases, primarily from the landlord’s point of view, and is intended to help the casual observers and occasional participants understand the rapid pace and numerous pitfalls of the Chapter 11 process as applied to retail companies. II. Parties and Case Profiles

A. The Players

Aside from the leading role of debtor in possession held by the retail tenant, the main characters in a retail chapter 11 are: (i) the presiding judge, who decides relevant legal issues; (ii) the debtor’s secured lenders, that often drive the decision-making process for the debtor; (iii) equity holders, which are unlikely to receive a distribution; (iv) landlords and vendors; (v) the Office of the United States Trustee, which has general oversight responsibilities; (vi) the debtor’s general unsecured creditors; and (vii) inventory liquidators and real estate advisors retained by the debtor or secured lenders in connection with the bankruptcy proceeding.

Because unsecured creditors fall at the bottom of the waterfall, save only equity, the Bankruptcy Code

1

provides that the Office of the United States Trustee, an arm of the Department of Justice, select an official committee of unsecured creditors (the “Committee”)

2 from the largest unsecured creditors willing to participate.

The Committee is responsible for protecting the interests of all unsecured creditors and plays a decisive role in chapter 11 proceedings. Attached as Exhibit A is a sample notice and questionnaire with an explanation of the role of the Committee in chapter 11 proceedings from the bankruptcy case of The Walking Company.

3

B. Lease Decisions and Fast Track Cases

Although many factors may lead a retailer into chapter 11 (overleveraged, poor management, supply

chain disruption, vendor or labor disputes), from the landlord’s perspective, the treatment of the retail debtor’s store leases and the claims related to those leases are the most important issues.

1. Treatment Options with Unexpired Leases

Section 365 grants to the trustee or a debtor in possession4 three options with respect to how they may

treat unexpired leases of nonresidential real property – assumption, assumption and assignment, or rejection.

a. Assumption

Pursuant to section 365(b)(3)(C), assumption of an unexpired lease of nonresidential real property in a shopping center must be cum onere, accepting both its benefits and its burdens.

5 Whether a leased premises

qualifies for treatment as a “shopping center” for purposes of section 365(b)(3) depends upon a number of factors, including whether (i) there exists “a combination of leases . . . held by a single landlord;” (ii) all tenants are “engaged in the commercial retail distribution of goods;” (iii) there is “a common parking area;” (iv) there was a “purposeful development of the premises as a shopping center;” (v) there is “a master lease;” (vi) there are “fixed hours during which all stores are open;” (vii) there is “joint advertising;” (viii) there exists “[c]ontractual

1 11 U.S.C. §§ 101, et seq. All statutory references contained herein are to the Bankruptcy Code unless

otherwise indicated. 2 11 U.S.C. § 1102.

3 In re The Walking Company, Inc., et al., Case No. 18-10474-LSS (Bankr. D. Del.).

4 See 11 U.S.C. § 1107(a).

5 See Adventure Resources v. Holland, 137 F.3d 786, 798 (4th Cir. 1998) (“That the obligations of an

executory contract be accepted along with its benefits is made plain by the Bankruptcy Code’s requirement that, as conditions of the contract’s assumption, the debtor cure any existing default and compensate all non-debtor parties for actual pecuniary losses that have resulted therefrom.”).

interdependence of the tenants as evidenced by restrictive use provisions in their leases;” (ix) there are “percentage rent provisions in the leases;” (x) there exists a “right of the tenants to terminate their leases if the anchor tenant terminates its lease;” (xi) there exists “[j]oint participation by tenants in trash removal and other maintenance;” (xii) there is a “tenant mix;” and (xiii) there is “contiguity of the stores” in the center.

6

Section 365(b)(1) provides conditions for the trustee or debtor in possession’s assumption of an

unexpired lease of nonresidential real property if “there has been a default” under the lease. The landlord bears the initial burden under section 365(b)(1) of establishing the existence of an event of default.

7 A “default” has

been defined as “the omission or failure to perform a legal or contractual duty.”8 Courts have interpreted the “has

been a default” language of section 365(b)(1) as “implying that the default does not have to be present” based upon the use of the past tense.

9 If the landlord fails to establish that there has been a default, “the elements of §

365(b)(1) are not required to be proven by the debtor.”10

In the event the landlord establishes a default under the lease, the trustee or debtor in possession bears

the burden of establishing that all requirements of section 365(b)(1) have been satisfied.11

To satisfy section 365(b)(1), the trustee or debtor in possession must (i) cure all defaults under the lease or provide adequate assurance of a prompt cure of all defaults

12; (ii) compensate or provide adequate assurance of prompt

compensation “for any actual pecuniary loss to such party resulting from such default”13

; and (iii) provide adequate assurance of future performance of all lease terms.

14 Future performance includes the payment of

future base, additional and/or percentage rent, amounts that have accrued or will accrue under the lease, but are unbilled or not due at the time of assumption, such as reconciliations for CAM, real estate taxes, and insurance and indemnity obligations. With respect to (ii), “pecuniary losses” are limited to those losses that the landlord “is able to prove, that [are] authorized by the parties’ agreement, and that [are] reasonable.”

15

The Bankruptcy Code does not define the term “promptly.” “[C]ase law provides that the amount of time

necessary to be considered ‘prompt’ varies in accordance with the facts and circumstances of each case.”16

Courts are typically reluctant to find that a trustee or debtor in possession has satisfied the “prompt” requirement

6 In re Joshua Slocum, Ltd., 922 F.2d 1081, 1087–88 (3d Cir. 1990); see also In re Ames Dept. Stores, 121

B.R. 160, 163, 164 (Bankr. S.D.N.Y. 1990) (holding that maintaining the “physical appearance” of a shopping center is a threshold requirement before section 365(b)(3) can apply, but that “the statute indicates that Congress was concerned with protecting legal relationship among tenants and with landlords”).

7 See In re Patriot Place, Ltd., 486 B.R. 773, 795 (Bankr. W.D. Tex. 2013); In re F.W. Restaurant Assocs.,

190 B.R. 143, 147 (Bankr. D. Conn. 1995); In re Rachels Indus., Inc., 109 B.R. 797, 802 (Bankr. W.D. Tenn. 1990).

8 In re Metromedia Fiber Network, Inc., 335 B.R. 41, 49 (Bankr. S.D.N.Y. 2005); see also Abovenet, Inc. v.

SBC Telecom, Inc., 2007 U.S. Dist. LEXIS 13561, at *4, *5 (S.D.N.Y. Feb. 26, 2007) (section 365(b)(1) applies to defaults defined by an agreement and by law, and does not require proof of notice of default or opportunity to cure).

9 In re Wingspread Corp., 116 B.R. 915, 928 (Bankr. S.D.N.Y. 1990); see also In re Patriot Place, Ltd., 486

B.R. at 795. 10

In re Rachels Indus., Inc., 109 B.R. at 802; see also In re MP Invs., L.L.C., 2010 Bankr. LEXIS 6294, at *12 (Bankr. S.D. Iowa Nov. 18, 2010) (“It is only on default that a landlord is entitled to adequate assurance”); In re F.W. Restaurant Assocs., 190 B.R. at 147; In re U.L. Radio Corp., 19 B.R. 537, 541 (Bankr. S.D.N.Y. 1982).

11 In re Rachels Indus., Inc., 109 B.R. at 802; see also Richmond Leasing Co. v. Capital Bank, N.A., 762

F.2d 1303, 1309 (5th Cir. 1985). 12

11 U.S.C. § 365(b)(1)(A). 13

11 U.S.C. § 365(b)(1)(B). 14

11 U.S.C. § 365(b)(1)(C). 15

In re DBSI, Inc., 405 B.R. 698, 705 (Bankr. D. Del. 2009); see also In re Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir. 1999), including reasonable attorneys’ fees if the lease provides for the same. See Urban Retail Props. v. Loews Cineplex Entm’t Corp., 2002 U.S. Dist. LEXIS 6186, at *25–28 (S.D.N.Y. Apr. 8, 2002); In re Crown Books Corp., 269 B.R. 12, 18 (Bankr. D. Del. 2001); In re Entertainment, Inc., 223 B.R. 141, 152–53 (Bankr. N.D. Ill. 1998); In re French, 131 B.R. 138, 141 (Bankr. E.D. Miss. 1991).

16 In re Brown, 2006 Bankr. LEXIS 2180, at *10 (Bankr. S.D. Miss. Sept. 1, 2006); see also In re Bockes

Bros. Farm, Inc., 1994 Bankr. LEXIS 2386, at *4 (Bankr. N.D. Iowa Aug. 16, 1994) (prompt cure can range from two weeks to five years); but see In re Urbanco, Inc., 122 B.R. 513, 519 (Bankr. W.D Mich. 1991) (“commencing to pay the prepetition arrearage in monthly installments some six months after the order for relief does not comport with the requirements of § 365(b)(1)(A)”).

of section 365(b)(1) where a period in excess of two years is proposed;17

however, “there is not a clear litmus test or set of factors which can be rigidly applied in order to make this determination.”

18 Factors to be considered

include “the nature of the leased property, the provisions of the lease, the amount of arrearage under the lease, the remaining term of the lease, and the provisions of the debtor’s proposed plan.”

19

“Adequate assurance of future performance” is also not defined by the Bankruptcy Code, although

Congress explained the phrase as a requirement that the court “insure that the trustee’s performance under the contract or lease gives the other contracting party the full benefit of the bargain.”

20 The term should “be given a

practical, pragmatic construction.”21

Generally, “while an absolute guarantee of future performance is not required under § 365(b)(1)(C), more than the debtor’s speculative plans are needed.”

22 “[T]he [d]ebtor is not required to

prove that it will thrive and make a profit, but it must, however, appear that the rent will be paid and the other lease obligations met.”

23

“[W]hether a debtor has given adequate assurance is extremely fact-specific.”

24 “Some helpful factors

include whether the debtor’s financial data indicated its ability to generate an income stream sufficient to meet its obligations, the general economic outlook in the debtor’s industry, and the presence of a guaranty.”

25 Other

factors considered include “evidence of profitability such as demonstrated reductions in operating costs, payroll, and inventory coupled with an increase in sales; a plan which would earmark money exclusively for the landlord; or the willingness and ability of debtor . . . to fund the cure payments.”

26

However, a landlord should make note of the “additional elements” of adequate assurance that must be

satisfied in connection with the assumption of a “shopping center” lease.27

The Bankruptcy Code – at section 365(d)(3) – “imposes heightened restrictions on the assumption or assignment of leases for shopping centers[,]”

28

including adequate assurance (i) “of the source of rent and other consideration due under such lease”29

; (ii) “that any percentage rent due under such lease will not decline substantially”

30; (iii) that the “radius, location, use, or

exclusivity provision[s]” of the lease or any other lease, financing agreement, or master agreement relating such shopping center will not be breached

31; and (iv) that assumption “of such lease will not disrupt any tenant mix or

balance in such shopping center.”32

However, “[e]ven under the tightly drawn definition of adequate assurance in the shopping center case, Congress did not envision literal compliance with all lease provisions; insubstantial disruptions in, inter alia, tenant mix and insubstantial breaches in other leases or agreements were contemplated and allowed.”

33

Upon assumption, the expenses and liabilities incurred under the lease are treated as administrative

expenses, which are given priority of payment over general unsecured claims.34

Any Order approving assumption of an unexpired lease of nonresidential real property should provide for the assignee’s assumption of liability for

17

See In re DiCamillo, 206 B.R. 64, 72 (Bankr. D.N.J. 1997) and cases cited therein. 18

In re PRK Enters. Inc., 235 B.R. 597, 601 (Bankr. E.D. Tex. 1999). 19

In re Brown, 2006 Bankr. LEXIS 2180, at *11; see also In re Reed, 226 B.R. 1, 2 (Bankr. W.D. Ky. 1998). 20

In re U.L. Radio Corp., 19 B.R. at 541 (citing H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 347, 348 (1977)).

21 In re Tex. Health Enters., 72 Fed. Appx. 122, 126 (5th Cir. 2003).

22 In re Washington Capital Aviation & Leasing, 156 B.R. 167, 173 (Bankr. E.D. Va. 1993) (citing Richmond

Leasing Co., 762 F.2d at 1310). 23

In re MP Invs., L.L.C., 2010 Bankr. LEXIS 6294, at *11–12 (quoting In re Natco Indus., Inc., 54 B.R. 436, 440 (Bankr. S.D.N.Y. 1985)); see also In re Patriot Place, Ltd., 486 B.R. at 804 (employing the “more probable than not” test to determine that the debtor provided adequate assurance); In re THW Enter., Inc., 89 B.R. 351, 357 (Bankr. S.D.N.Y. 1988).

24 In re Tex. Health Enters., 72 Fed. Appx. at 126.

25 Id. (quoting Richmond Leasing Co., 762 F.2d at 1310).

26 In re Embers 86th St., 184 B.R. 892, 902 (Bankr. S.D.N.Y. 1995).

27 In re TSW Stores of Nanuet, Inc., 34 B.R. 299, 307 (Bankr. S.D.N.Y. 1983).

28 In re Joshua Slocum, Ltd., 922 F.2d at 1086.

29 11 U.S.C. § 365(b)(3)(A).

30 11 U.S.C. § 365(b)(3)(B).

31 11 U.S.C. § 365(b)(3)(C).

32 11 U.S.C. § 365(b)(3)(D).

33 In re U.L. Radio Corp., 19 B.R. at 544 (noting that the court cannot invalidate a use restriction, but stating

that “the range between unenforceability of a use clause and insubstantial breaches of a use clause, the Code provides no specific standard by which to measure permissible deviations in use”).

34 See 11 U.S.C. § 503(b).

additional rents and charges and indemnity obligations which have accrued prior to assumption, such as year-end reconciliations and adjustments. Absent same, the debtor could take the position that it is not liable for such charges.

b. Assumption and Assignment

The requirement that an unexpired lease of nonresidential real property in a shopping center must be assumed cum onere applies equally to assignment, as assumption of an unexpired lease of nonresidential real property is a necessary prerequisite to assignment.

35 The trustee or debtor in possession may assign an

unexpired lease of nonresidential real property to a third party only if the trustee or debtor in possession (i) assumes the unexpired lease of nonresidential real property in accordance with the terms of section 365(b)(1)

36;

and (ii) provides adequate assurance of future performance by the assignee “whether or not there has been a default in such contract or lease.”

37 Therefore, a key distinction between assumption and assumption and

assignment is that adequate assurance must exist in the context of an assignment regardless of the existence of a default.

Adequate assurance of future performance in the assignment context involves, in addition to the

adequate assurance requirements for assumption, an assessment of the assignee’s (and its owner’s) financial resources and operating experience.

38

As with assumption, the same “heightened restrictions” or “additional elements” of adequate assurance

must be satisfied with shopping center leases, including evidence that the assignee will comply with all “radius, location, use, or exclusivity provision[s]” of the lease or any other lease, financing agreement, or master agreement relating such shopping center.

39 In addition to providing “the source of rent and other consideration

due under such lease,” the trustee or debtor in possession must also establish that “the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease.”

40 This serves to preserve the benefit of the bargain for the landlord. Importantly, the

landlord should be mindful of its independent right upon assignment to “require a deposit or other security for the performance of the debtor’s obligations under the lease substantially the same as would have been required by the landlord upon the initial leasing to a similar tenant.”

41 Further, if the lease requires the payment of percentage

rent, the debtor must demonstrate “that any percentage rent due under such lease will not decline substantially[.]”

42 Finally, the assignment must “not disrupt any tenant mix or balance in such shopping center.”

43

Landlords commonly object to language in assignment orders that attempts to render anti-assignment

provisions contained in an unexpired lease of nonresidential real property void and of no force and effect. “Courts do not have carte blanche to rewrite leases under §§ 365(f)(1) and (f)(3) or any provision of the statute.”

44

Section 365(f)(1) provides that “the trustee may assign” an unexpired lease notwithstanding a provision “that prohibits, restricts, or conditions the assignment of such contract or lease,” and section 365(f)(3) provides that an unexpired lease may not be terminated or modified based upon a provision “permit[ting] a party other than the debtor to terminate or modify” such lease “because of the assumption or assignment of such contract or lease by the trustee.”

45 However, neither section 365(f) nor any other provision of the Bankruptcy Code renders an anti-

assignment provision “void and of no force and effect.” “Sections 365(f)(1) and (f)(3) do not allow the debtor to abrogate any contractual provision, but only those that directly or indirectly affect the assignment of an executory

35

See 11 U.S.C. § 365(f)(2)(A); In re Sunterra Corp., 361 F.3d 257, 266 (4th Cir. 2004). 36

11 U.S.C. § 365(f)(2)(A). 37

11 U.S.C. § 365(f)(2)(B). 38

See In re Bygaph, Inc., 56 B.R. 596, 605 (Bankr. S.D.N.Y. 1986); see also Ramco-Gershenson Props., LP. v. Serv. Merch. Co., 293 B.R. 169, 177 (Bankr. M.D. Tenn. 2003) (“Commercial reasonableness factors include the proposed subtenant’s financial responsibility, the type of business to be conducted on the premises, and whether the proposed business competes with that of the lessor or the lessee.”).

39 11 U.S.C. §§ 365(b)(1)(C) and 365(b)(3)(C).

40 11 U.S.C. § 365(b)(3)(A).

41 11 U.S.C. § 365(l).

42 11 U.S.C. § 365(b)(3)(B); see, e.g., In re Trak Auto Corp., 367 F.3d 237, 244 (4th Cir. 2004) (assumption

and assignment denied where proposed assignee “d[id] not propose to take the [] lease subject to the specific restriction limiting use of the premises”).

43 11 U.S.C. § 365(b)(3)(D).

44 In re Jamesway Corp., 201 B.R. 73, 77 (Bankr. S.D.N.Y. 1996).

45 11 U.S.C. § 365(f) (emphasis added).

contract or lease in the bankruptcy reorganization process[.]”46

Anti-assignment provisions of leases should be preserved and left intact for future application.

Any order approving the assumption and assignment of a lease should provide for the assignee’s

assumption of liability for additional rents and charges and indemnity obligations which have accrued prior to assumption and assignment, such as year-end reconciliations and adjustments. Absent same, the assignee could and usually will take the position that it is not liable for such charges.

c. Rejection

Rejection of an unexpired lease of nonresidential real property requires Bankruptcy Court approval.47

In large cases, the debtor will often seek court approval of procedures to reject unexpired leases of nonresidential real property by filing only a notice, rather than separate motions. These procedures should ensure that the landlord has full dominion and control over the leased premises as of the effective date of rejection, which is the date through which the debtor must pay post-petition rent.

Typically, the rejection procedures provide for filing and service of a rejection notice identifying the

unexpired lease(s) of nonresidential real property sought to be rejected, the lease counterparty, the effective date of rejection and the deadlines/procedures for objecting to such rejection. Ideally from the landlord’s perspective, the effective date of rejection should be the later of (i) the proposed effective date of rejection set forth in the rejection notice, (ii) expiration of the period of time to object to the rejection notice, and (iii) the debtor’s relinquishment of control of the leased premises to the landlord by notice to the landlord in writing of the debtor’s delivery of the premises by turning over the keys, key codes and alarm codes or, if the keys, key codes and alarm codes are unavailable, by notice to the landlord that they are unavailable and that the landlord may rekey the leased premises. Many debtors will not consent to an effective date of rejection earlier than the deadline to object to the rejection notice, but rather want the ability to reject as of the date of the notice or motion and, sometimes, nunc pro tunc to an earlier date.

The rejection procedures should also provide for abandonment of any of the debtor’s personal property at

the leased premises as of the effective date of the rejection and permit the landlord or its managing agent to dispose of the personal property in its sole discretion, free and clear of liens and claims, without further notice or order and without liability to the debtor or any third party. Further, any order permitting abandonment of personal property should preclude the trustee or debtor in possession from abandoning hazardous materials (as such term is defined in any federal, state, or local law, rule, regulation, or ordinance).

48 The rejection procedures order

should provide that the automatic stay is lifted to the extent necessary to permit such relief.

2. The 210 Day Deadline to Assume or Reject

In plain English, the debtor has 210 days (7 months) from the filing of the bankruptcy case to make its decision to assume or reject leases. Further extensions require further orders of the court and the prior written consent of the landlord. The debtor has an initial period of 120 days that is almost always extended by order of the bankruptcy court for 90 days, to 210 days. Importantly, section 365(d)(4) of the Bankruptcy Code makes clear that the period of time to assume or reject should always end on the earlier of the date of the entry of an order confirming a plan and the specific date set by statute unless extended with the written consent of the landlord.

Specifically, section 365(d)(4) requires a trustee or debtor in possession to assume or reject an unexpired

lease of nonresidential real property by the earlier of (i) 120 days after entry of the “order for relief,” which would typically be the date the debtor filed the Petition; or (ii) confirmation of the Plan.

49 Upon the failure of the trustee

or debtor in possession to assume a lease within the time period set forth in section 365(d)(4)(A) (assuming the lease has not been previously rejected), the lease is deemed rejected effective immediately, and the trustee or debtor in possession must immediately surrender the leased premises to the landlord,

50 unless within the original

120 day period, the trustee, debtor in possession or landlord timely obtains an extension of the deadline for assumption or rejection, and establishes “cause” for the extension.

51

46

In re Howe, 78 B.R. 226, 231 (Bankr. D.S.D. 1987) (emphasis added). 47

11 U.S.C. § 365(a). 48

See Midlantic Nat’l Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S. 494, 502 (1986). 49

11 U.S.C. § 365(d)(4)(A). 50

11 U.S.C. § 364(d)(4)(A). 51

11 U.S.C. § 365(d)(4)(B).

Bankruptcy courts disagree as to the timeliness of the motion to extend the deadline for assumption and rejection. Certain courts have interpreted section 365(d)(4)(B)(i) to require that an order be entered extending the deadline for assumption or rejection within the original 120 day period.

52 Other bankruptcy courts have held that

the mere filing of a motion to extend the deadline for assumption or rejection tolls the running of the original 120 day period.

53

“Cause” for an extension is a matter to be determined in the sound discretion of the bankruptcy court,

and bankruptcy courts have relied on several factors in determining whether cause exists, including (i) “whether the debtor was paying for the use of the property”; (ii) “whether the debtor’s continued occupation . . . could damage the lessor… beyond the compensation available under the Bankruptcy Code”; (iii) “whether the lease is the debtor’s primary asset”; (iv) “whether the debtor has had sufficient time to formulate a plan of reorganization”; (v) “the complexity of the case facing the debtor”; (vi) “the number of leases that the debtor must evaluate”; and (vii) “the need for judicial determination of whether a lease exists.”

54 In large retail cases, timely motions to

extend the deadline to assume or reject unexpired leases of nonresidential real property are routinely granted. However, in no event may the court extend the deadline for assumption or rejection past the date of entry

of the order confirming the Plan of Reorganization, and the court is not authorized to grant a further extension of the assumption or rejection deadline in excess of 210 days from the order for relief without prior written consent of the landlord.

Often times, the debtor in possession financing (“DIP Financing”) and/or a pre-negotiated Restructuring

Support Agreement (“RSA”) will provide milestones which include an early deadline for the debtor in possession to secure an extension of the deadline to assume or reject unexpired leases of nonresidential real property.

3. Case Outcomes In 2018, we have seen a continuation of the significant increase in stand-alone reorganization plans as

compared to the liquidations that dominated the practice over the past decade. Although many associate the chapter 11 process with plans of reorganization, it is the rare retailer that is able to reorganize within the confines of chapter 11. Reorganization requires the cooperation of many parties in interest, including secured lenders, landlords, and vendors. In many recent reorganizations, the debtors entered with pre-packaged or pre-negotiated plans of reorganization that gave them a head start over other debtors.

a. Reorganizations and RSAs

Chapter 11 of the Bankruptcy Code provides for reorganization or liquidation of an entity in financial

distress. During the pendency of a bankruptcy case, the debtor typically continues to operate its business in the ordinary course as a debtor in possession, unless cause exists for the appointment of a trustee. Section 1107(a) grants to debtors in possession “all the rights, other than the right to compensation under section 330 of this title, and powers” of a trustee, and imposes upon debtors in possession “all the functions and duties, except the duties specified in section 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case” under chapter 11 of the Bankruptcy Code.

A debtor’s exit strategy may be the product of a pre-negotiated RSA entered into between a debtor and

its secured lenders. The RSA provides (i) the terms upon which the secured lenders are willing to restructure certain debt or advance additional financing to support the debtor’s continued business operations, and (ii) milestones (or deadlines) by which the debtor must perform certain tasks in the bankruptcy case, the failure of which constitutes an event of default and may result in a liquidation.

With respect to the plan of reorganization, section 1121(b) exclusively grants to the debtor the right to file

a plan of reorganization within the first 120 days after the date of the order for relief (typically, the filing of the petition), after which any party in interest may file a plan of reorganization. The 120-day exclusivity period may be

52

See, e.g., In re Flying Star Cafes, Inc., 2016 Bankr. LEXIS 4466, at *9–10 (Bankr. D.N.M. Dec. 23, 2016); In re Jim Slemons Haw., Inc., 2011 Bankr. LEXIS 3017, at *8 (Bankr. D. Haw. Aug. 3, 2011); In re R. Ring Enters., 2009 Bankr. LEXIS 685, at *6–7 (Bankr. N.D. Cal. Feb. 18, 2009); In re Tubular Techs. LLC, 348 B.R. 699, 703 (Bankr. D.S.C. 2006); In re Parker, 351 B.R. 790, 801 n.10 (Bankr. N.D. Ga. 2006).

53 See, e.g., In re Hartford Court Dev., Inc., 2018 Bankr. LEXIS 212, at *9 (Bankr. N.D. Ill. Jan. 25, 2018); In

re Simbaki, Ltd., 520 B.R. 241, 244 (Bankr. S.D. Tex. 2014); see also Del. Bankr. Ct L.R. 9006-2. 54

In re Burger Boys, Inc., 94 F.3d 755, 761 (2d Cir. 1996) (internal quotation marks omitted).

reduced or extended for up to 18 months upon request of a party in interest.55

A request to extend the exclusivity period must, by rule, be made within 120 days of the order for relief, and a showing of “cause” is required.

56

Whether “cause” exists to extend the exclusivity period “is inherently fact-specific and calls for a delicate exercise of judgment about which seasoned judges could differ.”

57 “[T]he legislative intent has been construed to leave the

question to the reorganization court in the exercise of its discretion and to promote maximum flexibility to suit various types of reorganization proceedings.”

58 Factors to be considered include “(a) the size and complexity of

the case; (b) the necessity of sufficient time to permit the debtor to negotiate a plan of reorganization and prepare adequate information to allow a creditor to determine whether to accept such plan; (c) the existence of good faith progress towards reorganization; (d) the fact that the debtor is paying its bills as they become due; (e) whether the debtor has made progress in negotiations with its creditors; (g) the amount of time which has elapsed in the case; (h) whether the debtor is seeking an extension of exclusivity in order to pressure creditors to submit to the debtor’s reorganization demands; and (i) whether an unresolved contingency exists.”

59

In retail cases, so as to be consistent with the aggregate 210-day period to assume or reject without prior

landlord consent, the RSA will probably require confirmation of a plan of reorganization within 210 days of filing of the petition.

Quick summaries follow of a few of the retail companies that successfully reorganized during the first half

of 2018:

Charming Charlie:60

Charming Charlie entered bankruptcy during the holiday season of 2017. After rapid expansion increased its store footprint to 390 locations by its bankruptcy filing, the company determined that it needed to right-size its operations. After four and a half months, Charming Charlie confirmed a plan of reorganization that reduced the company to a chain of 265 stores, leaving little to nothing, however, for general unsecured creditors.

SE Grocers:61

At the time of its bankruptcy filing in March 2018, Southeastern Grocers operated more than 700 supermarkets in Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, and South Carolina. As an industry, supermarkets have been increasingly hurt by growing competition from retailers such as Walmart and online giants such as Amazon. As part of its reorganization, Southeastern Grocers refinanced its existing debt, which lowered the principal amount by about $600 million; $522 million of its debt was exchanged for equity in the reorganized company. Southeastern Grocers also reduced its physical footprint by closing 94 stores.

Shiekh Shoes:62

Just after Thanksgiving 2017, Shiekh Shoes filed its chapter 11 petition. With a business model centered on selling the latest sneakers, shoes, and clothes to hip urban youth and a deep commitment to the go-forward business by its founder, Shiekh Ellahi, the company successfully stayed afloat during the chapter 11 process through a number of insider and unconventional loans. While the company always intended to reorganize, it attempted a sale process at the behest of the committee, which was ultimately unsuccessful. After negotiations and lease modifications with a number of landlords, Shiekh Shoes transitioned back to a plan of reorganization, which was confirmed during June 2018.

The Walking Company:

63 The Walking Company, a retailer of comfort shoes, began its third chapter 11

bankruptcy case on March 6, 2018 with 200 stores and 1,600 employees. Upon entering bankruptcy, the Walking Company already had the support of its major shareholders for a proposed plan of reorganization. A critical

55

11 U.S.C. § 1121(d). 56

Id. 57

In re Mayo Newhall Mem. Hosp., 282 B.R. 444, 452 (B.A.P. 9th Cir. 2002). 58

In re Public Serv. Co. of New Hampshire, 88 B.R. 521, 534 (Bankr. D.N.H. 1988). 59

In re Adelphia Communs. Corp., 336 B.R. 610, 674 (Bankr. S.D.N.Y. 2006). However, note that the rules are different in a small business case. See 11 U.S.C. § 1121(e). In a small business case, the exclusivity period is 180 days and the plan and disclosure statement (if there is one) must be filed within 300 days of the order for relief. See 11 U.S.C. § 1121(e)(1), (2). These time periods may only be extended if “(A) the debtor . . . demonstrates by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable period of time; (B) a new deadline is imposed at the time the extension is granted; and (C) the order extending time is signed before the existing deadline has expired.” 11 U.S.C. § 1121(e)(3).

60 In re Charming Charlie Holdings, Inc., et al., Case No. 17-12906-CSS (Bankr. D. Del.).

61 In re Southeastern Grocers, LLC, et al., Case No. 18-10700-MFW (Bankr. D. Del.).

62 In re Shiekh Shoes, LLC, Case No. 2:17-bk-24626-VZ (Bankr. C.D. Cal.).

63 In re The Walking Company, Inc., et al., Case No. 18-10474-LSS (Bankr. D. Del.).

condition to implementation of the plan was to secure rent relief from a number of landlords. Confirmation of the plan occurred during June 2018.

b. Section 363 Going Concern Sales

Many retail debtors are unable to reorganize and, instead, the trustee or a debtor in possession may seek

to sell the debtor’s business as a going concern, including unexpired leases of nonresidential real property. Such sales are typically subject to a public auction as a market test. Section 363 sales are routinely approved in chapter 11 cases and transfer the debtor’s assets to the buyer free and clear of any liens, claims, or encumbrances. However, the requirements for assumption and assignment contained in section 365(f)(2) must be complied with.

In the best case scenario, a debtor will enter bankruptcy with an interested buyer and that interested

buyer will offer to serve as the “Stalking Horse Bidder” in exchange for certainty that, if someone else steps in to purchase the company, the Stalking Horse Bidder will be reimbursed for the costs it incurred in submitting its bid, including attorneys’ fees, as well as a “break-up fee” of three to five percent of the purchase price as its incentive. Cases in which there is a Stalking Horse Bidder going into an auction fare much better than those where there is no starting bid on the table.

In other cases, the value of a retail tenant debtor’s business as a going concern may not be enough to

enable a section 363 sale of the entire company; however, the debtor’s leases may have value individually and, as a result, the debtor may seek to auction those leases one-by-one or in groups. The leases may be valuable because they provide for below-market rent or because the stores are located in highly desirable malls. Before the debtor can implement bid guidelines and auction procedures, it must provide notice and an opportunity for a hearing to parties in interest, and then receive court approval.

If you find out that a debtor tenant intends to sell your lease at an auction, be afraid! Lease auctions are

the source of the most significant headaches and problems for landlords in the bankruptcy context. The proposed bid guidelines and auction procedures will provide tremendous flexibility to the debtor to maximize the number of interested bidders. Debtors will usually attempt to minimize the time for the landlords to object to proposed assignees by scheduling a hearing to approve the sale of the leases either the same day or within 24 hours of the auction. Landlords must actively engage with the debtor and object if necessary to ensure that the procedures provide landlords with, among other things, the ability to submit bids and attend the auction, sufficient information regarding a potential assignee, and sufficient time to object to any proposed assignment, including time to potentially conduct discovery.

i. The Motion to Approve Bidding and Sale Procedures

In a large retail case, the trustee or debtor in possession will typically file a motion to approve bidding and

sale procedures and the actual sale(s) and lease assignments. The sale motion will involve a two-step process – approval of procedures, then approval of the sale(s) and lease assignments. The proposed procedures will set dates or deadlines for (i) the submission of bids and required documentation with bids, including adequate assurance of future performance information, (ii) determination of whether a bid is qualified, (iii) the date and time of the auction, (iv) the provision of notice of the successful and back up bidder, (v) deadlines for objections to the sale, proposed cure amounts, proposed assumption and assignment of leases, and existence of adequate assurance of future performance, and (vi) the sale hearing. As these dates are set in advance of the auction, landlords must be mindful of the bidding and sale procedures proposed by the trustee or debtor in possession and it is important for landlords to object to the bidding and sale procedures to the extent that the proposed schedule violates their right to due process or does not require the timely delivery of sufficient adequate assurance information to the landlords.

Landlords will often request that any potential assignee’s adequate assurance information include the

proposed use of the premises, the proposed trade name the assignee intends to use, audited and unaudited financial statements, financial projections for the next 2-3 years, the last two years of filed tax returns, information regarding the assignee’s experience in retail operations, including management and their qualifications, the number of stores currently operated by the assignee (including the number of stores operated in the landlord’s shopping centers), the potential assignee’s business plan, and a contact person that the landlord can correspond with regarding adequate assurance of future performance.

ii. Due Process

Due process is important in going concern sales. Due process requires that notice “be reasonably calculated to apprise interested parties of the pendency of an action” and that interested parties be afforded “an opportunity to present [an] objection”

64 and a “meaningful opportunity to be heard within the limits of

practicality[.]”65

Landlords are entitled to notice reasonably calculated to apprise the landlord of the identity of the

successful bid, sufficient time to review the bidder’s adequate assurance of future performance information, and to object to the assumption and assignment of the lease, if necessary. Reasonable notice necessitates receipt of the required adequate assurance information from any bidder and a meaningful opportunity to review that adequate assurance information to assess the successful bidder’s ability to perform under the terms of the lease and, if necessary, time to file an objection to the (i) adequacy of the adequate assurance information, (ii) the ability of the successful bidder to perform under the lease, and (iii) the correct cure amount to be paid as a condition of assumption and assignment. Since a motion to sell assets and assume and assign leases is a contested matter, landlords should be permitted to take expedited discovery of the proposed assignees.

66

iii. The Auction

If no qualified bid or only one qualified bid for a particular asset is received, the auction is typically

cancelled as to that asset. If there is more than one qualified bid, an auction is conducted. At the beginning of the lease auction, the debtor’s retail consultant will announce the auction procedures.

As the auction progresses, the procedures will probably change to provide the debtor with as much flexibility as needed to maximize bidding. Most auctions are conducted outside the court’s presence with the debtor’s retail consultant, the debtor’s counsel, and counsel for the committee of unsecured creditors. These professionals will determine which is the highest and otherwise best bid for each of the leases. Some of the factors they will consider in making their decision include: (i) who bid the highest amount; (ii) whether the top two bidders placed any conditions on their bids; (iii) the dollar difference between the first place and second place bids; (iv) whether the landlord is willing to consent to an assignment to either of the two highest bidders; and (v) if the landlord submitted a bid to terminate the lease, whether the estate, from a cost-benefit analysis, should accept the landlord’s offer even though the landlord’s bid was not the highest bid for the lease.

Never leave an auction early. No bidder should ever consider its bid final until the court approves the bid and authorizes either the assignment or termination of the lease.

67 A bidder should never leave the auction until

the auctioneer announces the conclusion of the auction for each property. In some cases, the estate will not accept minimal bids from any party and continue marketing properties, and there is almost always post-auction activity by landlords opposing a proposed assignment and disgruntled bidders whose bids were not selected as the highest and best. Unsuccessful bidders may try to increase their offer to get the debtor to reconsider its decision. In some cases there may even be a second auction.

68 The successful bidder should stay in touch with

the debtor’s professionals, monitor the bankruptcy case for objections to the sale that may be filed during the period between the auction and the sale hearing, and be ready to respond to any objections to the assignment or attempt to re-open the bidding before or at the sale hearing. Out of an abundance of caution, the successful bidder should gain the appropriate authority to increase its bid up to a maximum amount in the event the court re-opens the bidding at the hearing. Finally, the successful bidder should always review and comment on the proposed sale order and appear at the hearing to approve the sale.

64

Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). 65

Boddie v. Connecticut, 401 U.S. 371, 379 (1971). 66

See FED. R. BANKR. PROC. 9014(a), (c). 67

See In re Food Barn Stores, Inc., 107 F.3d 558, 564-68 (8th Cir. 1997); Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 768-69 (7th Cir. 2004); In re Farmland Indus., Inc., et al., 284 B.R. 111, 117–19 (Bankr. W.D. Mo. 2002) (re-opening auction when holder of right of first refusal was not given notice of auction).

68 See Corporate Assets, 368 F.3d at 768 (affirming the bankruptcy court’s approval of the debtors’ decision to re-open bidding upon receiving a higher bid after the close of the auction and observing that “financial gain for the estate and its creditors might suffice as a basis for reopening the bidding without an additional showing that the initial bids were grossly inadequate or that the original bidding was tainted by fraud or some other irregularity”); In re E-Z Serve Convenience Stores, Inc., et al., 289 B.R. 45, 54–56 (Bankr. M.D.N.C. 2003) (opting to approve a bid other than the original bid submitted to the bankruptcy court that was 20% higher than the original bid and thus “the best offer available to the estate”); but see In re Bigler, LP, 443 B.R. 101, 110 (Bankr. S.D. Tex. 2010) (refusing to re-open auction absent fraud because the integrity of the judicial system outweighed a better offer to the estate).

iv. Lease Designation Rights

As an alternative to auctioning leases directly to interested tenants, debtors, especially in retail cases of anchor tenants, will sometimes sell their rights to assign or reject their leases, which is commonly referred to as “designation rights”.

69 This allows the debtor to realize value from its leases without having to market the leases

and incur related carrying costs during the marketing period. Instead, during the designation rights period, the purchaser is responsible for the carrying costs of the leases. In return, the designation rights purchaser is entitled to the proceeds from the sale of the leases. For example, in the first bankruptcy case filed by the retailer Wet Seal, the debtors sold substantially all of their assets, including lease designation rights, within the first 90 days of the bankruptcy cases.

70 This allowed the purchaser approximately 120 days to determine which leases it wanted

to retain, which leases it wanted to sell, and which leases should be rejected.

Landlords should carefully examine the agreement to sell the designation rights, and the order approving the sale, to ensure the purchaser of the designation rights is not seeking any premature relief, such as a broad elimination of certain lease provisions that would make the leases more attractive to potential assignees (i.e. use restrictions or exclusivity provisions). In addition, the designation rights period could be up to 210 days (or longer if the leases are assumed), during which time stores may remain dark. Therefore, if the lease contains an operating covenant, the landlord has a basis to object to the length of the designation rights period.71 The landlord should also insist that any order approving the sale of designation rights provide that the debtor and the purchaser remain current on all financial obligations required by the leases. Once the designation rights purchaser directs the debtor to assign a lease to a proposed assignee, the landlord should make sure it reserves its right to object to the assignment in accordance with section 365.

72

v. Recent Cases

The following retail companies were recently sold in successful 363 sales:

Vitamin World:

73 In the recent chapter 11 case of Vitamin World, a retailer focused on the vitamin,

mineral, herb, and supplement markets, the debtor operated 334 stores at the time of its filing in September 2017, mostly in malls and outlet centers, and employed nearly 1,500 people. As with many recent retail bankruptcies, Vitamin World pointed to costly leases, overextended store footprints, and a sales slump as major drags on the company’s balance sheet and sought to review and downsize its real estate portfolio. The company was ultimately able to execute a quick sale to a third party, Vitamin World USA Corporation, before the end of 2017 that enabled it to continue operating with a reduced store footprint.

Aeropostalé:

74 The iconic mall based retailer, Aeropostalé, was also saved by the section 363 sale

process. Upon filing chapter 11 bankruptcy, Aeropostalé immediately closed 154 of the company’s 800 stores, then proceeded on a dual track reorganization and sale process. In that case, a joint venture comprised of mall owners, inventory liquidators, and a branding company came together to preserve the retail chain, saving over 500 store locations and 7,000 jobs. As a result, Aeropostalé emerged from bankruptcy with a healthy balance sheet and a right-sized store platform.

c. Liquidations A bankruptcy case may begin as a liquidation (e.g., In re The Bon-Ton Stores, Inc.) or may begin as a

reorganization and become a liquidation (e.g., In re Toys “R” Us, Inc.). In In re The Bon-Ton Stores, Inc.,

75 the cases began as at least partial liquidations, with the potential for a

going concern sale of a portion of the assets, but the debtors ultimately sold designation rights for their remaining store leases and the right to conduct store closing sales at the remaining locations. After the first round of store

69

See In re Ames Dep’t Stores, Inc., et al., 287 B.R. 112, at 125–26 (Bankr. S.D.N.Y. 2002). 70

In re Seal123, Inc. (f/k/a The Wet Seal, Inc.) et al., Case No. 15-10081-CSS (Bankr. D. Del.). 71

See In re Serv. Merch. Co., 297 B.R. 675, 690–91 (Bankr. M.D. Tenn. 2002) (“As to the going dark provision, the court finds that the provision bargained for by the parties provides for a nine (9) month going dark period, and this provision cannot be removed by the court simply because it is unfavorable to a proposed subtenant.”).

72 11 U.S.C. § 365.

73 In re Vitamin World, Inc., et al., Case No. 17-11933-KJC (Bankr. D. Del.).

74 In re ARO Liquidation, Inc. (f/k/a Aeropostalé, Inc.), et al., Case No. 16-11275-SHL (Bankr. S.D.N.Y.).

75 Case No. 18-10248.

closings, the debtors entered into a term sheet with a consortium of a few landlords having multiple leases, which required payment by the debtor of a work fee to the consortium as a condition of going forward with the deal. Although the debtor and its unsecured creditors agreed, one secured lender in favor of a complete liquidation objected to the payment of the work fee, and the bankruptcy court sustained the objection. The consortium did not go forward with purchasing the assets. The bankruptcy court then approved the sale of the assets to a joint venture consisting of a group of inventory liquidators and the debtor’s second lien noteholders, including going out of business inventory sales and the sale of lease designation rights for unexpired leases of nonresidential real property. The joint venture hired A&G Realty Partners, LLC to market and sell the remaining unexpired leases and real estate assets. The agent established a schedule for landlord bids on unexpired leases and an auction.

In In re Toys “R” Us, Inc.,

76 the cases began as reorganizations; however liquidation was allegedly

necessitated by poor holiday season performance and the failure of the debtor to comply with lending covenants to its secured lenders or obtain waivers of such defaults. Because of the transformation of the cases to a complete liquidation, the debtor asked the bankruptcy court to establish a wind down/liquidation date after which the debtor would comply with all ongoing obligations incurred in the ordinary course of business and to impose an administrative stay preventing the payment of administrative claims that were not authorized by a wind-down budget. The bankruptcy court did not grant the debtors’ request for an administrative stay, but also did not order the debtors to pay vendors with pre-wind down administrative claims. With respect to rent and other monetary obligations under the leases, the bankruptcy court required the debtors to comply with the monetary requirements of section 365(d)(3) going forward. With respect to administrative claims, the bankruptcy court subsequently entered an Order requiring creditors to file a Proof of Administrative Claim by an administrative claim bar date; however, landlords were generally excluded from the requirement of filing such claims.

III. First Day Motions

A. Store Closing Sales

Courts will permit the debtor, or liquidators retained by the debtor, to conduct store closing or going-out-of-business sales (“Store Closing Sales”) at a landlord’s store notwithstanding the existence of a lease provision that prohibits such sales.

77 The rationale for invalidating this type of provision is that it contravenes the express

intent of the Bankruptcy Code – maximizing the value of the debtor’s assets for all creditors and providing the debtor with a “fresh start.”

78

1. Adequate Protection - 363(e)

While Store Closing Sales are being conducted, it is critically important for landlords to ensure that the

debtor and/or the liquidator honor the leases. Section 365(d)(3) requires a debtor to comply with all of the terms and conditions of the leases until such time as they have been assumed or rejected.

79 The express language of

the Bankruptcy Code goes beyond merely prohibiting the debtor from ignoring the terms of its leases; it imposes an affirmative duty on a debtor to comply with all of its obligations under the leases.

80 Motions to authorize Store

Closing Sales will often seek to invalidate certain lease provisions that the debtor alleges hamper its ability to conduct the sales. Landlords must be vigilant to respond to these attempts, especially when the Store Closing Sales will be conducted in an important shopping center for the landlord or during a critical time of the year.

76

Lead Case No. 17-34665. 77

See Ames Dep’t Stores, 136 B.R. at 359; In re Tobago Bay Trading Co., 112 B.R. 463, 467 (Bankr. N.D. Ga. 1990) (provisions in a lease that prohibit store closing sales were unenforceable under 11 U.S.C. §§ 365(b)(2)(A), (e)(1)(A), as relating “to the insolvency or financial condition of the debtor”) (internal citations omitted); In re Libson Shops, Inc., 24 B.R. 693, 695 (Bankr. E.D. Mo. 1982) (bankruptcy court may compromise private rights which may conflict with a debtor’s ability to receive the full benefit of a reorganization or liquidation proceeding); but see In re Antwerp Diamond, Inc., 138 B.R. 865, 868 (Bankr. N.D. Ohio 1992) (sale of the debtor’s inventory to a liquidator who sought to conduct store closing sales at the debtor’s stores was an assignment that would violate the use clause of the leases and therefore prohibited by 11 U.S.C. § 365(b)(3)(C)).

78 Ames Dep’t Stores, 136 B.R. at 359; accord In re R.H. Macy & Co., 170 B.R. 69, 77 (Bankr. S.D.N.Y. 1994).

79 11 U.S.C. § 365(d)(3). “The [debtor] shall timely perform the obligations… arising from and after the

[petition date] under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of [the Bankruptcy Code]….” Id.

80 See In re New Almacs, Inc., 196 B.R. 244, 248 (Bankr. N.D.N.Y. 1996); see also In re C.A.F. Bindery,

Inc., 199 B.R. 828 (Bankr. S.D.N.Y. 1996).

Lease provisions restricting the manner in which the premises may be used can be critical to a landlord’s interest in preserving the character and quality of the shopping experience at its shopping centers and courts are willing to enforce them.

81

Under Section 363(e), landlords have a right to adequate protection in connection with a debtor’s use of

its property outside of the ordinary course of business.82

“A landlord’s right to adequate protection seems to follow clearly from the language of §363(e) of the Bankruptcy Code….”

83

2. Sale Guidelines

When a debtor files a motion to authorize Store Closing Sales, it will attach a set of proposed guidelines

for the conduct of those sales. For example, attached as Exhibit B is a copy of the Store Closing Sales guidelines proposed by Bon-Ton Stores during its chapter 11 cases. The proposed Store Closing Sales guidelines often contravene shopping center lease provisions. Although courts will typically allow Store Closing Sales to be conducted notwithstanding lease provisions that prohibit them, courts also recognize the need to place certain parameters on Store Closing Sales that protect shopping center landlords and other tenants in the mall.

84

Landlords should be attuned to any specific issues at the shopping center involved, as well as the

following general issues that tend to arise in all cases: (i) restricting the size, location, and number of signs; (ii) prohibiting banners or neon colored signs; (iii) prohibiting or limiting augmentation of goods with non-debtor inventory, particularly if the goods are not of a similar kind and quality as the inventory generally sold at the store; (iv) limiting the sale of furniture, fixtures, and equipment and the removal of any furniture or fixtures during regular mall hours; (v) limiting the Store Closing Sales to the mall’s normal operating hours; (vi) mandating compliance by the liquidator with all maintenance, security, and trash removal policies, as well as state and local consumer laws;

85 (vii) ensuring that the liquidator and debtor remain liable for all financial obligations under the lease,

including "stub rent," which debtor may not otherwise be obligated to pay under section 365(d)(3);86

(viii) deeming abandoned and permitting the landlord to dispose of any property, including furniture, fixtures, equipment, and inventory, remaining on the premises after the conclusion of the Store Closing Sales; (ix) requiring a direct contact at the liquidator’s business for the landlord to call in the event of a problem; (x) mandating that the liquidator track sales for percentage rent purposes; and (xi) requiring the premises be returned to the landlord promptly at conclusion of Store Closing Sales, or, at least, permitting the landlord to have the right to enter the store to “dress the windows” at the end of the Store Closing Sales to minimize the impact of having a dark store at the shopping center.

3. Side Letter Agreements

On a practical basis, landlord objections to Store Closing Sales are resolved through agreements entered into between the debtor and the landlord, which set forth the specific guidelines for the conduct of the Store Closing Sales at a particular store or set of stores. These “Side Letter Agreements” are negotiated outside of

81

See In re Antwerp Diamond, Inc., 138 B.R. 865, 868 (Bankr. N.D. Ohio 1992) (proposed store closing sale at the leased premises could not be approved where the leases specifically prohibited such sales); In re Joshua Slocum, Ltd., 922 F.2d 1081, 1091 (3d Cir. 1990) (modification of the rights of contracting parties “is not to be taken lightly” and a bankruptcy court “must be sensitive to the rights of the non-debtor contracting party”).

82 11 U.S.C. § 363(e). “Notwithstanding any other provision of this section, at any time, on request of an

entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest….” Id.

83 In re P.J. Clarke’s Restaurant Corp., 265 B.R. 392, 404 (Bankr. S.D.N.Y. 2001). See In re Friedman’s

Inc., 336 B.R. 880, 883, 884 (Bankr. S.D. Ga. 2005) (“section 363[(e)] places on the debtor the burden of proving adequate protection” and “landlords who are compelled by a Section 363 Order to permit a use prohibited in their leases are entitled to additional adequate protection beyond regular rental payments”).

84 See Ames Dep’t Stores, 136 B.R. at 359.

85 See In re White Crane Trading Co., Inc., 170 B.R. 694, 698 (Bankr. E.D. Cal. 1994) (bankruptcy courts lack the power to approve store closing sales which violate state consumer protection laws).

86 See In re ZB Co., Inc., et. al., 302 B.R. 316, 319 (Bankr. D. Del. 2003) (there is no justification for a debtor’s failure to pay the landlords rent during the first month of case, when the debtor is collecting occupancy expenses from a liquidator); but see In re Chi-Chi’s, Inc., 305 B.R. 396, 400–01 (Bankr. D. Del 2004) (debtors are not obligated to pay stub rent where they sought rejection effective as of the petition date and were not receiving occupancy expenses from a liquidator).

court and never filed on the docket. Courts often indicate a reluctance to decide Store Closing Sales issues from the bench and prefer that the parties negotiate a business agreement that takes into account the particulars of each store location. Therefore, the best way to control how the sale is conducted at your store is to hire counsel to negotiate these agreements quickly and efficiently to avoid leaving the issues to the court’s discretion.

4. Stub Rent

In addition to ensuring that the conduct of the Store Closing Sales does not negatively impact the store or

the shopping center, landlords must also ensure that they are paid timely for post-petition rent and additional rent, as well as the “Stub Rent” due for the period from the petition date until the end of the first month of the bankruptcy case. This is particularly important at stores where a debtor proposes to conduct Store Closing Sales, then reject the underlying lease, because such sales are conducted outside of the ordinary course of business.

B. DIP Financing and Cash Collateral Motions

At the commencement of a bankruptcy case, the debtor often requires credit and permission to use cash

collateral immediately to cover expenses and working capital and fund its restructuring efforts. The trustee (or debtor in possession) is authorized under section 364 to obtain unsecured credit or to incur unsecured debt. However, if the trustee or debtor in possession is unable to obtain unsecured credit, upon notice and a hearing, the court may authorize the trustee or debtor in possession to obtain secured credit or incur secured debt, and to grant lien priority.

87 Given that lenders are typically unwilling to provide unsecured financing to a debtor in

bankruptcy, debtors typically file a motion seeking approval of DIP Financing and use cash collateral contemporaneously with the filing of the petition.

At the time of filing the petition, ordinarily the debtor’s cash collateral (as well as most other assets) is

pledged as collateral for pre-petition financing. The debtor cannot use the cash collateral without consent of the secured creditor, which is typically granted based upon an approved operating budget that sets forth the specific operating and administrative expenses the debtor is allowed to incur and pay with the cash collateral.

A motion to authorize secured DIP Financing seeks authorization under section 364 to grant liens,

including priming liens, to the post-petition lenders. Like the use of cash collateral, the DIP loan documents will contain a budget itemizing how the financing may be used.

In connection with either motion, it is important for the landlord to carefully review the budget, the motion

papers, and the proposed order to ensure that the debtor and secured creditor have provided for the timely payment of post-petition rent.

1. Quick Case Milestones

A retail landlord must address the potential impact of a debtor’s post-petition financing on its unexpired lease of nonresidential real property. Typically, the DIP lender wants the right to sell all of its collateral in the stores without paying rent and to capture any market value in the leased premises. The terms of the secured DIP Financing must be approved by the bankruptcy court, which is typically accomplished in a two-step process.

Rule 4001 of the Federal Rules of Bankruptcy Procedure governs the procedure for a motion to use cash

collateral88

and obtain DIP Financing.89

Rule 4001 requires at least 14 days’ notice of a final hearing to approve the use of cash collateral

90 or to authorize the debtor to obtain DIP Financing.

91 However, at the request of the

trustee or debtor in possession, the court may conduct a preliminary hearing before the expiration of 14 days, but the court’s authority to grant relief at that preliminary hearing is limited to such relief that “is necessary to avoid immediate and irreparable harm to the estate pending a final hearing.”

92

An interim order approving a DIP Financing and/or cash collateral motion is typically entered after the first

day hearing, with a final hearing usually scheduled within 30 to 45 days thereof. The debtor’s loan agreement

87

See 11 U.S.C. § 364(c) and (d). 88

See FED. R. BANKR. PROC. 4001(b). 89

See FED. R. BANKR. PROC. 4001(c). 90

See FED. R. BANKR. PROC. 4001(b)(2). 91

See FED. R. BANKR. PROC. 4001(c)(2). 92

FED. R. BANKR. PROC. 4001(b)(2) and (c)(2).

with the post-petition lender will require the debtor to obtain interim approval of the DIP Financing within just days of the bankruptcy filing and final approval by a date certain.

2. Liens Against Leases and Lender Occupancy Rights

As a condition of DIP Financing, lenders often require a first priority lien on cash, inventory, receivables and any unencumbered assets of the estate. A careful review of the DIP Financing motion and the loan documents is key.

Often times the DIP lender will seek a lien on all of the debtor’s assets, including unexpired leases of

nonresidential real property. Many leases of nonresidential real property do not permit (and often expressly preclude) the tenant from granting a lien against, assigning, or pledging an interest in the lease. Bankruptcy courts routinely enforce provisions of leases limiting the tenant’s right to encumber the lease.

93 In addition, the

grant of a lien directly against the lease may trigger an event of default under the landlord’s own financing, which may include covenants precluding such liens. Therefore, it is important for the landlord to insist that the security for the DIP Financing be limited to a lien against the proceeds of a lease of nonresidential real property, and does not grant a lien against the lease itself.

In addition, DIP lenders include broad covenants in the loan documents to secure recovery in the event

that the debtor is forced to liquidate. For example, a typical covenant would grant a DIP lender or its agent the right to enter the leased premises to liquidate collateral and/or to occupy the leased premises in the event of a default, often without further order of the court or consent of the landlord, and without the attendant requirement that the DIP lender pay rents and charges, cure defaults, or indemnify the landlord. To the extent that any right to enter or occupy the leased premises is recorded, such rights may create a cloud on title.

The debtor’s rights with respect to the leased premises are limited to its rights under the lease

94 and,

therefore, the debtor is not authorized to expand those rights to grant the DIP lender a right of access to, entry on, and/or occupancy of the leased premises. The DIP lender is not a party to the lease and, absent an agreement with the landlord, the lender has no independent right of access, to enter on and/or occupy the leased premises without the prior consent of the landlord. Therefore, it is important that any right of access to, entry on, or occupancy of the leased premises be conditioned upon express written consent of the landlords or further court order obtained by motion of the DIP lender on reasonable notice to the applicable landlord.

In certain cases, the interim and/or final order authorizing DIP Financing will appropriately limit the rights

of a DIP lender with respect to unexpired leases of nonresidential real property. However, it is also important to pay close attention to the plan of reorganization and plan supplement to ensure that appropriate limitations are also included in the debtor’s proposed exit financing.

3. Stub Rent and Waiver of Right to Surcharge Lender – 506(c) A landlord should also pay close attention to the use of cash collateral and DIP Financing by the debtor at

the expense of the landlord’s right to payment of post-petition rent (including stub rent) and administrative claims. Post-petition use and occupancy of the leased premises is necessary for the retail debtor’s operations and the sale of the DIP lender’s collateral. Allowing use and occupancy without the attendant requirement of timely performance of lease obligations by the trustee or debtor in possession renders the landlord an involuntary and interest-free lender to the debtor, and improperly shifts the risk of future insolvency of the estate to the landlord, resulting in a windfall to the debtor and secured creditors. To avoid the resulting windfall, the Bankruptcy Code provides protection to landlords of unexpired leases of nonresidential real property.

For example, where a trustee or debtor in possession proposes to use a leased premises, section 363(e)

provides that, upon request of the landlord, the bankruptcy court “shall prohibit or condition such use . . . as is necessary to provide adequate protection” of the landlord’s interest in the leased premises.95 This may include a condition that the debtor keep current on all post-petition monetary obligations and timely perform all post-petition

93

See, e.g., In re The Gymboree Corporation, Case No. 17-32986 (KLP), Dkt. No. 384 (Bankr. E.D. Va. 2017); In re Pacifica Mesa Studios LLC, 2010 Bankr. LEXIS 6115, at *27 (Bankr. C.D. Cal. July 30, 2010) (“any such lien shall not extend to any leasehold where the terms of the lease would prohibit the imposition of such lien, but provided further that such lien shall extend to the proceeds of any such leasehold”).

94 See In re Boutilier, 196 B.R. 323, 328 (Bankr. W.D. Va. 1996).

95 11 U.S.C. § 363(e).

non-monetary obligations. Where “mere performance of debtor’s obligations under the contract would not provide adequate protection for the party in interest[,]” section 363(e) may require, for example, a condition that the debtor create a segregated account to fund lease obligations

96 or a prohibition or limitation on the use of cash

collateral.97

Again, landlords should review the budget of the debtor’s permitted expenditures and make sure the budget provides for the timely payment of rent.

In addition, section 506(c) provides “an important exception to the rule that secured claims are superior to

administrative claims.”98

Under section 506(c), “[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim….” This is known as the trustee or debtor in possession’s right to “surcharge” the collateral.

Often times, the DIP Financing motion will seek a waiver of the debtor’s 506(c) right to surcharge the

collateral. That collateral includes the inventory and furniture, fixtures, and equipment at the leased premises, much of which is sold during Store Closing Sales for the direct financial benefit of the DIP lender. By waiving the right to surcharge the sale proceeds for the costs and expenses of protecting that collateral, the DIP lender avoids the important exception set forth in section 506(c), that administrative claims, including those of landlords, incurred in preserving the DIP lender’s collateral be paid before payment of the allowed secured claim.

99 If waiver

is permitted, the landlord’s right to payment of its administrative claim for post-petition rent and charges (incurred to protect the collateral) is left to depend upon the future administrative solvency of the estate, thereby improperly shifting the risk of a future insolvency or liquidation to the landlord.

Bankruptcy courts have refused to grant 506(c) waivers without payment of administrative claims,

including stub rent.100

This concept has been referred to as the “pay to play” concept. Others have conditioned 506(c) waivers on a finding of a reasonable basis to conclude that the estate will be administratively solvent.

101

Where there is outstanding rent and charges, particularly stub rent, due to the landlord, the landlord should consider objecting to the waiver of 506(c) rights without payment of outstanding rents and charges that are “the reasonable, necessary costs and expenses of preserving, or disposing of” the DIP lender’s collateral.

C. Pre Negotiated/Packaged Plans of Reorganization, Disclosure Statement Hearing

Recently, the scheduling of combined hearings to approve the disclosure statement and confirm the plan of reorganization, a procedure expressly permitted in a small business case,

102 has increased in large retail

bankruptcy cases. This procedure was recently used in the Southeastern Grocers supermarket chain cases.103

In fact, the Bankruptcy Court for the District of Delaware has implemented Local Rule 3017-2, which expressly permits this procedure in any case arising under chapter 11 of the Bankruptcy Code where certain requirements are met. This procedure is authorized by section 105(d)(2)(B)(vi) so long as the order is not “inconsistent with another provision of this title or with applicable Federal Rules of Bankruptcy Procedure.

104

The procedure of combining the disclosure statement and confirmation hearings is desirable particularly

where the “milestones” mandated by the DIP lender are difficult to achieve. However, in doing so, the landlords’ rights may be jeopardized.

At least one court has determined that “[a]n order combining the disclosure statement and confirmation

hearings is inconsistent with section 1125 except in prepackaged cases or small business cases.”105

The reasons

96

11 U.S.C. § 506(c). See In re RB Furniture, Inc., 141 B.R. 706, 714 (Bankr. C.D. Cal. 1992). 97

See In re M.D. Moody & Sons, Inc., 2010 Bankr. LEXIS 5220, at *20 (Bankr. M.D. Fla. Mar. 5, 2010). 98

Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, *5 (2000). 99

See In re Visual Indus., Inc., 57 F.3d 321, 325 (3d Cir. 1995) (the preservation of collateral inures to the direct benefit of the secured creditor, and therefore the secured creditor will be unjustly enriched if a claimant is not entitled to recover the costs of preserving that collateral).

100 See In re Sports Authority, Inc., Case No. 16-10527 (Bankr. D. Del. May 3, 2016) (denying waiver of

506(c) rights unless the final order provided for immediate payment of stub rent). 101

See, e.g., In re Fluid Routing Solutions Intermediate Holding Corp., Case No. 09-10384 (D. Del. Mar. 13, 2009) (granting 506(c) waiver only upon finding of reasonable probability that estate was administratively solvent); In re NEC Holdings Corp., Case No. 10-11890 (D. Del. July 13, 2010).

102 See 11 U.S.C. § 1125(f).

103 In re Southeastern Grocers, LLC, et al., Case No. 18-10700-MFW (Bankr. D. Del 2018).

104 11 U.S.C. § 105(d)(2).

105 In re Amster Yard Assocs., 214 B.R. 122, 124 (Bankr. S.D.N.Y. 1997).

given by the court included that (i) due process requirements provide creditors with notice and an opportunity to be heard; (ii) plan proponents may be “less willing to make modifications that could nullify votes they have already solicited”; and (iii) “courts may be reluctant to delay confirmation based on shortcomings that might have foreclosed approval of the disclosure statement if the hearings had not been combined.”

106

“The purpose of a disclosure statement is to provide ‘adequate information’ to enable ‘impaired’ classes

of creditors and interest holders to make an informed judgment about the proposed plan and determine whether to vote in favor of or against that plan.”

107 A retail debtor that is assuming leases under its plan will request that

assumptions be effective upon the effective date of a confirmed plan and may ask that it can make its final decision to assume or reject the lease after the plan is confirmed, in clear violation of section 365(d)(4). The debtor will want maximum flexibility with regard to its treatment of the lease and as much time as possible to negotiate lease amendments before assumption. The debtor will also want to avoid effectively assuming the lease until the plan becomes effective because, if the plan does not become effective, the assumed lease could be rejected, providing the landlord with an administrative priority claim of up to two years of rent.

108 In most

cases, there will be a separate hearing to consider approval of the disclosure statement and confirmation of the plan. Issues regarding timing of the debtor’s disclosure of its final assumption/rejection decisions and notice of those decisions can be addressed at the disclosure statement hearing. However, with a combined hearing on the disclosure statement and plan, it may be too late for a landlord to be heard regarding adequate notice of such decisions prior to confirmation.

Furthermore, the landlord is usually an impaired creditor upon rejection of an unexpired lease of

nonresidential real property, entitled to vote its claim arising from rejection to accept or reject the plan of reorganization. In order for a landlord to exercise its fundamental right to vote to accept or reject the plan of reorganization, it must have adequate notice of final, irrevocable treatment of its unexpired lease of nonresidential real property sufficiently in advance of the deadline to vote to accept or reject the plan of reorganization. Without sufficient notice, the landlord is disenfranchised and deprived of its right to vote its lease rejection damage claim. The debtor will thus need to finally decide whether to assume or reject leases and provide notice of that decision to landlords sufficiently in advance of the deadline to vote on the plan.

D. Lease Rejections

When rejecting a lease, a debtor has only one task to fulfill: get a bankruptcy court order. Without an order, the rejection is ineffective. Landlords should take steps to protect their rights in the event the debtor rejects the lease. First, the landlord should ensure that the debtor pays rent through the effective date of rejection and surrenders possession of the premises on or before the effective date of rejection.

109 Second, the landlord should

require the debtor to either (i) remove all furniture and equipment from the store prior to surrendering possession, or (ii) abandon the property to allow the landlord to dispose of the property without liability to any third party that may have an interest in such property. Third, if the debtor seeks an effective date of rejection that is prior to obtaining court approval, the landlord should object, arguing that the effective date of rejection should be the date the court authorizes the debtor to reject the lease and vacates the premises.

110

Upon rejection of the lease, the landlord has a claim with three components: (i) unpaid post-petition, pre-

rejection rent; (ii) unpaid pre-petition rent; and (iii) rejection damages, capped by section 502(b)(6).111

The landlord should carefully review the order authorizing the rejection of the lease because it may contain a deadline

106

Id. at 125. 107

In re Phoenix Petroleum Co., 278 B.R. 385, 392 (Bankr. E.D. Pa. 2001). 108

See 11 U.S.C. § 503(b)(7). 109

See, e.g., In re Rickel Home Ctrs., Inc., 240 B.R. 826 (Bankr. D. Del. 1998); Westbury Real Estate Ventures, Inc. v. Bradlees, Inc. (In re Bradlees Stores, Inc.), 194 B.R. 555 (Bankr. S.D.N.Y. 1996); In re CCI Wireless, LLC, 279 B.R. 590 (Bankr. D. Colo. 2002).

110 Thinking Mach. Corp. v. Mellon Fin. Servs. (In re Thinking Machines Corp.), 67 F.3d 1021, 1025–26 (1st Cir. 1995) (holding that rejection of a nonresidential lease under section 365(a) becomes legally effective only after judicial approval has been obtained); but see Pacific Shores Dev., LLC v. At Home Corp. (In re At Home Corp.), 292 B.R. 195, 200–02 (N.D. Cal. 2003) (holding that bankruptcy courts may apply rejection retroactively to the date the debtor filed the rejection motion).

111 The purpose of the statutory cap on rejection damages is to compensate the landlord for its loss without allowing a claim so large that it prevents other general unsecured creditors from recovering a dividend from the estate. H.R. Rep No. 595, 95th Cong., 1st Sess. 353 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 63 (1978); see also In re PPI Enters. (U.S.), Inc., 324 F.3d 197, 207 (3d Cir. 2003).

by which the landlord is required to file a proof of claim. If the rejection order does not provide a deadline, rejection damage claims are generally governed by the bar date order.

The claim for unpaid post-petition, pre-rejection rent may be entitled to administrative expense claim priority. The claim for unpaid pre-petition rent is a general unsecured claim and is not capped by section 502(b)(6).

112 The rejection damages are also a general unsecured claim, but these are capped by section

502(b)(6).

Included in the rejection damages are all amounts that the landlord is entitled to under the lease through the expiration of the term of the lease. After determining its actual damages, the landlord must determine the “rent reserved” under the terms of the lease. “Rent reserved” charges are all amounts regular and fixed, and are payable in the same way as base rent.

113 These charges include, among other things, common area

maintenance charges, real estate taxes, utility charges, and insurance expenses.114

The statutory cap limits a landlord’s claim to the “rent reserved” under the lease, without acceleration, for the greater of one year or 15 percent of the total rent remaining under the lease, not to exceed three years, following the earlier of the petition date or the date the premises are surrendered.

115 The 502(b)(6) cap is only

applied if the landlord’s actual damages (taking into account mitigation, if required) exceed the cap amount. Further, section 502(b)(6) caps only rejection damages. The landlord bears the burden of showing the damages resulting from rejection of the lease. In some states, this includes the affirmative duty to make a good faith effort to mitigate damages.

116 If the landlord succeeds in re-letting the premises, any rent derived from the new tenant

should be deducted from the total amount of landlord’s actual damages.117

If a debtor decides to assume a lease during the bankruptcy case, the debtor still has the right to reject that lease before it emerges from bankruptcy. However, in such a scenario, the landlord is entitled to recover for any damages it suffers as a result of the debtor changing its position. Section 503(b)(7) limits the amount of a landlord’s administrative claim arising from the rejection of a lease that the debtor has already assumed.

118 Under

the 503(b)(7) cap, a landlord is only entitled to an administrative priority claim for, at most, the monetary obligations due under the lease for a period of two years from the later of the rejection of the lease or the surrender of the premises; any remaining damages are treated as a general unsecured claim subject to the cap in section 502(b)(6).

119

E. Lease Rejection Procedures

To reduce the administrative cost of filing a separate motion to reject each lease over the course of a

bankruptcy case, a debtor may file a motion seeking to establish streamlined procedures that would permit the

112

See In re Handy Andy Home Improvement Ctrs., Inc., 222 B.R. 571, n.7 (Bankr. N.D. Ill. 1998) (section 502(b)(6) permits the addition of unpaid pre-petition rent to the termination damage statutory cap); In re Gantos, Inc., 176 B.R. 793 (Bankr. W.D. Mich. 1995) (pre-petition rent, which had been deferred under the lease until end of lease term, constitutes pre-petition unpaid rent under section 502(b)(6)(B) and, therefore, was not subject to damage cap).

113 Kuske v. McSheridan (In re McSheridan), 184 B.R. 91, 102 (9th Cir. B.A.P. 1995), overruled in part on other grounds, 504 F.3d 978 (9 Cir. 2007); In re Metals USA, Inc., 2004 WL 771096 at *15 (S.D. Tex. 2004); see also In re Edwards Theatre Circuit, Inc., 281 B.R. 675, 683 (Bankr. C.D. Cal. 2002); In re New Valley Corp., 2000 U.S. Dist. LEXIS (D. N.J. 2000).

114 In re Blatstein, 1997 WL 560119 (E.D. Pa. 1997). Attorneys’ fees, since they are not fixed and periodic and do not relate to the value or use of the property, are not included in the term “rent reserve.” See In re PPI Enters., 228 B.R. at 349.

115 11 U.S.C. § 502(b)(6); In re Shane Co., 464 B.R. 32, 44 n. 10 (Bankr. D. Colo. 2012).

116 See, e.g., McGuire v. City of Jersey City, 593 A.2d 309 (N.J. 1991) (duty to mitigate extended to commercial landlords); but see In re PPI Enters., 228 B.R. at 197 n. 17 (while landlord retains duty to mitigate tenant’s breach, any mitigation of damages will offset only the landlord’s actual damages and does not affect the section 502(b)(6) cap); In re Andover Togs, Inc., et al., 231 B.R. 521 (Bankr. S.D.N.Y. 1999) (under New York law, upon a commercial tenant’s breach of a lease and failure to pay rent, landlord has no duty to mitigate its damages).

117 See, e.g., In re Fifth Ave. Jewelers, 203 B.R. 372, 381 (Bankr. W.D. Pa. 1996) (mitigation shall figure into the calculation of damages prior to application of the section 502(b)(6) cap); In re Handy Andy Home Improvement, 222 B.R. at 575.

118 11 U.S.C. § 503(b)(7).

119 Id. 11 U.S.C. § 502(b)(6).

debtor to reject leases on a rolling basis as needed. Court approval is required for such procedures because they typically reduce and modify the notice required under the Bankruptcy Code. Exhibit C sets forth the lease rejection procedures that Claire’s sought to establish during its chapter 11 case.

120

In larger cases, the debtor often files such a motion on the first day of the case (and sometimes on

shortened notice), which requires additional vigilance by landlords. Some issues to look out for include whether the number of days given for the landlord to object is sufficient, whether a hearing will be held to consider the relief requested, whether the rejection could be effective before the debtor vacates the space, what will happen to the personal property remaining in the space after the lease is rejected, and when the landlord must file claims for rejection damages. IV. Lease Amendments in Retail Cases

Landlords often receive requests from the debtor or its real estate advisor to provide rent relief to the tenant in bankruptcy for stores that are either slated for potential rejection by the debtor or “on the bubble” (or sometimes even for those stores that are performing well). Before entering into any negotiations with the debtor or its real estate advisor, the landlord must understand whether or not the store is currently profitable and the recent sales trends at that location.

A. Context and Purpose

1. Assumption or Assumption and Assignment

In deciding whether to grant rent relief, and for how much and how long, landlords should consider a variety of factors, including: (i) the value of the debtor’s store in the shopping center; (ii) whether a replacement tenant will be easy to find; (iii) whether the landlord needs to keep the lights on at the store; and (iv) whether the debtor threatens to reject the lease, if the request is denied.

Rent relief should keep the tenant in business at the leased premises, not create value for a future assignment. A landlord considering a debtor’s request for rent relief should always negotiate for certain protections in exchange. The landlord should insist that the debtor assume the lease immediately upon execution of the rent relief agreement. This “ask” helps to keep the debtor operating at the leased premises and allows the landlord to increase the amount of its rejection damages claim if the debtor later rejects the assumed lease. As discussed above, if a landlord’s lease is rejected after being assumed, the landlord’s rejection damages claim is capped at the monetary obligations due under the lease for a period of two years from the later of the effective date of the rejection of the lease or the surrender of the premises.

121 Any remaining damages are treated as a

general unsecured claim subject to the section 502(b)(6) cap.122

Notwithstanding the limitation placed on a landlord’s damages, few debtors will agree to assume leases before the deadline to assume or reject unexpired nonresidential real property leases provided by section 365(d)(4) expires.

123

As a back-up position, the rent relief agreement should prohibit the debtor from assigning the lease to a

third party or, in the alternative, require a return to full rent if the debtor rejects or assigns the lease. In addition, if the debtor rejects or assigns the lease after being provided with rent relief, the agreement should provide that the landlord will have an allowed administrative claim for the total amount of the reduced rent from the date rent relief started to the effective date of the rejection or assignment of the lease. Because bankruptcy courts may construe these provisions as anti-assignment clauses, landlords should demand to have the presiding court approve any agreement that incorporates similar provisions.

A landlord should also consider offering to defer, rather than reduce, the rent. Alternatively, the landlord may limit the duration of the rent concession to a short period of time—three months at a time, for example. Finally, the landlord may choose to delay the rent reduction until the debtor’s emergence from bankruptcy, provided that the debtor has not assigned the lease. In some instances, the landlord may agree to make the reduction retroactive to an agreed upon date during the bankruptcy. If the debtor successfully emerges from bankruptcy, the accrued rent relief can then be applied as a credit towards any cure amount owed by the debtor to the landlord, then to the reduced rent going forward.

120

In re Claire’s Stores, Inc., et al., Case No. 18-10584-MFW (Bankr. D. Del. 2018). 121

11 U.S.C. § 503(b)(7). 122

Id., 11 U.S.C. § 502(b)(6). 123

11 U.S.C. § 365(d)(4).

Any deal that is reached should be approved by the court. Debtors are sometimes reluctant to get court approval, and may claim that entering into rent concession agreements are in the ordinary course of their business. The question, however, is not whether the debtors have authority to agree to a rent reduction, but whether the modified terms are enforceable if the debtor breaches any of them. As mentioned previously, court approval is essential for any provision that may be construed as a restriction on assignment.

B. Terms

1. Court Approval

Unlike assumption and rejection of an unexpired lease, the debtor will consider an amendment of its unexpired lease in the ordinary course of its business. It will thus typically not want to seek bankruptcy court approval of the amendment. However, better practice is to ensure the enforceability of the terms and request court approval upon execution of the lease amendment. If the amendment only becomes effective upon court approval of the debtor’s assumption of the lease as amended, the landlord will be satisfied with such approval. Further, the lease amendment may contain terms that may not be in the debtor’s ordinary course of business, such as a release of the landlord. Additionally, the amendment should provide that the concessions the landlord is providing are not available to an assignee of the debtor. The landlord will not want to risk the Bankruptcy Court’s determining that such a provision is an unenforceable anti-assignment clause.

124 These provisions

demonstrate the importance of court approval and the landlord conditioning effectiveness of the amendment on obtaining court approval.

2. Retroactive Relief

The landlord will typically want concessions and other amendments to an unexpired lease conditioned upon the entry of a final order of the bankruptcy court approving the debtor’s assumption of the lease. The tenant, on the other hand, will want rent concessions to commence upon execution of the lease amendment or upon some other date agreed upon by the debtor and landlord. Typically, leases are not assumed until the effective date of the debtor’s plan of reorganization. Ideally, the landlord will want the concessions to commence no earlier than assumption of the lease, with the debtor continuing to pay rent according to the terms of the lease until assumption. If the parties agree to retroactive rent relief, upon assumption, any overpayment of rent may be credited first against the cure amount due to landlord and then against future rent. The debtor may want the landlord to repay the debtor the full amount of the overpayment upon assumption. The lease amendment should make clear when the rent concession and other modifications to the original lease will commence.

3. Conditions to Effectiveness

a. Order Approving Assumption (but not Assignment)

As noted, it is in the landlord’s best interest to seek a court order approving assumption of the lease upon execution of the lease amendment.

Debtors, however, rarely consent to assumption before confirmation of a plan or the expiration of the

deadline to assume or reject unexpired leases of nonresidential real property. A middle ground generally acceptable to landlords and debtors involves conditioning the effective date of amendment on the debtor assuming the lease as amended. The purpose of the lease amendment is to provide an accommodation to retain the tenant, not create a more valuable lease for assignment to a third party. If the debtor rejects the lease or elects to assign the lease to a third party, the lease amendment should provide that it becomes null and void. To the extent rent concessions commenced prior to assignment or rejection, the concessions would be eliminated retroactively and the lease amendment should provide the landlord an allowed administrative claim for any rent relief obtained by the debtor prior to assignment or rejection and require the debtor to promptly pay such claim.

The landlord may also want to impose a deadline by which the effective date of the amendment must

occur. This provides the landlord with certainty as to when assumption will occur, if at all. The lease amendment may provide that if this deadline is not met, the amendment becomes null and void without further notice by the parties.

b. Timely Compliance with Lease and Amendment

124

See 11 U.S.C. § 365(f)(1).

Another enforcement mechanism the landlord may try to require is that any rent concession or other modification to the lease be conditioned upon timely compliance with all requirements of the lease and amendment during the modification period. Upon the occurrence of a monetary or non-monetary default (beyond any applicable notice and cure periods), the amendment becomes null and void and the tenant is required to resume payment of full rent and to comply with all terms of the lease without amendment. Debtors will often resist such provisions but may agree to include an affirmative obligation to continue to timely comply with their leasehold obligations even though the Bankruptcy Code requires this.

125

c. Cure of Defaults and Agreement on Amount

If there is any outstanding balance due and owing under the lease, ideally the lease amendment should

contain an acknowledgement of the amount and a requirement that the cure amount be paid within a defined period after assumption and the effective date of the amendment. The effectiveness of the amendment should also be subject to the debtor’s payment of the cure amount. These provisions avoid time consuming negotiations or litigation reconciling the cure amount. Debtors usually resist such provisions and take the position that they will address cure amounts later.

The lease amendment should further contain an acknowledgement on the part of the debtor as to its

continuing liability upon assumption for all obligations under the lease, including (i) amounts that have accrued under the lease, but are unbilled or not due at the time of assumption, such as reconciliations for CAM, real estate taxes, and insurance, (ii) any rents and charges that may come due regardless of when they accrued, and (iii) any other obligations under the lease, including indemnity obligations. The landlord will want these acknowledgements in order to avoid the debtor’s refusal to pay future reconciliations that accrued prior to assumption but were not included in the court-approved cure amount.

d. Attorneys’ Fees

While attorneys’ fees are considered pecuniary losses (assuming the lease provides for same and they

are reasonable)126

that must be paid upon assumption, negotiation of a lease amendment is an opportune time to obtain a commitment by the debtor to pay a specific amount of attorneys’ fees as part of the cure amount upon assumption.

e. Release of Landlord

Ideally, the lease amendment will release all claims the debtor may have against the landlord, and/or an

acknowledgement by the debtor that it has no existing rights of setoff, counterclaim, or defense to any amount due and owing under the lease as of the time of amendment. The debtor may refuse to agree to such a release or require a mutual release from the landlord from all obligations that are not included in the lease amendment.

f. Multiple Leases – Condition Amendment on Assumption of Other Leases

In large retail cases, the landlord (or its affiliates) may be counterparty to more than one unexpired lease

with the debtor. The landlord’s agreement to amend one lease may provide leverage for the landlord to demand assumption of one or more of the other leases; either “as is” or based on agreed upon similar amendments. The effectiveness of such amendments should be expressly conditioned upon entry of an order approving assumption of the other unexpired lease(s) “as is” and there should be cross-referencing provisions in each amendment conditioning the effectiveness of the amendments on the occurrence of the effective date of all other amendments.

125

See 11 U.S.C. § 365(d)(3). 126

See In re Shangra-La, Inc., 167 F.3d at 849; Urban Retail Props. v. Loews Cineplex Entm’t Corp., 2002 U.S. Dist. LEXIS 6186, at *25–28 (S.D.N.Y. Apr. 8, 2002); In re Crown Books Corp., 269 B.R. 12, 18 (Bankr. D. Del. 2001); In re Entertainment, Inc., 223 B.R. 141, 152–153 (Bankr. N.D. Ill. 1998); In re French, 131 B.R. 138, 141 (Bankr. E.D. Miss. 1991).

EXHIBIT A

Sample Committee Questionnaire and Notice of Formation Hearing

Office of the United States Trustee District of Delaware

844 King Street, Suite 2207 Wilmington, DE 19801

Tel. No. (302) 573-6491 Fax No. (302) 573-6497

IN RE: Chapter 11 The Walking Company, Inc. Case No. 18-10474 (LSS) Debtor(s).

Notice of Formation Meeting for Official Committee of Unsecured Creditors

The above-named debtor(s) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Section 1102(b) of the Bankruptcy Code authorizes the United States Trustee to appoint an official committee of Unsecured Creditors ("Committee"), and the debtor's petition or other sources of information indicate that you may be eligible for appointment to the Committee in this case. The Committee represents the interests, and acts on behalf, of all unsecured creditors. Members of the Committee are generally selected from the list of the twenty largest unsecured creditors.

This is to notify you that the United States Trustee will hold a meeting to form a Committee on Tuesday, March 20, 2018 @ 10:00 am at the following location:

The Doubletree Hotel 700 King Street

Wilmington, DE 19801

A representative of the debtor will attend the meeting to provide information regarding the status of the case.

If you wish to be considered for membership on the Committee, please complete the enclosed Questionnaire and return it to the Office of the United States Trustee via fax no later than Monday, March 19, 2018 @ 5:00 pm. Return of the questionnaire, however, does not guarantee appointment to the Committee, only that you will be considered. If you do not wish to serve on the Committee, you do not need to return the form or attend the meeting.

If you wish to be considered for Committee membership but are unable to attend, you should immediately notify the Office of the United States Trustee. If you do not attend the meeting and do not affirmatively indicate your willingness to serve, you will not be considered. If you send an individual to represent you at the meeting, that representative must present your written proxy authorizing him or her to act on your behalf

The United States Trustee urges you to consider serving on the Committee. Under the Bankruptcy Code, the Committee has the right to demand that the debtor consult with the Committee before making major decisions or changes, to request the appointment of a trustee or examiner, to participate in the formation of a plan of reorganization, and in some cases, to propose its own plan of reorganization. If appropriate, the Committee may request that the Bankruptcy Court convert a chapter 11 case to one under chapter 7, at which time the debtor's operations would cease and its assets would be liquidated. The Committee is authorized to select and employ an attorney and other necessary professionals, subject to court approval. Fees of professionals employed by the Committee may be paid from available assets, if any, of the bankruptcy estate after court approval. Further, Committee members' actual expenses may be reimbursed from estate assets. The Committee performs a vital role in chapter 11 reorganizations, and we hope that you will choose to participate.

ANDREW R. VARA ACTING UNITED STATES TRUSTEE /s/ Mark Kenney for T. PATRICK TINKER ASSISTANT UNITED STATES TRUSTEE

Dated: March 9, 2018 cc: Debtors' Counsel: Jamie O'Neill, Esq., Phone: 302-652-4100, Fax: 302-652-4400

Official Committee of Unsecured Creditors' Committee Information Sheet

Purpose of Unsecured Creditors' Committees. To increase participation in the chapter 11 proceeding, section 1102 of the Bankruptcy Code requires that the United States Trustee appoint a committee of unsecured creditors (the "Committee") as soon as practicable after the order for relief has been entered. The Committee ordinarily consists of the persons, willing to serve, who hold the seven (7) largest unsecured claims of the kinds represented on such committee. The debtor has filed a list indicating that your claim may be among the largest unsecured claims against the debtor, and for that reason, you may be eligible to serve on the Committee.

Powers and Duties of Unsecured Creditors' Committees. Members of the Committee are fiduciaries who represent all unsecured creditors as a group without regard to the types of claims which individual unsecured creditors hold against the debtor. Section 1103 of the Bankruptcy Code provides that the Committee may consult with the debtor, investigate the debtor and its business operations and participate in the formulation of a plan of reorganization. The Committee may also perform such other services as are in the interests of the unsecured creditors which it represents. Moreover, Federal Rule of Bankruptcy Procedure 2019, as amended, requires each member of an official committee to file a verified statement disclosing its name, its address, and the nature and amount of each "disclosable economic interest”

127 held in relation to the debtor on the date the committee was formed. Rule 2019 also requires

the committee to file a verified supplemental statement updating the earlier information (if information previously disclosed has materially changed) when taking a position before the court or soliciting votes on a plan.

Employment of Professionals. Section 1103 of the Bankruptcy Code provides that the Committee may, subject to the bankruptcy court's approval, employ one or more attorneys, accountants or other professionals to represent or perform services for the Committee. The decision to employ particular professionals should occur at a scheduled meeting of the Committee where a majority of the Committee is present. All professionals retained by the Committee may be compensated from assets of the debtor's estate pursuant to section 330 of the Bankruptcy Code. Applications for the payment of professional fees may be monitored by the Office of the United States Trustee and are subject to the Court's approval. However, the Committee should carefully review all applications and not rely on the Court or the United States Trustee to discover and object to unreasonable or unnecessary professional fees or costs.

Other Matters. The Committee should elect a chairperson and may adopt bylaws. As a party in interest, the Committee may be heard on any issue in the bankruptcy proceeding. Federal Bankruptcy Rule 2002(i) requires that the Committee (or its authorized agent) receive all notices concerning motions and hearings in the bankruptcy proceeding.

In the event you are appointed to an official committee of creditors, the United States Trustee may require periodic certifications of your claims while the bankruptcy case is pending. Creditors wishing to serve as fiduciaries on any official committee are advised that they may not purchase, sell or otherwise trade in or transfer claims against the Debtor while they are committee members absent an order of the Court. By submitting the enclosed Questionnaire and accepting membership on an official committee of creditors, you agree to this prohibition. The United States Trustee reserves the right to take appropriate action, including removing a creditor from any committee, if the information provided in the Questionnaire is inaccurate, if the foregoing prohibition is violated, or for any other reason the United States Trustee believes is proper in the exercise of her discretion. You are hereby notified that the United States Trustee may share this information with the Securities and Exchange Commission if deemed appropriate.

127

"Disclosable economic interest" means any claim, interest, pledge, lien, option, participation, derivative

instrument, or any other right or derivative right granting the holder an economic interest that is affected by the

value, acquisition, or disposition of a claim or interest.

Privacy Act Statement. 11 U.S.C. § 1102 authorizes the collection of this information. The information will be used by the United States Trustee to determine your qualifications for appointment to the Committee. Disclosure of this information may be to a bankruptcy trustee or examiner when the information is needed to perform the trustee's or examiner's duties, or to the appropriate federal, state, local, regulatory, tribal, or foreign law enforcement agency when the information indicates a violation or potential violation of law. Other disclosures may be made for routine purposes. For a discussion of the types of routine disclosures that may be made, you may consult the Executive Office for United States Trustee's systems of records notice, UST-001, "Bankruptcy Case Files and Associated Records." See 71 Fed. Reg. 59,818 et seq. (Oct. 11, 2006). A copy of the notice may be obtained at the following link: http://www.justice.gov/ust/eo/rules_regulations/index.htm Your disclosure of information is voluntary; however, failure to provide the requested information may result in the rejection of your application to be appointed to the Committee.

Should you have any additional questions concerning the Committee or your membership on the Committee, please contact the Office of the United States Trustee.

OFFICE OF THE UNITED STATES TRUSTEE DISTRICT OF DELAWARE 844 King Street, Suite 2207

Wilmington, DE 19801 Tel. No. (302) 573-6491 Fax No. (302) 573-6497

QUESTIONNAIRE FOR OFFICIAL COMMITTEE OF UNSECURED CREDITORS

The Walking Company, Inc. 18-10474 (LS S)

Please Type or Print Clearly. I am willing to serve on a Committee of Unsecured Creditors. Yes ( ) No ( )

A. Unsecured Creditor's Name and Contact Information: Name: Phone: Address: Fax: E-mail: B. Counsel (If Any) for Creditor and Contact Information: Name: Phone: Address: Fax: E-mail: C. If you have been contacted by a professional person(s) (e.g., attorney, accountant, or financial advisor)

regarding the formation of this committee, please provide that individual's name and/or contact information:

Name: Address: D. Amount of Unsecured Claim (U.S. $) E. If your claim is against more than one debtor, list all debtors: F. Describe the nature of your claim(s), i.e., whether arising from goods or services provided; loans made;

litigation; etc., including whether any portion is secured. If secured, please describe the collateral securing the claim. If any portion of the claim(s) arise from litigation, please state the nature of the claim, the case number and jurisdiction (if applicable) and the status.

G. Amount of Unsecured Claim entitled to 11 U.S.C. §503(b) treatment as an administrative expense: H. Would your schedule permit you to actively participate on the committee by attending weekly meetings

(either by telephone or in person)? Yes ( ) No ( ) I. Representations:

1. Are you or the company you represent in any way: "affiliated" with any of the debtors within the meaning of Section 101(2) of the Bankruptcy Code, or a shareholder of, or related to, the debtor(s)? Yes ( ) No ( ) If a shareholder, state the number of shares:

2. Do you, or the company you represent, engage in a business which directly or indirectly competes with any of the businesses of the debtor(s)? Yes ( ) No ( )

3. Have you ever been or are you an officer, director, agent, representative or employee of the debtor(s)? Yes ( ) No ( ) Does your claim arise from this relationship? Yes ( ) No ( )

4. State when you acquired the claim, the amount paid, and the face amount of the claim: 5. Have you or your attorney entered into a settlement agreement with the debtor regarding resolution of

your claim? Yes ( ) No ( ) 6. Do you have a claim against any entity affiliated with the debtor? Yes ( ) No ( )

State the name of the entity and the nature and amount of the claims:

7. Do you or any affiliated entities have any other claims against, or debt or equity securities of, the debtor(s)? Yes ( ) No ( )

8. Do you or any affiliated entities have any financial arrangement that may affect the value of your claim(s) against or interest(s) in the debtor(s) (e.g. personal guarantees, credit insurance, etc.)? Yes ( ) No ( )

9. If you have given a proxy to a third party either to represent you at the creditors' committee formation meeting, or in connection with your claim, please attach a copy of the written proxy. If a professional person has arranged for someone to hold a proxy on your behalf, please identify that individual:

Name: Address: You may attach a written statement to explain or supplement any responses. Creditors wishing to serve as fiduciaries on an official committee are advised that they may not

purchase, sell or otherwise trade in or transfer claims against the debtor while they are committee members absent an order of the court on application of the creditor.

Please be advised that once a committee is formed, the United States Trustee will file a notice of appointment in the court record that contains contact information for any creditor appointed, including the creditor's name, address, and telephone number.

Privacy Act Statement. 11 U.S.C. § 1102 authorizes the collection of this information. The information will be used by the United States Trustee to determine your qualifications for appointment to the Committee. Disclosure of this information may be to a bankruptcy trustee or examiner when the information is needed to perform the trustee's or examiner's duties, or to the appropriate federal, state, local, regulatory, tribal, or foreign law enforcement agency when the information indicates a violation or potential violation of law. Other disclosures may be made for routine purposes. For a discussion of the types of routine disclosures that may be made, you may consult the Executive Office for United States Trustee's systems of records notice, UST-001, "Bankruptcy Case Files and Associated Records." See 71 Fed. Reg. 59,818 et seq. (Oct. 11, 2006). A copy of the notice may be obtained at the following link: http://www.justice.gov/ust/eo/rules regulations/index.htm Your disclosure of information is voluntary; however, failure to provide the requested information may result in the rejection of your application to be appointed to the Committee.

I hereby certify that, to the best of my knowledge and belief, the answers to this Questionnaire are true and correct. By executing this Questionnaire, I also agree to the restrictions and conditions set forth in the preceding paragraphs and in the Committee Information Sheet, and I agree to provide periodic certifications upon request of the United States Trustee.

Date: Signature: Print Name: Note: This is not a proof of claim form. Proof of claim forms are filed with the Clerk of the Bankruptcy Court, not with the United States Trustee.

EXHIBIT B

Sample Store Closing Sale Guidelines

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re: THE BON-TON STORES, INC., et al.

1

Debtors.

Chapter 11 Case No. 18-10248 (____) (Jointly Administered)

SALE GUIDELINES

2

1. The Closing Sales shall be conducted so that the Closing Stores in which sales are to occur will remain open no longer than during the normal hours of operation or such hours as otherwise provided for in the respective leases for the Closing Stores.

2. The Closing Sales shall be conducted in accordance with applicable state and local “Blue Laws,” where applicable, so that no Closing Sale shall be conducted on Sunday unless The Bon-Ton Stores, Inc. (“Bon-Ton”) had been operating such Closing Store on a Sunday prior to the commencement of the Closing Sales.

3. On “shopping center” property, the Agent shall not distribute handbills, leaflets or other written materials to customers outside of any Closing Stores’ premises, unless permitted by the lease or if distribution is customary in the “shopping center” in which such Closing Store is located; provided that the Agent may solicit customers in the Closing Stores themselves. On “shopping center” property, the Agent shall not use any flashing lights or amplified sound to advertise the Closing Sales or solicit customers, except as permitted under the applicable lease or agreed to by the landlord.

4. At the conclusion of the Closing Sales, the Agent shall, subject to the Store Closing Agreement, vacate the Closing Stores in broom clean condition; provided that Agent may abandon any furniture, fixtures, and equipment (including, but not limited to, machinery, rolling stock, office equipment and personal property, and conveyor systems and racking) (“FF&E”) not sold in the Closing Sales at the conclusion of the Closing Sales, without cost or liability of any kind to the Agent. The Agent shall notify Bon-Ton of its intention to abandon any FF&E at least two (2) days prior to the Sale Termination Date. Bon-Ton will have the option to remove the FF&E at its own cost prior to the termination date. Any abandoned FF&E left in a Closing Store after a lease is rejected shall be deemed abandoned to the landlord having a right to dispose of the same as the landlord chooses without any liability whatsoever on the part of the landlord to any party and without waiver of any damage claims against Bon-Ton. For the avoidance of doubt, as of the Sale Termination Date, the Agent may abandon, in place and without further responsibility or liability of any kind, any FF&E.

5. The Agent and Bon-Ton may advertise each Closing Sale as a “store closing,” “sale on everything,” “everything must go,” “liquidation sale,” “winter clearance outlet,” “winter clearance entire store on sale,” or similar themed sale. The Agent and Bon-Ton may also have “countdown to closing” signs prominently displayed in a manner consistent with these Sale Guidelines. All signs, banners, ads and other advertising collateral, promotions, and campaigns will be approved by Bon-Ton in accordance with these Sale Guidelines.

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification

number, are: The Bon-Ton Stores, Inc. (5229); The Bon-Ton Department Stores, Inc. (9309); The Bon-Ton Giftco,

LLC (2805); Carson Pirie Scott II, Inc. (2140); Bon-Ton Distribution, LLC (5855); McRIL, LLC (5548); Bonstores

Holdings One, LLC (8574); Bonstores Realty One, LLC (8931); Bonstores Holdings Two, LLC (8775); and

Bonstores Realty Two, LLC (9075). The headquarters for the above-captioned Debtors is 2801 East Market Street,

Bldg. E, York, Pennsylvania 17402.

2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the

Debtors’ Emergency Motion for Interim and Final Orders (A) Authorizing the Debtors to Assume Store Closing

Agreement; (B) Authorizing and Approving Closing Sales Free and Clear of All Liens, Claims, and Encumbrances;

(C) Approving Dispute Resolution Procedures; (D) Authorizing Customary Bonuses to Employees of Closing

Stores; and (E) Approving the Debtors’ Store Closing Plan, filed contemporaneously herewith.

6. The Agent shall be permitted to utilize sign walkers, display, hanging signs, and interior banners in connection with the Closing Sales; provided that such sign walkers, display, hanging signs, and interior banners shall be professionally produced and hung in a professional manner. Bon-Ton and Agent shall not use neon or day-glo on its sign walkers, display, hanging signs, or interior banners. Furthermore, with respect to enclosed mall locations, no exterior signs or signs in common areas of a mall shall be used unless otherwise expressly permitted in these Sale Guidelines. In addition, Bon-Ton and Agent shall be permitted to utilize exterior banners at (i) non-enclosed mall Closing Stores and (ii) enclosed mall Closing Stores to the extent the entrance to the applicable Closing Store does not require entry into the enclosed mall common area; provided, however, that such banners shall be located or hung so as to make clear that the Closing Sales are being conducted only at the affected Closing Store, and shall not be wider than the storefront of the Closing Store. In addition, Bon-Ton and Consultants shall be permitted to utilize sign walkers in a safe and professional manner and in accordance with the terms of the Order. Nothing contained in these Sale Guidelines shall be construed to create or impose upon Bon-Ton or the Agent any additional restrictions not contained in the applicable lease agreement.

7. Conspicuous signs shall be posted in the cash register areas of each of the affected Closing Stores to effect that “all sales are final.”

8. Except with respect to the hanging of exterior banners, the Agent shall not make any alterations to the storefront or exterior walls of any Closing Stores, except as authorized by the applicable lease.

9. The Agent shall not make any alterations to interior or exterior Closing Store lighting, except as authorized by the applicable lease. No property of the landlord of a Closing Store shall be removed or sold during the Closing Sales. The hanging of exterior banners or in-Closing Store signage and banners shall not constitute an alteration to a Closing Store.

10. The Agent shall keep Closing Store premises and surrounding areas clean and orderly consistent with present practices.

11. Subject to the provisions of the Store Closing Agreement, the Agent shall have the right to use and sell all Offered FF&E. The Agent may advertise the sale of the Offered FF&E in a manner consistent with these guidelines. The purchasers of any Offered FF&E sold during the Closing Sales shall be permitted to remove the Offered FF&E either through the back or alternative shipping areas at any time, or through other areas after applicable business hours, provided, however that the foregoing shall not apply to de minimis FF&E sales made whereby the item can be carried out of the Closing Store in a shopping bag. For the avoidance of doubt, as of the Sale Termination Date, the Agent and Bon-Ton may abandon, in place and without further responsibility, any FF&E.

12. At the conclusion of the Closing Sales at each Closing Store, pending assumption or rejection of applicable leases, the landlords of the Closing Stores shall have reasonable access to the Closing Stores’ premises as set forth in the applicable leases. Bon-Ton, the Agent, and their agents and representatives shall continue to have access to the Closing Stores as provided for in the Store Closing Agreement.

13. The rights of landlords against Bon-Ton for any damages to a Closing Store shall be reserved in accordance with the provisions of the applicable lease.

14. If and to the extent that the landlord of any Closing Store affected hereby contends that the Bon-Ton or the Agent is in breach of or default under these Sale Guidelines, such landlord shall email or deliver written notice by overnight delivery to Bon-Ton and the Agent as follows:

If to Bon-Ton:

(a) Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1285 6th Ave, New York, NY 10019 (Attn: Kelley A. Cornish, Esq., Elizabeth R. McColm, Esq., Claudia R. Tobler, Esq., and Alexander Woolverton, Esq.), kcornish@paulweiss.com, emccolm@paulweiss.com, ctobler@paulweiss.com, awoolverton@paulweiss.com;

(b) Young Conaway Stargatt & Taylor, LLP, Rodney Square, 1000 North King Street, Wilmington, DE 19801 (Attn: Pauline K. Morgan, Esq., Sean T. Greecher, Esq., Andrew

L. Magaziner, Esq., and Elizabeth S. Justison, Esq.), pmorgan@ycst.com, sgreecher@ycst.com, amagaziner@ycst.com, ejustison@ycst.com; and

(c) Malfitano Partners, Joseph A. Malfitano, PLLC, 747 Third Ave. 2nd

Floor, New York, NY 10017 (Attn: Joseph Malfitano), jm@malfitanopartners.com.

If to Agent:

(a) Gordon Brothers Retail Partners, LLC, 800 Boylston Street, 27th Floor, Boston, MA 02199

(Attn: Mackenzie Shea), mshea@gordonbrothers.com;

(b) Hilco Merchant Resources, LLC, 5 Revere Drive, Suite 206, Northbrook, IL 60062 (Attn: Ryan Lawlor), rlawlor@hilcoglobal.com; and

(c) Kirkland & Ellis LLP, 300 N. LaSalle, Chicago, IL 60654 (Attn: Joseph M. Graham and Timothy Bow), joe.graham@kirkland.com, timothy.bow@kirkland.com.

EXHIBIT C

Sample Lease Rejection Procedures

UNITED STATES BANKRUPTCY COURT

DISTRICT OF DELAWARE

---------------------------------------------------------------------- x

In re

CLAIRE’S STORES, INC., et al.,

Debtors.1

:

:

:

:

;

:

:

Chapter 11

Case No. 18–________

(Jointly Administered)

---------------------------------------------------------------------- x

LEASE REJECTION PROCEDURES

1. Rejection Notice. The Debtors will file with the Court and serve on the Rejection Notice Parties (as defined herein) a notice (a “Rejection Notice”), substantially in the form attached hereto as Schedule A, to reject the identified unexpired lease(s) and/or sublease(s) pursuant to section 365 of the Bankruptcy Code, which Rejection Notice shall set forth, among other things: (i) the unexpired lease(s) and/or sublease(s) to be rejected; (ii) the names and addresses of the counterparties to such unexpired lease(s) and/or sublease(s); (iii) the proposed effective date of the rejection for each such unexpired lease(s) and/or sublease(s) (the “Rejection Date”); and (iv) the deadlines and procedures for filing objections to the Rejection Notice (as set forth below). The Rejection Notice shall include the proposed order approving rejection of the unexpired lease(s) and/or sublease(s) (the “Rejection Order”).

2. Abandonment. The Debtors will specify in the Rejection Notice whether they intend to abandon any personal property, including inventory, furniture, fixtures, equipment, and/or other material at the leased premises as of the Rejection Date. Any such property of the Debtors remaining after the Rejection Date shall be deemed abandoned to the applicable lease counterparty without further notice or order of the Court, free and clear of all liens, claims, interests, or other encumbrances. Any landlord or other designee shall be free to dispose of any such items without notice or liability to any party. Landlords’ rights, if any, to file claims for the costs of disposal of such property are fully reserved, as are the rights of all parties in interest to object to such claims.

With respect to any personal property that is leased to the Debtors by a third party or owned by a third party, such third party shall contact the Debtors and remove or cause to be removed such personal property from the leased premises prior to the Rejection Date. For the avoidance of doubt, if any such personal property remains on the leased premises after the Rejection Date, the landlord may dispose of any and all such property as set forth above.

3. Service of the Rejection Notice. The Debtors will cause the Rejection Notice to be served by overnight mail or email upon (i) the unexpired lease or sublease counterparties affected by the Rejection Notice, and their counsel, if known; (ii) any party known to assert an ownership interest in, or that has filed a UCC-1 statement against, personal property located at the applicable leased premises; (iii) any party known to assert a lien on any real property subject to the Lease; (iv) the Office of the United States Trustee for the District of Delaware; (v) counsel to the DIP Agent, (a) Latham & Watkins LLP, 330 North Wabash Avenue, Suite 2800, Chicago, Illinois 60611 (Attn: Richard A. Levy, Esq. (richard.levy@lw.com)), and (b) Latham & Watkins LLP, 885 Third Avenue, New York, New York 10022 (Attn: Annemarie V. Reilly, Esq. (annemarie.reilly@lw.com)); (vi) the Prepetition ABL Agent; (vii) the Prepetition RCF Agent; (viii) the Claire’s Stores Term Loan Agent; (ix) the 9.00% First Lien Notes Trustee; (x) the 6.125% First Lien Notes Trustee; (xi) the Second Lien Notes Trustee; (xii) counsel to the Ad Hoc First Lien Group, Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, NY 10019 (Attn: Matthew A. Feldman, Esq. (mfeldman@willkie.com) and Brian S. Lennon, Esq. (blennon@willkie.com)) and Morris, Nichols, Arsht & Tunnell, LLP, Rodney Square, 1201 North Market Street, Wilmington, DE 19899 (Attn: Robert

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, as applicable, are Claire’s

Inc. (6919); Claire’s Stores, Inc. (0416); BMS Distributing Corp. (4117); CBI Distributing Corp. (5574); Claire’s Boutiques, Inc. (5307); Claire’s Canada Corp. (7936); Claire’s Puerto Rico Corp. (6113); and CSI Canada LLC (7936).

Dehney, Esq. (rdehney@mnat.com)); and (xiii) counsel for any statutory committee appointed in these chapter 11 cases (collectively, the “Rejection Notice Parties”).

4. Objection Procedures. Parties objecting to a proposed rejection or abandonment must file and serve a written objection (an “Objection”) so that the Objection is filed with the Court and is actually received by (i) the Debtors c/o Claire’s Stores, Inc., 2400 West Central Road, Hoffman Estates, IL 60192 (Attn: Legal Department); (ii) the proposed attorneys for the Debtors, (a) Richards, Layton & Finger, P.A., One Rodney Square, 910 N. King Street, Wilmington, Delaware 19801 (Attn: Daniel J. DeFranceschi, Esq. (defranceschi@rlf.com)) and (b) Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153 (Attn: Ray C. Schrock, P.C. (ray.schrock@weil.com), Matthew S. Barr, Esq. (matt.barr@weil.com), Ryan Preston Dahl, Esq. (ryan.dahl@weil.com)); and (iii) the Rejection Notice Parties, no later than ten (10) calendar days after the date the Debtors serve the relevant Rejection Notice (the “Rejection Objection Deadline”). Each Objection must state with specificity the legal and factual grounds for objection to the proposed rejection.

5. Event of No Objection. If no Objection is filed and served by the Rejection Objection Deadline, the Debtors shall submit the proposed Rejection Order to the Court after the Rejection Objection Deadline, and the Court may enter such order without a hearing. The Rejection Order shall set forth the applicable Rejection Date, which shall be (i) the earlier of (a) service of the Rejection Notice, and (b) the Debtors’ unequivocal surrender of the leased premises via the delivery of the keys, key codes, and alarm codes to the premises, as applicable, to the applicable lease counterparty, or, if not by delivering such keys and codes, then by providing notice that the landlord may re-let the premises or (ii) as otherwise agreed by the Debtors and the applicable lease counterparty.

6. Unresolved Objections. If an Objection is timely filed and not withdrawn or resolved (an “Unresolved Objection”), the Debtors shall file a notice for a hearing for the Court to consider the Unresolved Objection at the next scheduled omnibus hearing after the Rejection Objection Deadline, unless the Debtors and lease and sublease counterparties, as applicable, agree to a different hearing date and subject to the Court’s schedule. If the Unresolved Objection is overruled or withdrawn, the effective date of rejection shall be the (i) Rejection Date; (ii) such other date to which the Debtors and the counterparty to the Unresolved Objection have agreed; or (iii) such other date as determined by the Court. If an Objection is filed for fewer than all of the leases included on the Rejection Notice, the Debtors may proceed with submitting a proposed Rejection Order in accordance with the above procedures for the remaining leases on the Rejection Notice.

7. Treatment of Security Deposits. If the Debtors have deposited funds with a lease counterparty as a security deposit or other similar arrangement, such counterparty may not set off or otherwise use such deposit without the prior authorization of this Court or consent of the Debtors.

8. Deadline to File Proofs of Claims. Claims arising out of the rejection of lease must be filed on or before the later of (i) the deadline for filing proofs of claims established by this Court in these chapter 11 cases and (ii) thirty (30) days after entry of the applicable Rejection Order. If a proof of claim is not timely filed, such claimant shall not be treated as a creditor with respect to such claims for voting on any chapter 11 plan in these chapter 11 cases and shall be forever barred from asserting claim for rejection damages and from participating in any distributions made in connection with these chapter 11 cases.