On April 11, 2014 Coldwater Creek filed in Delaware for Chapter 11 bankruptcy reorganization. It follows filings in 2014 by Dots, January in New Jersey, and Ecko, April in New Jersey. For retailers, the most common motivation is the right a debtor company has in bankruptcy to “reject” burdensome leases that were entered into when the debtor was expanding its locations. Another is the insistence of a lender that it will only extend “debtor-in-possession” financing.
Most pertinent to the fashion industry is the effect of bankruptcy on suppliers of merchandise to the debtor company. Most of what a supplier is owed generally turns out to be an unsecured claim that eventually is paid, if anything, out of revenue that remains after secured, administrative and priority claims. Often, little is available for the general unsecured creditor body, and unsecured creditors receive a small percentage of their unsecured claims, payable at the end of the bankruptcy case. However, a supplier is entitled to an “administrative claim” for the value of goods received by the debtor within 20 days before the bankruptcy filing if the goods were sold to the debtor in the ordinary course of the debtor’s business. An administrative claim is valuable because administrative claims must be paid in full before any unsecured claims.
If a supplier provided goods less than 45 days before the bankruptcy filing, it can move to physically reclaim the goods. Such a supplier has a strict time frame in which to demand in writing reclamation. However, when the goods were provided within the 20 day pre-filing period, an administrative claim payable in currency is generally preferable to physical reclamation.
A supplier should immediately consult counsel if it provided goods to a debtor company within 45 days before the bankruptcy filing.