Articles Posted in Real Property

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Any property owner which has experienced the bankruptcy of a tenant is doubtless keenly aware of the limitation on damages which the Bankruptcy Code imposes on the landlord. A new decision by the Ninth Circuit bolsters the position of landlords in this long-running tussle.

Section 502(b)(6) Cap Refresher

Before getting to the Ninth Circuit’s recent opinion, here is a quick review for those who have not confronted the issue recently: Bankruptcy Code section 502(b)(6) generally “caps” a landlord’s claim for “damages” against a bankrupt tenant when a lease is terminated before or during the bankruptcy case to (a) the greater of the next year of rent due, or 15% of all the remaining rent due up to 3 years of the remaining term, and (b) any unpaid rent owing as of the date of the bankruptcy, or the date the tenant lost possession of the premises if prior to bankruptcy.  Fairly or not, the policy justification for the cap is that large claims of landlords, which are by their nature long-term and hard to calculate, should not overwhelm the claims of other trade creditors.

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Greenberg Glusker Fields Claman & Machtinger LLP partner Brian Davidoff was quoted in an article that ran in the Los Angeles Daily Journal on July 31st about current predictions that the bankruptcy industry will soon see a spike in bankruptcy cases as a result of the state’s ongoing drought.

According to Davidoff, the bankruptcy industry has seen several years of declining filings as a result of high filing costs, low interest rates and a market that has been in recent years financially sound.

With the agricultural industry struggling from years of drought, many are predicting the next cycle of bankruptcies is on the horizon.

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Commercial landlords should take notice. Within the last several months, one women’s clothing retailer after another has gone out of business. On Dec. 4, 2014, Philadelphia-based Deb Shops filed Chapter 11. Next came Delia’s, based in New York, which filed bankruptcy only four days later. On Jan. 9, 2015, Body Central, based in Florida, a chain with 265 stores, announced that it was closing all of its stores by way of an assignment for the benefit of creditors, an alternative to federal bankruptcy. On Jan. 15, Wet Seal, a Southern California-based company, filed its own Chapter 11. Then on Feb. 4, Cachè, another New York-based chain filed Chapter 11. In addition to these, Jones New York andKate Spade Saturday recently announced that their retail locations would be closing.

If one is an anomaly, two a coincidence and three a trend, then we should pay attention when we see so many substantial retail women’s clothing companies file bankruptcy all within a few months. There is anecdotal evidence that as millennials get older and start to assert their spending power, traditional brick-and-mortar businesses may be in for some tough times.

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The economy is humming along and bankruptcy filings are at historic lows.   Nevertheless, a recent trend in retail may suggest that the times, they are a changing.

Radio Shack, the 95 year old national chain that for many years was the “go to” store for consumer electronics, has been in the headlines as a result of its bankruptcy filing in February.   But getting much less national mainstream publicity was the demise of at least seven clothing retailers, all of whom went out of business or filed Chapter 11 within the past 5 months.   In December it was Deb Shops and Delia’s.   In January, it was Body Central and Wet Seal.  In February, Cache filed, and in April, it was Fresh Produce, Simply Fashion and Frederick’s of Hollywood.

In total, these retailers operated out of over 6,500 stores.   That means many employees are now out of a job.   It also means that there were over 6,500 leases that either were forfeited back to the landlords or sold.  That is a significant disruption for property owners in such a short time period.   And a lot of new business for companies such as liquidators Hilco, Gordon Brothers, and others who specialize in liquidation sales for retail companies that are going out of business, not to mention the bankruptcy lawyers involved in those Chapter 11 cases.