October 2022 | Issue 3
Unlike a typical two-party dispute, retail bankruptcy cases involve the interaction of several important parties with different roles. It’s critical for landlords to be aware of and understand how these major players are likely to affect their interests.
a. The debtor (debtor-in-possession) is the tenant that filed for bankruptcy. A debtor is a fiduciary that must act in the best interests of its “estate”—collective property and assets—and its creditors, with statutory obligations under the US Bankruptcy Code.
b. The bankruptcy judge is in charge of the proceedings and will hear all arguments, consider the evidence, and issue rulings consistent with the US Bankruptcy Code. The only way to seek relief from the bankruptcy judge is through formal pleadings; private or “off-the-record” communications are not permitted.
c. The United States Trustee is a division of the United States Department of Justice that oversees administration of the case and may be heard on any matter, but does not represent individual creditors. The US Trustee presides over meetings of creditors and the formation of the official committee of unsecured creditors (UCC). Creditors with unsecured claims, notably those the debtor places on the required list of holders of the 20 largest unsecured claims, may receive a solicitation to join the UCC or may contact the US Trustee if it wishes to serve on the UCC.
d. Secured creditors are banks or other creditors with outstanding loans secured by mortgages or security interests in assets of the debtor (tenant). However, secured creditors can also include a landlord with a security deposit or a right of setoff against the debtor. Secured creditors get paid out of the value of their collateral (i.e., security deposit) first, with any remaining deficiency claim amount treated as an unsecured claim.
e. Debtor-in-possession lenders (DIP lenders) are secured creditors that lend to debtors after the date of commencement of the bankruptcy case (petition date). DIP lenders are critical to the success of the debtor’s bankruptcy case, but are often at odds with landlords over the timing and funding of post-petition date rent payments.
f. Administrative creditors include creditors that provided goods shortly before the petition date and creditors providing goods or services to the debtor after the petition date. Landlords with unpaid post-petition date rents are administrative creditors. Administrative creditors have considerable recourse for payment, as most Chapter 11 plans can only be confirmed if administrative claims are to be paid in full (unless the administrative creditor agrees to other treatment).
g. Priority creditors are pre-petition date creditors with preferred distribution priority, including pre-petition date employee wage claims and tax claims.
h. General unsecured creditors (GUCs) include all other creditors that provided goods or services to the debtor prior to the petition date. GUCs generally receive the worst treatment under Chapter 11 plans (other than equity holders). Landlords with claims under rejected leases for pre-petition rent, damages arising from rejection, or both are GUCs except to the extent the landlord holds a security interest in the debtor’s assets or security deposit.
i. The official committee of unsecured creditors (UCC) is appointed by the US Trustee and will consist of GUCs, often including landlords, suppliers, and bond holders. Although the UCC may champion certain issues that are favorable to landlords, the UCC represents the interests of GUCs as a whole and not individual creditors.
j. Equity holders. Occasionally, an equity committee is appointed by the US Trustee; typically, however, equity interests don’t have any value and holders have little input on the case.
k. Subchapter V trustee. Some features of the relatively new Subchapter V of Chapter 11 (i.e., small businesses with noncontingent, liquidated debt of $7.5 million or less) are that there is no UCC, administrative claims can be paid over the life of a three to five year plan, and a Subchapter V trustee is appointed. The Subchapter V trustee interacts with the debtor, the US Trustee, and the bankruptcy judge to facilitate the debtor’s reorganization.
The next issue of Bankruptcy Basics will cover Chapter 11 case outcomes. It’s a common misconception that Chapter 11 is only utilized for reorganizations, as sales and liquidations are also frequent outcomes. Stay tuned for Issue 4 of Bankruptcy Basics for Retail Landlords in early November.