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The way many corporations use Chapter 11 bankruptcy (reorganization) ought to be illegal. (1 Viewer)

timschochet

timschochet

Footballguy
This morning I saw the headline on the news: “Forever 21 to declare bankruptcy.” Well not really, they are declaring Chapter 11 bankruptcy, meaning they will close down the stores that aren’t earning enough money, fire those employees, and screw over the landlords. Forever 21 has over 700 stores. 

As far as I’m concerned, this is legal theft. Forever 21 has been notorious for negotiating back end leases (in which the landlord gives them all kinds of breaks and tenant improvements, free rent, etc, for the first few years in exchange for long terms) for excess square footage that they did not need, usually in large malls. They borrowed tons of money to expand as quickly as possible. Now they’re going to close down whatever stores they want, with virtually no penalty, and then likely sell the remaining stores to a larger corporation- the executives will walk away much wealthier than before. Our President is no doubt very familiar with this scam; he did it 3-4 times. 

Our bankruptcy laws were established originally as a means for people who ran small businesses to avoid debtor’s prison. These days it’s become a way for large corporations to invest with little or no risk and collect the profits while others suffer. Particularly chapter 11. 

End of rant. 

 
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timschochet said:
Forever 21 has been notorious for negotiating back end leases (in which the landlord gives them all kinds of breaks and tenant improvements, free rent, etc, for the first few years in exchange for long terms) for excess square footage that they did not need, usually in large malls. T
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This part is on the landlord, right?  He/she/they should know there is this risk in making such a deal and negotiate accordingly.

 
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Maybe there should just be better oversight regarding executive pay? And perhaps something should be done about preferred stock's pecking order. 

But otherwise allowing a business to maximize or continue to produce revenue instead of it just going away altogether seems like the way we should prefer things being done. 

 
fatguyinalittlecoat said:
Are you capable of making the arguments for the position you disagree with?
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Usually. In this case, sure. Actually @parasaurolophus made them quite well: better a company stay in business than go completely under. Yet perhaps if they don’t have this option they won’t be as irresponsible in the first place. And I don’t think executives should be rewarded for failure. 

 
timschochet said:
This morning I saw the headline on the news: “Forever 21 to declare bankruptcy.” Well not really, they are declaring Chapter 11 bankruptcy, meaning they will close down the stores that aren’t earning enough money, fire those employees, and screw over the landlords. Forever 21 has over 700 stores. 

As far as I’m concerned, this is legal theft. Forever 21 has been notorious for negotiating back end leases (in which the landlord gives them all kinds of breaks and tenant improvements, free rent, etc, for the first few years in exchange for long terms) for excess square footage that they did not need, usually in large malls. They borrowed tons of money to expand as quickly as possible. Now they’re going to close down whatever stores they want, with virtually no penalty, and then likely sell the remaining stores to a larger corporation- the executives will walk away much wealthier than before. Our President is no doubt very familiar with this scam; he did it 3-4 times. 

Our bankruptcy laws were established originally as a means for people who ran small businesses to avoid debtor’s prison. These days it’s become a way for large corporations to invest with little or no risk and collect the profits while others suffer. Particularly chapter 11. 

End of rant. 
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Hmmm maybe the landlords need to be better at negotiating then giving them all the freebies.  Don’t feel sorry for the landlords.

 
Repeal chapter 11?  You got to be kidding me. Nothing like forcing every company to liquidate. You think jobs, etc. suffer under chapter 11. 

 
Being a landlord of a mall right now is like trying to keep a sinking ship afloat. Forever 21 is one of many brands struggling in malls. 

 
I changed the title of this thread to be more accurate. I am not necessarily opposed to Chapter 11 for small businesses or even for corporations ideally. What I am opposed to is the way it’s being manipulated to make a profit by screwing over employees, landlords, and vendors. 

 
timschochet said:
I changed the title of this thread to be more accurate. I am not necessarily opposed to Chapter 11 for small businesses or even for corporations ideally. What I am opposed to is the way it’s being manipulated to make a profit by screwing over employees, landlords, and vendors. 
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Typical the equity is wiped out in chapter 11 so your assertion doesn’t make sense. 

 
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timschochet said:
I changed the title of this thread to be more accurate. I am not necessarily opposed to Chapter 11 for small businesses or even for corporations ideally. What I am opposed to is the way it’s being manipulated to make a profit by screwing over employees, landlords, and vendors. 
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I am generally very opposed to laws regarding pay, but this is an area i would love to see it. I mean the government is already involved. So if we have a process that already has them involved we might as well make it fair. 

I would also like to see the regulations tightened regarding the bs marketing involved with some of these store liquidations. 

 
Politician Spock said:
Being a landlord of a mall right now is like trying to keep a sinking ship afloat. Forever 21 is one of many brands struggling in malls. 
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I'm not familiar with Forever 21. They're mostly in malls? Are they big anchor stores, or similar to something that is better known?

 
Zow said:
May as well invest in some Blockbusters. 
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There’s always going to be shopping malls. Amazon and the internet cut heavily into profits but they won’t take over, for two reasons: first because people still enjoy being around other people. Second, because buyers still enjoy seeing an item, purchasing it, and owning it immediately. 

Obviously there will be changes: less square footage, more utility of square footage, etc. But they’re not going away. 

 
parasaurolophus said:
My town is zigging while other towns are zagging. Not only did they build another mall, but they are expanding the older one. 
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Same here in Orange County. 

I don’t think malls are going away but I think they’re changing. New ones have less square footage, more diverse tenants. 

 
timschochet said:
Same here in Orange County. 

I don’t think malls are going away but I think they’re changing. New ones have less square footage, more diverse tenants. 
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The use of resources for these projects is absurd. The mall they are adding to has an abandoned boston store and fresh market on one side. They are expanding to the other. So parking is a nightmare which leads to traffic issues(because cars get backed up onto the road) and they are happily destroying the environment. Yay jobs! 

 
parasaurolophus said:
My town is zigging while other towns are zagging. Not only did they build another mall, but they are expanding the older one. 
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My town built several, smaller, outdoor, malls 6-7 years ago.  This after most of the previous malls are empty lots or rat farms. The new malls are really struggling too.  FWIW 

 
I've worked for companies that went through Chapter 11 restructuring and all of them did so because the capital structure was turned upside down due to mismanagement by PE vampire squid. After emerging from bankruptcy, the companies all became profitable again. Until we start regulating LBOs and their structural disincentives to maintain corporate fiscal responsibility, Chapter 11 shouldn't be touched.

 
parasaurolophus said:
My town is zigging while other towns are zagging. Not only did they build another mall, but they are expanding the older one. 
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We are getting a lot of shopping center expansions here and the bulk of the businesses are booming.  They are obviously anchored by grocery stores, but the rest is fairly diverse.

 
timschochet said:
This morning I saw the headline on the news: “Forever 21 to declare bankruptcy.” Well not really, they are declaring Chapter 11 bankruptcy, meaning they will close down the stores that aren’t earning enough money, fire those employees, and screw over the landlords. Forever 21 has over 700 stores. 

As far as I’m concerned, this is legal theft. Forever 21 has been notorious for negotiating back end leases (in which the landlord gives them all kinds of breaks and tenant improvements, free rent, etc, for the first few years in exchange for long terms) for excess square footage that they did not need, usually in large malls. They borrowed tons of money to expand as quickly as possible. Now they’re going to close down whatever stores they want, with virtually no penalty, and then likely sell the remaining stores to a larger corporation- the executives will walk away much wealthier than before. Our President is no doubt very familiar with this scam; he did it 3-4 times. 

Our bankruptcy laws were established originally as a means for people who ran small businesses to avoid debtor’s prison. These days it’s become a way for large corporations to invest with little or no risk and collect the profits while others suffer. Particularly chapter 11. 

End of rant. 
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You do realize that “Forever 21” is just a legal entity, right?  And that in most cases where a company enters ch. 11, the owners of that company (ie the shareholders) lose all of their rights with regard to that company and effectively hand the keys to the creditors, right?  So who exactly are you talking about is “stealing” here?

Ch 11 was not created just to keep people out of jail.  It was created so that when a company can no longer meet its creditor’s obligations, there is an orderly process for the creditors, including landlords, to get what is owed to them.

The real estate contracts are treated the same as most other general unsecured claims (unless they were expressly written as otherwise).   The newly formed post ch.11 company will get to choose which contracts they would like to have survive the process and which ones they would like to break and therefore to have to settle a claim on.   Just as they would do for their loans, trade obligations, employee obligations, etc.

 
parasaurolophus said:
I am generally very opposed to laws regarding pay, but this is an area i would love to see it. I mean the government is already involved. So if we have a process that already has them involved we might as well make it fair. 

I would also like to see the regulations tightened regarding the bs marketing involved with some of these store liquidations. 
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It’s very fair.  People just don’t understand it.  What may not be fair though is the compensation that some management teams or shareholders may have received prior to driving the company into a filing.  Not sure how to address that problem.  

But ch 11 itself is fine, imo.  It’s by far the fairest system out there that I am aware of.  In many places like South America, Europe (esp france) and even CCAA in Canada, the shareholders and management teams get way more rights and control in the bankruptcy process and with that, have the ability to unduly benefit from something they do not deserve.

 
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timschochet said:
This morning I saw the headline on the news: “Forever 21 to declare bankruptcy.” Well not really, they are declaring Chapter 11 bankruptcy, meaning they will close down the stores that aren’t earning enough money, fire those employees, and screw over the landlords. Forever 21 has over 700 stores. 

As far as I’m concerned, this is legal theft. Forever 21 has been notorious for negotiating back end leases (in which the landlord gives them all kinds of breaks and tenant improvements, free rent, etc, for the first few years in exchange for long terms) for excess square footage that they did not need, usually in large malls. They borrowed tons of money to expand as quickly as possible. Now they’re going to close down whatever stores they want, with virtually no penalty, and then likely sell the remaining stores to a larger corporation- the executives will walk away much wealthier than before. Our President is no doubt very familiar with this scam; he did it 3-4 times. 

Our bankruptcy laws were established originally as a means for people who ran small businesses to avoid debtor’s prison. These days it’s become a way for large corporations to invest with little or no risk and collect the profits while others suffer. Particularly chapter 11. 

End of rant. 
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Of the several comments here that indicate a lack of understanding of the Chap 11 process, I think the most blatant may be the suggestion that the bankruptcy process will allow "the executives" to "walk away much wealthier than before."  Knowing nothing about this company other than what is stated here, I can say this is almost certainly going to be an asset sale (or "363 sale" in the parlance of bankruptcy geeks) with stock being cancelled and equity getting nothing.  Its possible executives gave themselves pre-filing sweetheart bonuses, but that's a corporate governance issue, not related to the bankruptcy process, and would have been approved by and ultimately paid by the secured lenders. Their stock and stock options are worthless.  There are a few different possible scenarios in play here, but its almost certain their primary lenders are calling the shots in this and its probably not happy times for the corporate execs.

As far as the landlords are concerned, they have to do some due diligence before entering into a back end lease.  Doing so gives you a much bigger stake in the tenant's financial performance.  Get some guarantees or some form of protection if you can, but otherwise recognize you're taking on risk / exposure and it may not pay off.

 
CletiusMaximus said:
Their stock and stock options are worthless.
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What if they had converted to preferred stock or already had preferred stock? 

ETA: My issue with this is that often times preferred stockholders will end up receiving some money and an agreement for new stock when the company emerges whereas the common stockholder gets worthless Q otc junk. 

Perhaps I am misunderstanding what happened but could swear I have seen several biotechs go down this route. 

 
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parasaurolophus said:
What if they had converted to preferred stock or already had preferred stock? 

ETA: My issue with this is that often times preferred stockholders will end up receiving some money and an agreement for new stock when the company emerges whereas the common stockholder gets worthless Q otc junk. 

Perhaps I am misunderstanding what happened but could swear I have seen several biotechs go down this route. 
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The general, inviolate rule is that equity won't get a penny in distributions from a bankruptcy estate unless general unsecured debt is paid in full with interest, which is extremely rare.  Preferred stock has certain advantages over common stock, but is still behind unsecured debt (trade, bond debt, etc.) on the priority ladder.  This is true in a reorganization or liquidation.  It is extremely rare that common or preferred stockholders get anything in a chapter 11 reorganization or liquidation.  Of course it has happened, but that is an extraordinary situation.

 
Would think the creditors, employees, and customers of Thomas Cook really wished they had chapter 11 and the benefits of the automatic stay at this point.  Good example of why our bankruptcy process is better than much of the rest of the world.  

 
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