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Garnerville Bankruptcy Law Blog

Shoe retailer plans bankruptcy to shed unprofitable stores

Bankruptcy can serve many purposes for a financially stressed New York business, from restructuring its operations to increase profitability to liquidating its assets and going out of business. The women's shoe retailer Aerosoles is reported to be on the verge of filing a Chapter 11 bankruptcy petition that will allow it to close a number of unprofitable stores in the United States but continue operations.

Aerosoles manufactures and sells flats and wedges that emphasize comfort. The company sells its products in its own stores and in large department stores. Aerosoles has experienced stiffening competition from e-commerce and has experienced difficulty in making its products easily distinguishable from competitive brands.

Toys "R" Us considering bankruptcy protection

The changing retail markets in the United States have affected both large and small merchandisers. As big online retailers such as Amazon gain larger and larger shares of various markets, their competitors are facing dire financial futures. One of the most recognizable chains, Toys "R" Us, has already abandoned its flagship store in New York City and is now reported to be considering bankruptcy because of reduced sales and a heavy debt load.

The toy retailer has long dominated toy sales, and its strength was reflected in its purchase by three private equity firms in 2005. However, in the last decade, both Target and Walmart have expanded their toy sections and have taken customers from the company. Toys "R" Us first showed signs of trouble ahead when it closed its Times Square store in 2015. Now, it has reportedly retained a major law firm, Kirkland & Ellis, to assist it in coping with the twin problems of dwindling sales and enormous debt.

How does bankruptcy affect garnishment proceedings in New York?

The ability to seize a portion of a debtor's paycheck is one of creditors' most powerful collection tools under New York law. For low-income families, the loss of even a small portion of a regular paycheck can be catastrophic. Filing a petition for personal bankruptcy can help alleviate this problem by invoking the so-called automatic stay.

A creditor must obtain a valid and enforceable judgment for money before it can use the garnishment process. Once the judgment is obtained, the creditor can require the debtor's employer (or other party who owes money to the debtor) to pay to it a portion of the debtor's salary or wages by serving a garnishment summons on the employer. Thus, the garnishment proceeding is an extension of the original judicial process, and it is subject to the automatic stay provision in the Bankruptcy Act.

TV star found guilty of bankruptcy fraud

People who filed bankruptcy petitions often lose sight of their responsibility to be honest in their statements to the court and to the bankruptcy trustee. Both the court and the trustee possess the power to impose civil fraud penalties on persons who make material misstatements to the court. In a recent order in a New York business bankruptcy case involving TV star Chris Laurita of "Real Housewives of New Jersey," the trustee demonstrated the scope of this power.

Laurita caused his clothing firm Signature Apparel to file a bankruptcy petition in 2009. During the course of the lengthy proceeding, the bankruptcy trustee Anthony Labrosciano commenced a lawsuit against Laurita and his wife, Laurita's brother and sister-in-law, and another brother for improperly using Signature Apparel cash to pay for private jets, lavish vacations and expensive cars.

Bankruptcy court approves sale of 28 bagel shops

As many Rockland County businesses know, longevity is not always a guard against financial adversity. After opening the first Bruegger's Bagels shop in Rochester in 1983, the nation's oldest Brueggers' Bagels franchisee filed for Chapter 11 protection in March 2016. Now, the franchisee is proposing to sell its remaining shops to emerge from Chapter 11.

The franchisee, Flour City Bagels, LLC, opened its first Bruegger's shop in Rochester in 1983. The Rochester shop was the country's first Bruegger's Bagel shop. In the ensuing 33 years, Flour City added 31 more locations in Albany, Syracuse and Rochester. By the time that it was forced into bankruptcy, Flour City had amassed $10 million in debts owed to more than 200 creditors. The company employed 385 hourly workers and 40 salaried workers.

Payless Shoesource completes Chapter 11 bankruptcy plan

It used to be the case that people in New York and nationwide flocked to Payless Shoesource stores to purchase affordable footwear. But, the company fell on hard financial times, and had to file for Chapter 11 bankruptcy. Shoppers may be pleased to hear, however, that the company has recently emerged from the protection of the bankruptcy court after around 4.5 months, and has continued its business. Through bankruptcy, although the company had to close around 673 brick-and-mortar stores, it was able to pay over $435 million in debt. This debt represented around 50 percent of that the company estimated it had when it filed for bankruptcy.

The private-equity company is one of 14 businesses that filed for bankruptcy since January 2016 to succeed in finishing the bankruptcy restructuring process. The company's chief executive officer will step down, and an executive committee is in place to appoint a new CEO.

Ruling in Lehman bankruptcy shows risks of deferred compensation

The Lehman Brothers bankruptcy has been grinding along for several years, but it occasionally produces a judicial ruling that has importance outside the specific case. A recent ruling by the bankruptcy judge supervising the case provides an important reminder for employees that lucrative deferred compensation plans come with significant risks - including non-payment if the employer seeks a Chapter 7 or Chapter 11 bankruptcy.

In 1985, Lehman Brothers' corporate ancestor created a deferred compensation plan for its executives. Each plan participant was required to sign an agreement that provided in part that claims for payment under the plan "shall be subordinate in right of payment and subject to the prior payment or provision for payment in full of all claims" of all other creditors. In effect, this term placed claims for payment of deferred compensation last in line in a bankruptcy. The term placed deferred compensation payments on the same level as unsecured creditors, a notoriously unfavorable position.

Litigation finance - a new tool for unsecured creditors

When a bankruptcy proceeding ends, the debtor's unsecured creditors are often left wondering how to collect on what appear to be worthless claims. In business bankruptcies, a common target is the debtor's claims that are owned by the bankruptcy trustee. When risk is high and money is scarce, the trustee may not be willing to pursue what may otherwise be valuable claims. How can creditors acquire these claims and then recover what is due the debtor?

The answer is litigation finance. Litigation finance has been a source of money for law firms and clients who are trying to recover money in what appears to be a long and costly lawsuit. In return for financing the litigation, the litigation finance firm receives a portion of the recovery. In effect, the debtor's claim, now owned by one or more creditors, is used to secure the loan that permits the lawsuit to proceed. Bankruptcy creditors are now turning to litigation financing to help them obtain and recover on claims that the trustee does not wish to pursue.

What is a voidable preference in a bankruptcy proceeding?

New York businesses often have informal advance notice of a customer's plans to file a petition under either Chapter 7 or Chapter 11. In such cases, a creditor may attempt to persuade or coerce the debtor into paying off all or part of an existing or antecedent debt. These creditors may face an ugly surprise once the bankruptcy proceeding is underway: such payments may frequently be set aside as "voidable preferences" and the payment refunded to the bankruptcy trustee.

A voidable preference is a transfer of the property of the debtor to or for the benefit of a creditor made while the debtor is insolvent. The transfer must occur within 90 days prior to the filing of the bankruptcy proceeding. Payments to creditors who have "inside knowledge" of such a payment can be declared voidable if the transfer occurred within one year prior to the filing. The final part of the test is a showing that the transfer enabled the creditor to receive a greater portion of the debt than if the creditor had filed a claim in a Chapter 7 liquidation.

Understanding executory contracts in a bankruptcy proceeding

When a New York business faces bankruptcy, one of the first choices that must be made is whether to seek reorganization under Chapter 11 or dissolution under Chapter 7. Choosing Chapter 7 is essentially a choice to end the business's existence, whereas Chapter 11 reflects management's desire to continue the business with reorganized debts and perhaps additional capital. If a corporation chooses Chapter 11, management must decide which business relationships should be preserved and which should be ended.

The Bankruptcy Code gives the trustee or a debtor in possession the right to accept or reject all "executory contracts," including unexpired leases. Understanding the concept of an executory contract can be difficult, even for judges. Many federal courts define an executory contract as an agreement that is either unperformed or partially performed and where the failure of either party to perform would be deemed material breach of the agreement. Other federal courts look at the manner in which the contract is intended to function. Long term agreements such as a franchising agreement or patent licensing agreement would be deemed to be executory. Agreements in which both parties have performed, such as the repayment of a promissory note or completion of a contract for the sale of goods, are not considered to be executory contracts. Unexpired real estate leases are perhaps the most common example of an executory contract.

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