In March it was announced that Sports Authority, a nation-wide sports retailer would be filing for Chapter 11. Now it looks like sports retailer Sports Chalet will be following in its competitor’s steps. It was just announced that owner Vestis Retail Group LLC, which operates Sport Chalet, Eastern Mountain Sports, and Bob’s Stores, has filed for Chapter 11 bankruptcy protection.
Sport Chalet Closing Stores as Result of Chapter 11 Filing
In a statement announced by Vestis, the company said it was planning to wind down Sport Chalet’s operations to focus on promoting the success of EMS and Bob’s stores.
“When Vestis first acquired EMS and Sport Chalet, each company faced significant operational challenges and was on the verge of liquidation,” said Mark Walsh, CEO of Vestis. “We have made significant progress in stabilizing the businesses and improving overall performance across all our brands.”
Walsh added that even though EMS and Bob’s have been performing solidly, they have also been burdened by limited financial flexibility “due, in part, to the unique competitive pressures facing Sport Chalet.”
Vestis has plans on shutting down all Sport Chalet stores, and will also be closing eight EMS stores in addition to one Bob’s store because of unfavorable real estate costs. Vestis went on to say that “the balance of the EMS and Bob’s lease portfolio will be evaluated for efficiencies as part of the company’s broader efforts to strengthen its financial performance.”
Vestis has plans to sale funds to Versa Capital Management, the private equity firm that owns Vestis. This plan will need to be approved in bankruptcy court, yet the company has a strong vision for the future: “The combination of EMS and Bob’s will be a stronger business partner with a renewed focus on the core successful operations in the eastern U.S., where they will continue to operate an approximately $400 million multi-channel retailer.”
Chapter 11 Common for Retailers
Sports Authority, American Apparel, and Pac-Sun are all clothing retailers that have recently fallen victim to the trend of consumers going online to shop in addition to stiff competition from the likes of H&M and Forever 21, two stores that regularly stock trendy affordable fashion.
It has become increasingly hard for brick-and-mortar stores to maintain a solid standing in an environment where consumers are looking for a one-stop-shop of sorts. This can be especially hard for smaller businesses, as well as niche-businesses that specialize in one form of clothing. When smaller stores run out of options to continue business as usual, it’s not unlikely for them to consider filing for Chapter 11 bankruptcy. As always, it’s advised that you work with a phoenix chapter 11 bankruptcy lawyer that can advise you on next steps if you are considering filing for Chapter 11 bankruptcy protection.
The Chapter 11 Bankruptcy Filing Process
The Chapter 11 bankruptcy process begins with the filing of a petition in bankruptcy court. Typically the debtor in these cases are corporations, partnerships, and limited liability companies. It should be noted that individuals are able to file Chapter 11 if they have too much debt or income to be able to qualify to file for Chapters 7 and 13.
While Chapter 11 is usually voluntary, sometimes creditors will file an involuntary Chapter 11 against a defaulting debtor.
Typically a debtor will file Chapter 11 where their primary place of business is located, but debtors are also able to file where they are “domiciled.” This just means where the business is incorporated or otherwise organized. The process can take anywhere from a few months to be finished, or can continue up to six months to two years.
Business Operations Typically Continue But Court Handles Major Decisions
While most Chapter 7 cases require that a trustee be appointed, a trustee is usually not appointed in Chapter 11. Rather, a debtor will continue day-to-day business operations as a “debtor in possession” (DIP). A bankruptcy court is able to appoint a trustee if it feels that the debtor has committed fraud, dishonesty, incompetence, or gross mismanagement of the debtor’s affairs.
Though a debtor is able to continue business operations, most major decisions are handed over to a bankruptcy court. Additionally, the bankruptcy court must approve the following:
any sale of assets, including property or real property. This excludes inventory sold by a retail debtor during ordinary course of business
either entering or breaking a lease of real or personal property
mortgages or other secured financing arrangements thatwill allow a debtor to borrow money after the bankruptcy case is filed
shutting down business operations
expanding business operations
entering or modifying contracts and agreements with unions, vendors, licensees or others and,
retention of and payment of fees and expenses to attorneys and other professionals.
Creditors Support or Oppose
Creditors, shareholders, and any other parties that hold an interest in the company have the option of either supporting or opposing actions requiring bankruptcy court approval. And the bankruptcy court must consider input from creditors, shareholders, and all other parties with an interest when deciding on how to proceed with the bankruptcy.
Unsecured Debt is not associated with a specific piece of property, which means that there is not specific property that serves as collateral for the debt. Unsecured creditors are able to participate in a Chapter 11 case through a committee that is appointed to represent all of the unsecured creditor’s interests.
Chapter 11 Reorganization Plan
A debtor typically has four months after filing Chapter 11 to propose a reorganization plan. These four months are usually considered exclusive, meaning that the debtor has the exclusive right to come up with the plan. This plan can also be extended or shortened.
After that “exclusivity period” expires, the creditors’ committee is able to propose a reorganization plan, although this is rare. Typically if creditors are dissatisfied with the debtor’s proposed plan, it will move to dismiss or convert the case to Chapter 7.
Confirmation of Chapter 11 Plan
Once a plan is approved it is referred to as “confirmation.” For a Chapter 11 plan to be confirmed, the plan must meet a number of requirements, including:
Feasibility. The proposed plan must be likely to succeed. This means that a debtor must be able to prove to the court that it will be able to raise enough revenue to cover its expenses over the plan term. This includes making all payments to creditors.
Good Faith. The plan must be proposed in good faith and not by means forbidden under applicable law.
Best Interests of Creditors. The plan must be in the best interests of its creditors. This means that creditors will receive as much in Chapter 11 as they would have if the debtor had gone through Chapter 7. Sometimes this means that a debtor will be required to pay creditors in full rather than just a fraction of what is owed.
Fair and Equitable. The plan must be deemed “fair and equitable” under the “fair and equitable” test. This means the following must be met:
Secured creditors (creditors that have a mortgage against real property or a lien against personal property included inventory or equipment) must be paid, over time, at least the value of their collateral.
The debtor is not able to retain anything on account of their equity interests unless all debts are paid in full. These debts can either be paid immediately following the confirmation of the plan, or over time. If paid over time, interest must be included. The bankruptcy court is able to allow equity holders (creditors) to retain ownership interests in the debtor in exchange for any “new money” that is contributed to pay expenses associated with reorganization of the debt. If this is not enabled by the court, equity holders lose all ownership rights once the reorganization plan is confirmed.
Some of the confirmation requirements apply only if the creditors vote against the proposed reorganization plan.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 11 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
AZBK Lawyers 668 N. 44th St., Ste 320, Phoenix, AZ 85008 (602) 648-3274