PRLA Restaurant & Lodging Matters Summer 2020

28 •  PENNSYLVANIA RESTAURANT & LODGING matters  •  Summer 2020 SINCE THE NATIONWIDE SHUTDOWN, many people have been waiting for an avalanche of bankruptcy filings under Chapter 11. As of the writing of this article, there have only been a few notable filings, such as the XFL, Frontier Communications, and True Religion. While there has been a lot of anticipation about filings by large retailers, such as Neiman Marcus, Lord & Taylor, and JC Penny, none have filed. Some have suggested that the delay is the recognition that there is no advantage to filing at this time, because lenders and other creditors have limited options. For example, many state courts are closed, so while lenders could declare default under loan documents, they cannot start a lawsuit. However, while these companies are not yet filing, that doesn’t mean they are doing nothing. Rather, they are taking steps that will either keep them from having to file or aid them if they opt to file. Small businesses should be doing the same thing. Since the scope and duration of the shutdown is still unknown, it would be difficult for any company to be able to come up with its exit strategy. When a large retailer files for bankruptcy, even if it is going to reorganize, it will likely need to reduce its footprint, both in terms of location and inventory. The way that happens is some type of deep discount sale at the stores. Also, once a retailer (or any company) files, it will need to start paying its ongoing expenses (called administrative expenses in bankruptcy). By not filing, it can delay paying these expenses. What is happening for a number of retailers is the lenders are “lifelines,” either in the form of additional financing or debt forbearance agreements, which will delay the restructurings, whether in or out of court. Small businesses should be doing the same thing. Right now, lenders will most likely be amenable to assisting the borrower. This is also a good thought for anyone who you own money to or who owes you money. Planning now will make a difference down the road. Small businesses should also wait to file for bankruptcy under the Small Business Reorganization Act. There are a number of reasons for this, one of the most significant being that the filing starts the 90-day clock on filing the plan of reorganization Better to wait until there is clarity as to what will constitute the “new normal.” The same thing applies to landlords. Anecdotal evidence appears to be saying that the landlords are less flexible than the lenders. This may be because landlords are pressured to continue paying their debt service. If so, the landlords should be making the same calls to their lenders. Also, you should check to see if your state or local government has issued any guidelines What Small Businesses Can Learn From Large Business By Robert M. Bovarnick, Esquire, Bovarnick and Associates LLC