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Presenting a live 90-minute webinar with interactive Q&A

Retail Bankruptcies: Key Issuesfor Debtors, Landlords and Vendors

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, JUNE 15, 2017

Felice R. Yudkin, Member, Cole Schotz, Hackensack, N.J.

George M. Cheever, Of Counsel, K&L Gates, Pittsburgh, Pa.

Jacob S. Frumkin, Cole Schotz, Hackensack, N.J.

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June 15, 2017

Overview of Retail Bankruptcies/Recent Surge in Filings Introduction of Model Case Pre-Bankruptcy Planning First Day Relief Landlord/Tenant Issues Creditor/Vendor Issues Going Out of Business (GOB) Sales

6

There have been a rising number of larger retailerbankruptcies since the beginning of 2017. Studies show that consumers are making more online

purchases and shifting their spending toward travel andother experiences. Inventory in physical stores continues to outweigh

shopper demand. The number of stores on Moody’s distressed list is at the

highest level. Since the beginning of 2017, over 10 retailers including

The Limited, Wet Seal, Eastern Mountain Sports, Bob’sStores, BCBG Max Azria, Payless and Rue 21 have filed forbankruptcy.

7

The debtor (XYZ LLC) is a specialty retailer of teen apparel andaccessories. The debtor sells its merchandise to customers in 48 states through its

online store and 1,180 brick and mortar stores located in various stripcenters, regional malls and outlet centers. The debtor has 15,800 employees including 12,300 part-time

employees. The debtor has the following outstanding pre-petition liabilities:

$72 million on an asset based loan $521 million on a secured term loan $239 million of unsecured notes $50 million trade debt

The debtor’s business performance has come under significantpressure in recent years including a decline in in-store transactions. The debtor relies on vendors, shippers and warehousemen to ensure

supply of goods to retail stores and customers.

8

Retention of Advisors Counsel Investment Banker Financial Advisor Liquidator

Secure DIP Financing (if necessary)

Prepare Communications Plan

9

Customer Programs Motion Attempt to maintain goodwill and customer relationships, and to attract new customers. 11 U.S.C. §§ 105(a), 363(b), 503(b)(1) and 1107(a); “doctrine of necessity” Payment of administrative fees associated with running such programs.

Gift Cards Liabilities for unredeemed gift cards purchased prior to petition date. E.g., In re RadioShack Corp., Case No. 15-10197 (Bankr. D. Del.) ($44 million); In re Am.

Apparel, Case No. 15-12055 (Bankr. D. Del.) ($5.1 million) 11 U.S.C. § 507(a)(7) - priority for unsecured claims relating to “customer deposits.” Inconsistent treatment by bankruptcy courts In re City Sports, Inc., 554 B.R. 329 (Bankr. D. Del. 2016) (general unsecured claims) In re BGI Inc., f/k/a Borders Grp. Inc., 476 B.R. 812 (Bankr. S.D.N.Y. 2012) (no distributions

for untimely filed proofs of claim because holders were not “known” creditors) The Shaper Image Corp., Case No. 08-10322, Dkt. No. 2243 (Bankr. D. Del.) (priority

subject to court-approved claims process) In re WW Warehouse, Inc., 313 B.R. 588 (Bankr. D. Del. 2004) (claims filed by holders of

unused gift certificates entitled to priority)

10

Refund/Return and Exchange Programs GOB sales likely carved out.

Credit Cards Includes setoff of processing obligations (fees and chargebacks) against

amounts remitted to debtor.

Spending, Promotional, Coupon and CustomerLoyalty Programs E.g., coupons upon spending set dollar amounts; seasonal and item

specific sales

Extended Service Contract and Warranty Programs

11

Critical Vendor Motion Seeks authority to pay prepetition claims of certain vendors essential to the debtors’

operations. 11 U.S.C. §§ 105(a), 363(b), 503(b)(9), 1107(a) and 1108 Subject to a set limit/cap for all such claims.

Critical vendor criteria include whether: Vendor is a sole or limited source or high volume supplier; Debtors can find an alternative vendor; Vendor is holding/fulfilling a large order that is at risk of loss upon nonpayment; and Vendor is able or likely to refuse to perform services or to ship products if prepetition

balances are not paid.

Examples American Apparel – component and raw materials suppliers, yarn and fabric suppliers,

contract knitters Gander Mountain – IT, data and retail website services, retail operations services

12

Trade Agreements Payment conditioned upon the vendor’s execution of a trade agreement

including the following terms, among others: Continuance of the parties’ existing relationship on terms at least as

favorable as prepetition practices and programs. Release of goods/assets owned by the debtors in the vendor’s possession.

When the critical vendor has executed a trade agreement and thereafterceases providing products or services under the agreement, payments tothat vendor may be deemed unauthorized postpetition transfers under 11U.S.C. §§ 549 and the debtors may, among other things: Seek to recover the payments in cash. Apply the payments against any administrative claim of the vendor.

Authorizes banks to process and honor checks presentedfor the payment of, and transfers related to, suchobligations.

13

Employee Wages Motion Maintain employee goodwill and ensure continuation of their services 11 U.S.C. §§ 105(a), 363(b), 507(a)(4), 507(a)(5), 541(b)(7), 541(d) E.g., accrued wages and salaries, employee benefits (such as vacation and sick time,

employee expenses

Banks authorized to process checks/ electronic transfers drawn on the debtors’ bankaccounts to pay such obligations.

Administrative processing costs included.

Retail-Specific Aspects Employee bonuses E.g., sales goals for periods of time

Employee commissions

14

As explained in the legislative history to Code Section 502(b)(6):

“[T]he phrase ‘lease of real property’ applies only to a ‘true’ or‘bona fide’ lease and or interests therein, and does not apply tofinancing leases of real property or interests therein, or to leases ofsuch property which are intended for security”

Financing “leases” are in substance installment sales or loans. The“lessors” are essentially sellers or lenders and should be treated assuch for purposes of bankruptcy law.

“The distinction between a true lease and a financing transaction isbased on the economic substance of the transaction and not, forexample, upon the locus of title, the form of the transaction or thefact that the transaction is denominated as a lease.”

15

The stay applies to all of a landlord’s default remedies under anunexpired real property lease, including actions to terminate thelease and eviction proceedings.

The stay does not apply to “any act by a lessor to the debtor ofnonresidential real property that has terminated by the expiration ofthe stated term of such lease before the commencement of orduring [the case] to obtain possession of such property.” CodeSection 362(b)(10).

The automatic stay does apply to lease terminations initiatedbecause of the tenant-debtor’s default. The landlord will need relieffrom the stay to complete the eviction process and recoverpossession.

16

An unexpired lease may not be terminated or modified during acase “solely because of a provision in such … lease that isconditioned on:

The insolvency or financial condition of the debtor at any timebefore the closing of the case;

The commencement of the case…; or The appointment or taking possession by a trustee … or a

custodian” before the case is filed. Code Section 365(e)(1).

17

An ipso facto clause will be enforceable if “(i) applicable law excusesa party, other than the debtor, to such … lease from acceptingperformance from or rendering performance to the trustee or to anassignee of such … lease, whether or not such … lease prohibits orrestricts assignments of rights or delegation of duties: and (ii) such partydoes not consent to such assumption or assignment….” Code Section365(e)(2)(A).

Ipso facto defaults need not be cured as a precondition to leaseassumption.

18

What “assumption” means:

The debtor or its assignee gets all the benefits of the lease,including the right to remain in possession for the remainder of thelease term.

In return, the debtor or its assignee must assume all the burdens ofthe lease, including the cure of existing payment defaults andperformance of the tenant-debtor’s ongoing obligations underthe lease for the remainder of its term.

19

What “rejection” means:

The debtor is deemed to have breached the lease. The debtor must surrender possession. The debtor is relieved from its ongoing performance obligations

under the lease. The landlord’s claim for damages resulting from the tenant-

debtor’s breach (including damages for breach of futureperformance obligations) is treated as a pre-petition claim, subjectto a statutory cap.

20

Assumption requires court approval. It’s not enough to simply tell thelandlord.

Rejection likewise requires court approval, unless a statutory deadlinefor approval passes.

Assumption or rejection may be provided for in the tenant-debtor’sChapter 11 Plan.

To obtain court approval for assumption or objection prior to planconfirmation, the tenant-debtor must proceed by motion. SeeBankruptcy Rule 6006.

21

“ [A]n unexpired lease of nonresidential real property under which thedebtor is the lessee shall be deemed rejected, and the trustee shallimmediately surrender that nonresidential real property to the lessor, ifthe trustee does not assume or reject the unexpired lease by theearlier of

(i) the date that is 120 days after the date of the order for relief; or(ii) the entry of an order confirming a plan.

The court may grant an extension for 90 days “for cause.” Further extensions require “prior written consent of the lessor in each

instance.” Code Section 365(d)(4).

22

Code Section 365(d) requires the tenant-debtor to “timely perform allof the obligations of the debtor…arising from and after the order forrelief under any unexpired lease of nonresidential real property, untilsuch lease is assumed or rejected … .”

There is an exception for obligations as to which a breach wouldbe an ipso facto default of the sort described in Code Section503(b)(2), e.g., financial covenants. The tenant-debtor need notperform these obligations.

23

Performance under Code Section 365(d)(3) is requirednotwithstanding Code Section 503(b)(1)(providing for the allowanceof administrative expenses after notice and hearing).

“The court may extend the time for performance of any suchobligation that arises within 60 days after the order for relief, but thetime for performance may not be extended beyond such 60 dayperiod.”

24

Tenant-debtor’s obligation is to pay the full amount specified in thelease--not just the reasonable value of its actual use andoccupancy.

When does an obligation “arise” for purposes of Code Section365(d)(3)? The “billing date” or “performance date” approach: “An obligation arises when one

becomes legally obligated to perform.” So, for example, real property taxreimbursement obligations coming due post-petition must be paid in full, even thoughsome of the taxes were assessed for pre-petition periods. In re Montgomery WardHolding Corp., 268 F.3d 205, 209 (3d Cir. 2001).

The “proration” approach: e.g., real property taxes for a period that spanned thepetition date and billed post-petition must be pro-rated as of the petition date. In reHandy Andy Home Improvement Ctrs., Inc., 144 F.3d 1125 (7th Cir. 1998).

25

Courts have used several different approaches:

The “breakpoint” approach--the “breakpoint” is the date when thetenant’s sales reach the minimum amount necessary to trigger theaccrual of percentage rent. If the breakpoint occurs on or after thepetition date, all the percentage rent accruing during the lease yearis payable under Section 365(d)(3). If the breakpoint occurs prior tothe petition date, only post-petition sales will be taken into accountin determining the percentage rent payable under Section 365(d)(3).Any percentage rent accruing after the breakpoint but before thepetition date will not have any priority.

26

The “billing date” approach--Courts looks to date on whichpercentage rent becomes due, irrespective of when the percentagerent accrued. So, for example, if the due date occurs after thepetition date, all the percentage rent is a Section 365(d)(3) expense,even if the lease year ended prior to the petition date.

27

The “sales volume” approach-- Percentage rent payable as a priorityitem under Code Section 365(d)(3) determined by pro-rating totalpercentage rent accrued for the lease year based on post-petitionsales.

The “calendar” approach--Percentage rent payable as a priorityitem under Code Section 365(d)(3) determined by pro-rating totalpercentage rent accrued for the lease year based on portion oflease term elapsing after the petition date.

For a good summary of these different approaches see 4 CollierBankruptcy Practice Guide ¶ 68.05[2][c][iii] (2016).

28

A motion for approval of the assumption or rejection of anunexpired lease should be evaluated under the “businessjudgment” test. See In re G Survivor Corp., 171 B.R. 755, 757-8(Bankr. S.D. N. Y. 1994).

Factors that courts have considered include: Whether the lease burdens the estate financially; Whether rejection would result in a large claim against the estate; Whether the movant has shown real economic benefit from rejection; and Whether balancing the equities, rejection will do more harm to the lessor

than to the estate if the lease is not rejected.

29

The fundamental overriding question is whether the proposedassumption or rejection will benefit the estate. Id. at 758; see also Inre Exide Techs., 340 B.R. 222 (Bankr. D. Del. 2006); In re Helm, 355 B.R.528 (Bankr. S.D.N.Y, 2006) (holding that a mere showing that rejectionwill benefit the estate is sufficient to satisfy the business judgmenttest).

30

If the tenant-debtor is in default under the lease but the lease has notbeen terminated, the tenant-debtor can assume the lease if thefollowing conditions are satisfied:

The tenant-debtor must cure all payment defaults and otherdefaults that are capable of complete cure, or provide“adequate assurance” that it will “promptly cure” all such defaults.

31

Non-payment defaults that are inherently incapable of beingcompletely cured because they are historical facts (e.g., violation oflease provisions barring the tenant from “going dark” or requiring thetenant to maintain the lease premises) will be deemed cured by“performance at and after the time of assumption in accordancewith such lease” and “pecuniary losses resulting from such defaultshall be compensated” like payment defaults (i.e., immediate or“prompt” payment in full and ”adequate assurance of futureperformance”). Code Section 365(b)(1).

Ipso facto defaults need not be cured as a condition to leaseassumption. Code Section 365(b)(2).

32

Code Section 365(b)(3) provides some specific criteria for determining”adequate assurance of future performance” under a shoppingcenter lease. In this context the concept includes adequateassurance:

“of the source of rent and other consideration due under suchlease,”

“that the financial condition and operating performance of” anyproposed assignee and its guarantors (if any) will be “similar to thefinancial condition and operating performance “of the originallessee and its guarantors (if any);”

33

“that any percentage rent under such lease will not declinesubstantially;”

“that assumption or assignment of such lease is subject to all theprovisions thereof,” including (for example) “radius, location, use,and exclusivity provisions” and “will not breach any such provisioncontained in any other lease , financing agreement, or masteragreement relating to such shopping center;” and that

“assumption or assignment of such lease will not disrupt any tenantmix or balance in such shopping center.”

34

A tenant-debtor may assign the debtor’s rights under an unexpiredlease only if the debtor assumes the lease and “provides adequateassurance of future performance by the assignee … whether or notthere has been a default in such … lease.” Code Section 365(f).

Contractual provisions and provisions in applicable law that prohibitor restrict lease assignments by tenant-debtors are generallyunenforceable. Code Section 365(f)(1) and (3). This may include provisions requiring the tenant to share the

proceeds of the assignment with other parties, and userestrictions that are actually designed to inhibit leaseassignment. See, e.g., In re Standor Jewelers W., Inc. , 129 B.R.200 (BAP 9th Cir. 1991); In re U.L. Radio Corp., 19 B.R. 537 (Bankr.S.D.N.Y.1982).

35

Prior to the enactment of the BAPCPA amendments to theBankruptcy Code in 2005, retailor-debtors sometimes disposed oflarge portfolios of potentially valuable but unwanted store leases byselling “designation rights” to brokers or other potential buyers whothereby acquired the right to designate which leases would beassumed and assigned to the buyer or other new lessees and whichleases would be rejected. The buyer would pay a premium to thetenant-debtor, and undertake to pay the carrying cost of the leasesduring the marketing/review period. See In re Ames Dept. Stores,Inc. , 287 B.R. 112 (Bankr. S.D.N.Y. 2002) (holding that designation rightare property that can be sold in case under the Bankruptcy Codeand that the sale of such rights does not involve an impermissibledelegation of the trustee’s duties).

The tighter time limits on lease assumptions introduced by BAPCPAhave made this technique harder to use without the cooperation ofthe landlords involved.

36

A tenant-debtor’s rejection of a lease is deemed a breach of thelease immediately prior to the commencement of the case. CodeSection 365(g).

Rejection does not necessarily mean the lease is terminated. See Inre Teleglobe Commc’ns Corp., 304 B.R. 79 (D. Del. 2004)(“Rejection”of a lease does not constitute “termination” of the lease; since“termination “ did not occur prior to “rejection,” the debtor-lessee’scontractual repair and removal obligations arising on terminationwere not within the scope of Code Section 365(d)(3)).

The tenant-debtor’s deemed breech of the lease means that, unlessthe damages fall within the scope of Code Section 365(d)(3), anyclaim of the landlord for damages due to any breach of the leasewill be a general, non-priority claim.

37

A “claim of a lessor for damages resulting from the termination of alease of real property” will be disallowed to the extent “such claimexceeds—

(A) the rent reserved by such lease, without acceleration, for thegreater of one year, or 15 percent, not to exceed three years, of theremaining term of such lease, following the earlier of --(i) the date of the filing of the petition; and(ii) the date on which such lessor repossessed or the lesseesurrendered, the leased property; plus

(B) any unpaid rent due under such lease, without acceleration, onthe earlier of such dates.” Code Section 502(b)(6).

38

Prior to the BAPCPA amendments, a tenant-debtor’s assumption of alease committed the debtor-tenant to pay in full all future obligationsarising under the lease--a potentially crushing burden if the leaseassumption proved improvident.

Subsequent rejection of an assumed lease offered no relief from thisburden.

The BAPCPA amendments added Code Section 503(b)(7), whichmitigated this risk by capping the lessor’s claim for damages sufferedby reason of post-rejection defaults by the tenant-debtor whorejected a previously assumed lease.

39

The cap limits the portion of the lessor’s claim entitled toadministrative expense priority to “a sum equal to all monetaryobligations due, excluding those arising from or relating to a failure tooperate or a penalty provision, for the period of 2 years following thelater of the rejection date or the date of actual turnover of thepremises, without reduction or setoff for any reason whatsoeverexcept for sums actually received or to be received from an entityother than the debtor,…”

The lessor’s “claim for remaining sums due for the balance of theterm of the lease” is not eliminated. Instead, it is treated as “a claimunder section 502(b)(6),” that is, a general unsecured claim subjectto the cap imposed by that statutory section.

40

Arrangement where vendor delivers goods to buyer/consignee, butretains title to goods pending a sale of the goods to a third party. Consignee often has the right to return the consigned goods if the consignee is unable

to sell or use the goods U.C.C. §§ 9-102(a)(20), 9-103(d), 9-317(a), 9-319, 9-324

Free and clear sales In re Sports Authority Holdings, Case No. 16-10527 (Bankr. D. Del.)

Consignment vendors opposed proposed sales on the basis that theyretained title to the consigned goods under their consignmentagreements with the debtors (i.e., the consigned goods were notproperty of the bankruptcy estate).

Ownership issues ultimately not decided due to a settlement. Highlights need for consignment vendors to satisfy UCC Article 9

requirements notwithstanding language in underlying consignmentagreement.

41

The BAPCPA amendments to the Bankruptcy Code, enacted in 2005,included Code Section 503(b),which created a new category of“administrative expenses” entitled to priority under Code Section507(a)(2).

This new administrative expense category encompasses “the valueof any goods received by the debtor within 20 days before the dateof commencement of a case under this title in which the good havebeen sold to the debtor in the ordinary course of the debtor’sbusiness.”

42

Issue: Does a creditor that delivers goods to a third party in a“drop shipment” transaction qualify for Section 503(b)(9)treatment?

Received by the debtor element of Section 503(b)(9): “thevalue of any goods received by the debtor in which thegoods have been sold to the debtor … .”

The term “received” is not defined in the Bankruptcy Code. Courts look to the Uniform Commercial Code definition of

“receipt” which focuses on physical possession.

43

Courts have consistently held that goods received by adebtor’s customers in a “drop shipment” transaction are notcompensable under Section 503(b)(9). In re Plastech Engineered Prods., Inc., No. 08-42417, 2008 WL 5233014 (Bankr. E.D. Mich.

Oct. 7, 2008) (sustaining debtors’ objection to 503(b)(9) claim for goods delivered to adebtor’s customer)

In re Momenta, Inc., Case No. 11-cv.479-SM, 2014 WL 3765171 (D.N.H. 2014) (affirmingbankruptcy court’s denial of 503(b)(9) claim for goods that were shipped directly tothe debtor’s customers)

In re World Imports, 516 B.R. 296 (Bankr. E.D. Pa. 2014) (holding goods shipped directlyto the debtor’s customers were not “received” by the debtor for purposes of Section503(b)(9)

In re SRC Liquidation Co., Case No. 15-10541 (BLS) (Bankr. D. Del. Oct. 15, 2015)(transcript of bench ruling) (“[W]hile it may be a business relationship developed oflong practice and, frankly, for the benefit and at the direction of the Debtor,nevertheless, the circumstances of that business relationship and the way product wasmoved from one party to another is such that it take it outside the scope of Section503(b)(9).”)

44

U.C.C. Section 2-702 provides in part:

(2) Where the seller discovers that the buyer has received goods on creditwhile insolvent he may reclaim the goods on demand made within ten daysafter the receipt , but if misrepresentation of solvency has been made to theparticular seller in writing within three months before delivery the ten daylimitation does not apply. Except as provided in this subsection the seller maynot base a right to reclaim goods on the buyer’s fraudulent or innocentmisrepresentation of solvency or of intent to pay.

(3) The seller’s right to reclaim under subsection (2) is subject to the rights of abuyer in the ordinary course or other good faith purchaser under this Article(Section 2-403). Successful reclamation of goods excuses all other remedieswith respect to them.

45

Code Section 546(c) provides in part:

(1)[S]ubject to the prior rights of holder of a security interest in such goods orthe proceeds thereof, the rights and powers of the trustee under section 544,545, 547, and 549 are subject to the right of a seller of goods that has soldgoods to the debtor, in the ordinary course of such seller’s business, to reclaimsuch goods if the debtor has received such goods while insolvent, within 45days before the date of the commencement of a case under this title, butsuch a seller may not reclaim such goods unless such seller demands inwriting reclamation of such goods-- (A) not later than 45 days after the date of receipt of such goods by the

debtor; or (B) not later than 20 days after the date of commencement of this case, if

the 45-day period expires after the commencement of the case.

46

(2) If a seller of goods fails to provide notice in the mannerdescribed in paragraph (1), the seller still may assert the rightscontained in section 503(b)(9).

47

Shippers Facilitate the shipment/movement of goods via land, air and water. E.g., common carriers, freight forwarders, customs brokers, logistics providers.

Warehousemen Store goods in transit. E.g., Bailees, storage facilities, distribution centers.

Possessory Liens These parties may holds liens against property of the debtors that is in their

possession for which payment has not been rendered. As a result, they may refuse to release goods in their possession unless their

prepetition claims are paid (see 11 U.S.C. 362(b)(3)). Based on state laws and the UCC. E.g., UCC § 7-307

May be entitled to adequate protection under 11 U.S.C. § 363(e).

48

First Day Relief 11 U.S.C. §§ 105(a) and 363(b) Often contain requirement that shippers/warehousemen execute a

trade agreement similar to critical vendors (e.g., continuation ofpast practices, release of goods for payment). Related claims for the payment of customs duties may be entitled

to priority under section 507(a)(8)(F) of the Bankruptcy Code.

49

Retail debtors often choose to liquidate inventory atunprofitable locations through Bankruptcy Court approvedgoing out of business sales (known as “GOB Sales”).

GOB Sales are also conducted outside of bankruptcy and arehighly regulated by state and local authorities. State statutesand local regulations often limit a merchant’s ability toconduct such sales in an effort to protect consumers fromdeceptive practices and protect other businesses from unfaircompetition. State and local authorities require a license and a fee to hold a

GOB Sale. Certain state and local laws have regulations that limit, among

other things, the length of the GOB Sale, advertising andrepeated GOB Sales in certain period of time.

50

Merchant – The retailer/debtor who engages anAgent to conduct the GOB Sale Agency Agreement: The agreement between the

Merchant and Agent Agent: The third party who enters into the Agency

Agreement and conducts the GOB Sale

51

An Agent is usually selected through a competitivebidding process similar to a 363 sale process. Stalking horse Agent Bidding Procedures Bidding Protections such as break-up fee

Highest and best offer is selected after an auction.

52

The Agency Agreement is the agreement thatgoverns the rights and obligations between theAgent and Merchant. The Agency Agreement identifies:

Consideration the Merchant will receive Methodology for a physical inventory Inventory subject to the GOB Sale Conditions Precedent Guaranteed Amount Threshold Sharing Augmentation

53

Efficient Experience and expertise of Agent in conducting

GOB Sales. Agent typically assumes any costs associated with

the operation of stores during the GOB Sale Processincluding lease expenses, payroll and advertisingcosts.

54

Leases often prohibit or limit GOB Sales. Section 365(d)(3) requires the debtor to “timely perform all the

obligations” under a lease that arise on and after the petition date. Majority of courts allow GOB Sales to go forward notwithstanding

restrictions in leases. Landlords often raise the following issues key issues with respect to

GOB Sales: Duration Hours of Operation Mall/Shopping Center Regulations Compliance with the Law Signage and Advertising Merchandise Rent and Lease Obligations Maintenance of Premises

55

Fair Advertising – Bankruptcy courts require that in conductingGOB Sales, debtors must be honest in their advertising andcannot violate regulations that affect public safety.

Augmentation of Inventory What is augmentation? GOB Sales supplemented with goods not

present at the store. Local and state authorities dislike augmentation. Authorities require

prominent disclosure of augmented goods and assurances thataugmentation will not extend the term of the GOB Sale.

Bankruptcy courts are more lenient in allowing augmentation if theinventory is from the Merchant’s other stores.

Bankruptcy courts are more inclined to prohibit augmentation where theaugmentation is excessive and in the interests of the Agent rather thanthe estate.

56

State Statutes Some GOB Sale statutes and regulations are not applicable if the

sale is conducted pursuant to a Bankruptcy Court order. Supremacy Clause Bankruptcy Courts have the authority to approve sale that may

otherwise be prohibited by state and local statutes, based ongeneral Supremacy Clause theories.

28 U.S.C. § 959(b) 28 U.S.C. § 959(b) requires trustees and debtors to comply with

state law when managing property in a bankruptcy proceeding. Certain courts have held that 28 U.S.C. § 959(b) does not apply to

debtors or their Agents liquidating assets. Bankruptcy Courts’ authority to preempt state and local

regulations, however, is not unfettered.

57

George M. CheeverOf Counsel, K&L Gates LLPT: +1.412.355.6544george.cheever@klgates.comJacob S. Frumkin

Associate, Cole Schotz P.C.T: +1.646.563.8944jfrumkin@coleschotz.com

Felice R. YudkinMember, Cole Schotz P.C.T: +1.201.525.6261fyudkin@coleschotz.com