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Store Closing Lease Rejection in 'Shiekh Shoes'
Store closing or liquidation sales are a routine part of Chapter 11 cases involving retail debtors. These sales are consistently authorized by bankruptcy courts, despite lease provisions purporting to forbid them. See, In re R.H. Macy & Co., 170 B.R. 69, 77 (Bankr. S.D.N.Y. 1994). The sales are usually conducted in accordance with “sale guidelines” proposed by the debtor for court approval. Moreover, bankruptcy courts can authorize store closing sales that would otherwise violate state and local laws since federal bankruptcy law may preempt laws that contravene the underlying policies of the Bankruptcy Code. See, In re Shenango Group, Inc., 186 B.R. 623, 628 (Bankr. W.D. Pa. 1995).
Generally, leases of stores that are closed, unless the lease is a below market lease, are rejected pursuant to section 365 of the Bankruptcy Code and lease termination damage claims are capped under section 502(b)(6). The primary goal of Chapter 11 is rehabilitation of the debtor. NLRB v. Bildisco & Bildisco, 104 S. Ct. 1188, 1197 (1984). In furtherance of this goal, there is a long-standing principle of bankruptcy law that a debtor should not be compelled to perform under a pre-bankruptcy contract that is burdensome to the estate. Id. at 1198.
Shiekh Shoes
On June 15, 2018, the U.S. Bankruptcy Court for the Central District of California (Judge Vincent Zurzolo) entered an order approving the plan of reorganization of Shiekh Shoes, LLC, in the company's Chapter 11 bankruptcy (Case No. 2:17-bk-24626-VZ). Shiekh is a retailer of shoes, apparel and accessories. The company commenced its Chapter 11 case on Nov. 29, 2017. At that time, Shiekh operated 125 retail stores in 10 states, and had annual revenues of approximately $180 million.
Shiekh successfully emerged from Chapter 11, having beneficially modified dozens of leases, eliminated millions of dollars of debt, obtained new financing and closed unprofitable locations. At its inception, however, Shiekh's Chapter 11 case was dependent upon the court approving store closing sales at certain of Shiekh's locations, the rejection of leases for irreversibly unprofitable locations, and modification of leases to turn other stores profitable. The store closing sales were designed to achieve a number of goals critical to the debtor's ongoing viability, including: 1) generating cash to help address liquidity issues; 2) eliminating the expense of maintaining poorly performing stores; and 3) reducing the store footprint to a level that would support a viable reorganization.
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