Something to Remember: The Flexibility of Chapter 11 in Retail Situations

Things Remembered and its advisers negotiated with both bidders, but the parties were unable to reach an agreement sufficient to establish either party as a stalking horse bidder. In the week preceding the Chapter 11 filing, however, a strategic buyer submitted a written proposal seeking to acquire a broader asset base than the other proposals — the direct business, more than 150 of Things Remembered's most profitable stores, and the company's valuable customer data. Things Remembered quickly moved to negotiate with this strategic buyer, reached an agreement on material terms, and moved toward definitive documentation. The deal, however, was premised on completing an in-court sale in only 30 days so that the buyer could acquire the business ahead of Things Remembered's peak spring season, where increased sales are driven by weddings, graduations and religious holidays.

Expedited In-Court Process

While all stalking horse bidders want to move through bankruptcy as quickly as possible, there was a real business rationale for the expedited timeline. If the buyer could not capture the increased sales of the spring season, the deal was not worth doing. Most going-concern in-court marketing processes require at least a 45- to 60-day timeline. In addition, the asset purchase agreement contemplated the sale of customer data, which would require the appointment of a consumer privacy ombudsman to assess whether the transaction appropriately accounted for consumer privacy considerations. Therefore, to meet the 30-day timeline, Things Remembered would need to have a consumer privacy ombudsman appointed on the first day of the case, which, again, departed from typical practice.

Following the Chapter 11 filing, Things Remembered took the timing challenges head-on, explaining that the need for speed was justified by business exigencies, and likewise, was permitted under the Bankruptcy Code. First, Things Remembered was proactive and worked collaboratively with U.S. Trustee before the Petition Date. Rather, than just articulating a compelling argument at the first day hearing, Things Remembered met with the U.S. Trustee early in the process to explain the need to consummate a quick transaction or face liquidation. Things Remembered discussed the need for a consumer privacy ombudsman immediately, giving the U.S. Trustee time before the filing to consider the relief, raise concerns, and select a consumer privacy ombudsman. Ultimately, at the first day hearing, the U.S. Trustee supported the novel relief of a consumer privacy ombudsman on the first day. Bankruptcy Courts rely heavily on the U.S. Trustee's office to vet a debtor's compliance with the Bankruptcy Code, so U.S. Trustee support is the best endorsement for quick case milestones.

Second, Things Remembered engaged in a robust prepetition marketing process before the Petition Date to test the market and obviate concerns that a short in-court process was not appropriate. Things Remembered explained in its pleadings, through declarations in support of the bid procedures and sale, and orally on the record, how the company scoured the market. Things Remembered's investment bankers also filed declarations in support of the bid procedures and sale, describing how the company engaged in hard-fought negotiations with multiple parties, only one of which was willing to buy the business with a store footprint.

Following formation of the creditors' committee, Things Remembered was immediately engaged. Only hours after the creditors' committee retained professionals, Things Remembered's advisors delivered a detailed diligence package and scheduled weekend calls to help them assess the transaction. The court leans on the creditors' committee to police aggressive debtors. When the committee also supported the sale timeline, because their constituents — vendors and landlords who depended on Things Remembered's business — stood to benefit from the sale, it was a strong endorsement for the transaction.

The bankruptcy judges in the District of Delaware have presided over many retail cases and are well-aware of the issues across the sector. They are also well-aware that it is not often that a Chapter 11 debtor, stalking horse bidder, U.S. Trustee, creditors' committee, and secured lender group line-up behind a shortened sale timeline. This result was possible because Things Remembered used the forum of Chapter 11 to proactively bargain with, and gain the support of, its many stakeholders. Things Remembered's 30-day sale is an example of the benefits of transparency and proactive stakeholder engagement. The Bankruptcy Code creates a broad set of rules for a debtor to engage with its many stakeholders to form consensus around a company's path forward. Without this consensus, precedent-setting transactions are not possible.

Conclusion

The odds were not in Things Remembered's favor in the days leading to its Chapter 11 filing. But, thanks to the efforts of its stakeholders and the Bankruptcy Court for the District of Delaware, Things Remembered's sale was approved on March 6, 2019 and closed on March 8, 2019 — only 30 days after the filing. Things Remembered is now pursuing confirmation of a Chapter 11 plan, which will distribute the proceeds of the sale and bring full closure to the Chapter 11 cases. Because the Chapter 11 process worked liked it is supposed to, there are still hundreds of Things Remembered stores operating across the country and, most importantly, thousands of employees are still employed.

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Christopher Greco is a partner and Spencer Winters and Derek Hunter are associates in Kirkland & Ellis' restructuring practice. This article also appeared in the New York Law Journal, an ALM sibling of The Bankruptcy Strategist.