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COVID-19: A Massive Impediment to Bankruptcy Relief
The impact of COVID-19 on efforts of businesses to reorganize or even orderly liquidate in bankruptcy has been swift and devastating, particularly in the retail sector. Who could have ever thought that the economy would be so shut down that restructuring efforts under the Bankruptcy Code would be impossible? In the financial apocalypse of 2008, the notion was that certain financial institutions were too big to fail. With the COVID-19 pandemic, "too shut down to shut down" may be the mantra to describe efforts under the Bankruptcy Code.
Whether it is orderly liquidation or reorganization, COVID-19 is serving as a massive impediment to bankruptcy relief. With uncertainty as to when the pandemic will ease, Bankruptcy Courts do not seem to be a panacea leading to successful reorganizations or orderly liquidations for troubled companies.
Art Van Granted Chapter 7 Conversion
Pleadings in bankruptcy cases almost always lead with a chronological history of financial difficulties, including cash flow issues, burdensome debt loads, and oppressive litigation. COVID-19 has downgraded the significance of such chronologies for retailers.
Art Van Furniture and its affiliated entities (Art Van) filed for Chapter 11 bankruptcy protection in Delaware on March 8, 2020. The plan was to orderly liquidate certain stores, and operate other stores, while seeking going concern transactions. That plan quickly evaporated. On April 3, Art Van filed a motion to convert the Chapter 11 case to one under Chapter 7 of the Bankruptcy Code, where it will lose control of its businesses. The standard bankruptcy chronology had now been replaced. As described in Art Van's motion to convert:
These Chapter 11 Cases were pending for just three days when on March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) outbreak to be a pandemic. These Chapter 11 Cases were pending for just five days when on March 13, 2020 the Trump administration declared a national emergency in response to COVID-19 outbreak. These Chapter 11 Cases were pending for just six days when on March 14, 2020, government regulators in Pennsylvania, one of four states in which the Debtors' core retail operations are concentrated, issued guidance urging all non-essential business to close, with other states and localities soon to follow. And, these Chapter 11 Cases were pending for just eleven to fourteen days when the four states in which the Debtors' principal operations are located — Michigan, Pennsylvania, Ohio and Illinois — issued "stay at home" or "shelter in place" orders.
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