Payless: Fighting the Label of Another Bricks and Mortar Store Gone Under

By: Jasmine Little*| Guest Writer

By BentleyMall (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

By BentleyMall (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

 

Another one bites the dust. Payless ShoeSource, the largest chain for footwear, recently filed chapter 11 bankruptcy in April of 2017. The chain has high hopes to avoid being labeled as one of the many bricks and mortar focused retail companies that permanently closes its doors, like Sports Authority Holdings Inc. and Wet Seal. However, the odds are not in the chain’s favor. Not only has Payless’ bankruptcy plan prompted questions from its unsecured creditors but the retail market in general is seeing a soar in bankruptcy filings and store closings. The retail industry is most susceptible to liquidating its assets and shutting down permanently after filing bankruptcy than is any other sector of the market. AlixPartners firm research study found that once a retail company files for bankruptcy, there is a about a fifty-five percent chance that it will never reopen.

While Payless has not yet chosen to liquidate all assets and call it quits, the bankruptcy proceedings may not go as smoothly as the chain hopes. Creditors claim Payless is attempting to take the “fast-track” to the despair of the chain’s general unsecured creditors. Leaving those creditors, largely vendors and suppliers, with $150 million in unpaid claims under the proposed plan. All unsecured creditors are requesting a more detailed liquidation and distribution analysis and missing information from valuation statements.

Payless is proposing to initially close 400 of its 4,400 stores in order to slash forty percent of its $838 million debt. The chain will close even more stores if its ongoing lease negotiations fail. Payless has a maximum of 210 days after filing bankruptcy to decide which of the remaining 4,400 stores will shut down. Under the Bankruptcy Code, a debtor can choose to break the lease or remain under the lease after filing a Petition with the Court. If the debtor chooses to remain under the lease after filing a Petition, the landlord’s post-petition claims are classified as administrative claims which are subject to full payment by the debtor. However, if the debtor breaks the lease upon filing bankruptcy, the landlord is classified as a general unsecured creditor. General unsecured claims do not require full payment and the landlord may receive substantially less than owed. Unfortunately, the clock is ticking for Payless to determine which stores’ profit margins are sufficient to run the risk of administrative claims. A common practice for retailers is to reject leases where stores are underperforming, and, as of now, it seems Payless intends to follow this common practice.

Payless and its unsecured creditors may rack up some attorney fees disputing the plan, yet one interesting question is what is to blame for Payless’ fumble? The company has attributed its current position to the market surrounding bricks and mortar retail space, internet presence, and a shipment mishap that occurred in 2015.

Jasmine R. Little is a second year law student at Wake Forest University School of Law. She graduated from East Carolina University Magna Cum Laude and holds a Bachelor of Science Degree in Political Science with a minor in Business Administration. Upon graduation, she intends to practice bankruptcy law or civil litigation.