Do shoppers suffer too much in bankruptcy, or should they be expected to share the pain?

Retailers come and go. Some are iconic brands, while others defined consumer shopping habits and American culture. Failures occur because of increased competition, upheaval in regional and national economies, new technology, poor management and even brand obsolescence. Some brands have disappeared, like Blockbuster, Borders, Builders’ Square, Circuit City, K.B. Toys, Musicland, Montgomery Ward and Woolworth. Others retrench, like RadioShack ’s transformation into a smaller chain of co-branded Sprint retail and electronics stores and Target’s departure from Canada. Still others have shed their bricks and mortar to become exclusive online retailers: Delia’s, Linens ‘n Things, Service Merchandise and Sharper Image. Alco , Anna’s Linens, Body Central, Cache, Coldwater Creek, Deb Shops, and Dots/Simply Fashion, among others, have all departed the bricks and mortar retail landscape over the last 18 months.

Ironically, consumers face both pain and opportunities in retail bankruptcies and liquidations. While they are an integral part of the retail business cycle, retail liquidations have increased in recent years—and consumers have no reason to believe that trend will abate any time soon. According to the UCLA-LoPucki Bankruptcy Research Database, only 39.5% of large public retailers liquidated in the 25-year period through 2005 while 58.8% have liquidated since that time, through 2013. That research is supported by findings in the New Generations Public and Major Private Companies database, where approximately 62% of retail cases ended in liquidation during the same period from 2006 to 2013.

Moreover, in recent years, as lenders and other retail creditors have sought to maximize their recoveries in an increased landfill of retail liquidations, retailers’ intellectual property (including their customer lists and other private customer-related information) has been sold at public auction to the highest and/or otherwise best bidder. Consumers’ gift cards have gone largely unredeemed with little solace in the complex bankruptcy claims administration process. And consumers who live in underserved communities—often the poorer, older and otherwise challenged among us—lose access to services that most of us take for granted, like the corner drug store, grocery mart and dry cleaners.

While bankruptcy practitioners, asset monetization firms, courts and state attorneys general have worked together to protect legitimate consumer privacy rights, there is less short-term assistance available to mitigate against worthless gift cards and neighborhoods devoid of retailers. On the other hand, many consumers benefit during retail liquidations by obtaining great values and the ability to shop in stores that they may not have otherwise been able to afford by bargain shopping at going-out-of-business sales. Also, the growth of online retailing has blunted the loss of near-by retailers in many brand categories, although sometimes at the expense of superior customer service.

Whatever the appropriate allocation of pain amongst a retailer’s constituents—and landlords, suppliers and lenders to a failed retailer believe that they shoulder most of the pain with consumers largely unscathed—the retail community, restructuring professionals and Congress are paying attention to the increased rate of retail liquidations and the related loss of jobs and economic dislocation. Michelle Harner, the reporter to the American Bankruptcy Institute Commission to Study the Reform of Chapter 11, recently observed that witnesses before the commission spoke to the challenges facing retailers trying to reorganize under chapter 11. She recently blogged that some of the commission’s witnesses suggested that “the period for a retail debtor to elect to assume or reject commercial real property leases under section 365(d) was too short, and that such period was made even shorter by the terms of the debtor’s postpetition financing facility. Witnesses cited other issues impacting retail reorganizations, which they largely attributed to the 2005 amendments to the code, including the debtor’s inability to capitalize on lease designation rights and liquidity issues caused by administrative priority claims granted to trade creditors under section 503(b)(9). Many of these witnesses also highlighted the more widespread issue of debtor’s filing with such excessive leverage that there is no equity in the company to support a reorganization.”

Jack Butler is an executive vice president with Hilco Global, where he provides advisory services to healthy and distressed companies, creditors and other stakeholders.

Source: Wall Street Journal