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Hearing Mulls Leases’ Role In Retail Bankruptcies

3/19/2009 12:04:00 PM Eastern

Washington — A U.S. House Judiciary Subcommittee heard recommendations last week that Congress lengthen the 210-day window that bankrupt retailers have to accept or reject store leases.

The testimony came during a hearing titled “Circuit City Unplugged: Why Did Chapter 11 Fail to Save 34,000 Jobs?” 

According to CoStar Group, a provider of commercial real estate information, the National Retail Federation (NRF) was among those advocating deadline extensions. In a letter distributed to several House representatives days before the hearing, Mallory Duncan, senior VP and general counsel for the retail trade association, argued that the current 210-day window is not enough time for a retailer with multiple locations to determine which stores are most likely to be profitable, since it might not cover the critical holiday selling period. He proposed that the code be amended to “beyond 365 days,” CoStar reported.

Harvey Miller, a partner specializing in bankruptcy law at Weil, Gotshal & Manges, testified before the sub-committee that current bankruptcy law is “self-defeating” for landlords because they end up with vacant stores. He argued that in an effort to avoid the accept/reject timeline, teetering retailers have been waiting too long to file bankruptcy, thereby putting themselves in an almost-always irreversible predicament that results in having no choice but to liquidate stores, CoStar reported.

But Daniel Hurwitz, president/COO of Developers Diversified Realty, Circuit City’s largest landlord with 50 leases and $38 million in potential unsecured claims, urged Congress to keep the 210-day deadline intact, CoStar said.

Hurwitz, who also serves as vice chair of Circuit City’s Official Committee of Unsecured Creditors, testified on behalf of the International Council of Shopping Centers that Circuit City’s liquidation would have occurred regardless of the 210-day time frame. Indeed, his firm and other shopping center landlords had agreed to put off collecting millions of dollars in post-petition rent payments, he said. Moreover, Circuit City’s accept/reject window wouldn’t have expired until June — three months after the chain shut its doors for good.

Rather, Circuit City was “overwhelmed and ultimately capsized” by insufficient financing, limited trade credit and poor business results, mooting any discussion of lease assumption.

“It is clear that what is pushing retailers into liquidation relates to credit availability and vendor willingness to ship consumer products on reasonable terms,” Hurwitz said. “Nothing in the bankruptcy law can change this unfortunate reality.”