Bankruptcy, Coronavirus (COVID-19), and How Retailers Can Brace for the ImpactThe brick-and-mortar retail industry has been in a state of flux since online retailers such as Amazon started business in the mid-‘90s. Recent years have been particularly difficult for retailers: in 2018, retailers represented 5 of the 10 largest Chapter 11 bankruptcies. The pace of retail bankruptcies showed no signs of slowing in 2019, with retailers such as Payless Holding LLC, Forever 21, Gymboree, Z Gallerie, and many others all filing Chapter 11 petitions. As the first quarter of 2020 comes to a close, the coronavirus pandemic has left markets reeling and millions of people confined to their homes.  The long-term impact on the already-fragile retail industry may be devastating and will almost certainly be transformative.

The impact of coronavirus (COVID-19) began to be felt in early January with supply chain issues from China, the world’s leader in exports and the first country to be hit by COVID-19. Business activity in China was 85% lower in January 2020 as compared to previous years. By late February, one footwear store was experiencing shipment delays between two to four weeks. These supply chain issues have continued to reverberate as the virus spread into Europe and the United States.  On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global pandemic.

Meanwhile, as coronavirus spread rapidly across the globe, supply chain issues were no longer the only problem. The Centers for Disease Control and Prevention (CDC) has urged the suspension of gatherings of 10 or more people. Bars, restaurants, and stores in the U.S. and many other countries have closed for in-person business. In the San Francisco area, residents are under a “shelter in place” order, essentially confined to their homes except for essential activities. The Trump administration is in discussions about enforcing a possible national curfew. As governments and health organizations take these and other steps to enforce social distancing measures to slow the spread of coronavirus, consumer demand has been drastically impacted. While the recent rush to grocery and big box stores may offer a brief reprieve for certain retailers, the decline in consumer demand that is a byproduct of social distancing measures will inevitably leave its mark on the retail industry.

The economic impact of ongoing supply issues, reduced consumer demand, and collective uncertainty about how it will all end has been devastating. On March 16, 2020, after trading hit a circuit breaker within seconds of the opening of the New York Stock Exchange, the Dow Jones Industrial posted its biggest single-day drop since the 1987 crash and hit its lowest point since 2017. Trading has had to be halted multiple times in the past week to slow the market free-fall.

Retailers have been adapting to these unprecedented circumstances in real time as the pandemic unfolds. Some local companies are encouraging customers to purchase gift cards for future use or, if the capabilities are there, offer online sales or deliveries. Larger brick-and-mortar retailers with an established online presence hope that increased online sales may make up for some of the declines in in-store sales.

While there is currently a discussion in Congress of passing legislation to benefit businesses, and particularly small businesses, that are hit hardest by this crisis, the timing of such relief and ultimate benefit to retailers is uncertain.

A retailer facing financial distress can take certain steps to best position itself to weather the storm:

  • Know your documents.  Review your leases and loan documents.  Understand the default provisions. Identify any grace periods under the contracts. Determine whether your contract contains a force majeure clause, which might provide a contractual basis for terminating or suspending performance if performance becomes impossible or impracticable. With the World Health Organization (WHO) declaring a global pandemic and President Trump declaring COVID-19 a national emergency, force majeure clauses —and interpretation of these clauses by courts — will play a major role in how the economy deals with the impact of COVID-19.
  • Communicate. Reach out to your lenders and landlords. It can be a natural impulse in times of financial distress to ignore the problem and hope it goes away, but being proactive in communications with lenders and landlords can lead to better outcomes. The instability unleashed by the coronavirus is unprecedented, and parties will have a vested interest in working together to preserve the enterprise and maximize value. On March 22, 2020, an interagency group including the Fed, FDIC, OCC, and state banking regulators issued a joint statement encouraging financial institutions to work with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and relaxing reporting requirements for banks with respect to the categorization of loan modifications as “troubled debt restructurings.” These and other actions by state and federal regulators will incentivize lenders to work with their borrowers through this crisis.
  • Stay informed. Join or stay connected with industry groups that are working on behalf of retailers, including advocacy for legislative relief.
  • Review your insurance policies. Check your insurance policies to see if you already have coverage that might provide some relief during this disruption. Such policies might include:
    • Civil Authority Coverage – When the government restricts access to the policyholder’s premises, ­this type of coverage can protect for losses that arise from the physical loss of the building.
    • Business-Interruption Coverage – Typically, this type of coverage will require a “direct physical loss of or damage to” insured property, but some of these policies contain clauses for communicable diseases. If property has been lost based upon potential contamination by COVID-19, this may be considered a direct physical loss eligible for insurance coverage.
    • Trade-disruption insurance – This coverage helps protect businesses when there is a disruption in trade flows. ­This type of coverage does not usually require a direct physical loss.
  • Understand Restructuring Options. Chapter 11 bankruptcy may provide another option for retailers facing mounting financial pressure as a result of COVID-19. If retailers cannot negotiate a workout with their lenders or landlords, and potential governmental relief is not available (or not available quickly enough), Chapter 11 bankruptcy could offer a pause button for distressed retailers.

When a business declares Chapter 11 bankruptcy, the business is still able to operate in the ordinary course of business. A Chapter 11 bankruptcy imposes an “automatic stay” of actions against the debtor, which halts collection on a business’s debts existing as of the bankruptcy filing and gives a business some breathing room to stabilize operations and work on a plan to repay its creditors. Additionally, such breathing space may allow a retailer to preserve its business while it waits for possible assistance through government-funded programs.

In recent years, there has been pressure on retailers that file Chapter 11 to liquidate or reorganize on truncated timetables. This is because the retail industry is seen as having high-value goods with a lower going concern value. With COVID-19, this trend may pivot towards more traditional Chapter 11 work-out plans. A more traditional Chapter 11 plan allows a retailer to spread out debt payments over a longer time and take a comprehensive look at the business and how to adapt it to the new market.

In addition, Congress recently enacted “Small Business” Chapter 11 provisions for companies with debts under $2,725,625. Small Business Chapter 11 filings trigger the automatic stay and other bankruptcy protections, but streamline the Chapter 11 process, and reduce the cost of Chapter 11, for small businesses that qualify. With the enactment of the Small Business Chapter 11 provisions to the Bankruptcy Code, smaller companies for which traditional Chapter 11 would be cost-prohibitive may be eligible for relief.


The ability of U.S. companies to adapt to an ever-evolving business landscape is part of what helps make our economy resilient. The coronavirus pandemic will test virtually every industry, especially the retail industry, which was already struggling. But if history is any indication, businesses will adapt and emerge in some form. Consumers’ demand for goods will eventually rebound, and they will need healthy companies from which to buy. The market will adjust. Government bailouts of a massive scale for certain industries are likely inevitable and will no doubt play a significant role in future restructurings.

Bradley’s Bankruptcy and Creditors’ Rights and Retail practice groups actively represent clients in all aspects of contractual and lending relationships. We have years of experience helping clients evaluate the risk and opportunities that economic distress presents. Firm clients find early analysis of strategic options extremely helpful as they decide how to react to the changing market. While Bradley has taken measures to protect its team members and clients from the risks posed by COVID-19, our firm is fully functioning and ready to assist you. We are available to discuss navigating these challenging times with you as a valued partner.