October 9, 2017
Averting the Pitfalls of Customer Claims, Noticing in Retail Bankruptcies
By Evan T. Miller, Senior Associate, Bayard P.A. and Travis Vandell, CEO & Mike Hill, Vice President, JND Corporate Restructuring
With the number of corporate bankruptcy filings in the retail industry nearly doubling in 2016 and continuing to climb in 2017,[1] retailers and their legal and financial professionals are faced with innumerable challenges in navigating the corporate bankruptcy process successfully in a streamlined and cost-efficient manner. Aside from the substantial task of restructuring debt in a rapid-paced, post-BAPCPA retail environment rife with constant marketplace disruption, retailer bankruptcy proceedings are often plagued with unexpected pitfalls when it comes to handling fallout from the loss of customer confidence and the potential wide array of claims owed to customers for various financial obligations, including gift cards, warranties, and rebates.
To address these challenges, retail debtors must proactively develop well-planned strategies to manage the intricacies of claims and noticing while efficiently and effectively communicating with creditors throughout their bankruptcy proceedings.
The complexity of identifying and managing customer claims in retail bankruptcies should not be underestimated. While many customers will not require notice if they have simply made purchases in the past, several subsets of the customer population could be eligible for claims as a result of their interactions with the company and the bankruptcy case. While potential creditors may vary from case to case, there are common prefiling preparations that retail debtors and their professionals can undertake to ensure that they appropriately communicate with the various subsets of their customer populations and manage their claims effectively.
The Retail Customer Creditor Universe
One of the crucial first steps in mapping out how best to manage potential customer claims is to identify the universe of customers to whom outstanding obligations could be owed and the subsets of this population to whom notice or communication should be provided. In short, retail debtors and their advisors should ask: Who are the customers, and what potential claims might they claim against the debtor’s estate? In a 363 sale scenario, certainly the purchasers already have this concern in mind. After all, a continued and loyal customer base is presumably critical to ongoing operations—and the crux of the underlying purchase.
To complicate matters, a significant number of customers typically are unknown, in essence, because there is no record of their contact information or the amount they are owed. For example, retail companies may not have any records pertaining to gift card holders, who have been the subject of much discussion and a handful of class action lawsuits in recent years as retailers in bankruptcy have faced challenges in honoring their obligations to these customers. As the product name implies, purchasers often end up giving the cards to others as gifts and with them the obligation of the debtor, rendering any associated address information captured at the point of sale all but irrelevant.
Encountering unknown populations of potential customer claimants isn’t limited to gift card holders. Given the relatively short shelf life of customer data, there is inherent difficulty associated with ensuring the long-term validity of noticing information contained in customer databases, warranties, refunds, lay-away programs, revenue sharing programs, loyalty programs, and financing programs. A litany of others may come into play, too.
These continuing obli
With the number of corporate bankruptcy filings in the retail industry nearly doubling in 2016 and continuing to climb in 2017,[1] retailers and their legal and financial professionals are faced with innumerable challenges in navigating the corporate bankruptcy process successfully in a streamlined and cost-efficient manner. Aside from the substantial task of restructuring debt in a rapid-paced, post-BAPCPA retail environment rife with constant marketplace disruption, retailer bankruptcy proceedings are often plagued with unexpected pitfalls when it comes to handling fallout from the loss of customer confidence and the potential wide array of claims owed to customers for various financial obligations, including gift cards, warranties, and rebates.
To address these challenges, retail debtors must proactively develop well-planned strategies to manage the intricacies of claims and noticing while efficiently and effectively communicating with creditors throughout their bankruptcy proceedings.
The complexity of identifying and managing customer claims in retail bankruptcies should not be underestimated. While many customers will not require notice if they have simply made purchases in the past, several subsets of the customer population could be eligible for claims as a result of their interactions with the company and the bankruptcy case. While potential creditors may vary from case to case, there are common prefiling preparations that retail debtors and their professionals can undertake to ensure that they appropriately communicate with the various subsets of their customer populations and manage their claims effectively.
The Retail Customer Creditor Universe
One of the crucial first steps in mapping out how best to manage potential customer claims is to identify the universe of customers to whom outstanding obligations could be owed and the subsets of this population to whom notice or communication should be provided. In short, retail debtors and their advisors should ask: Who are the customers, and what potential claims might they claim against the debtor’s estate? In a 363 sale scenario, certainly the purchasers already have this concern in mind. After all, a continued and loyal customer base is presumably critical to ongoing operations—and the crux of the underlying purchase.
To complicate matters, a significant number of customers typically are unknown, in essence, because there is no record of their contact information or the amount they are owed. For example, retail companies may not have any records pertaining to gift card holders, who have been the subject of much discussion and a handful of class action lawsuits in recent years as retailers in bankruptcy have faced challenges in honoring their obligations to these customers. As the product name implies, purchasers often end up giving the cards to others as gifts and with them the obligation of the debtor, rendering any associated address information captured at the point of sale all but irrelevant.
Encountering unknown populations of potential customer claimants isn’t limited to gift card holders. Given the relatively short shelf life of customer data, there is inherent difficulty associated with ensuring the long-term validity of noticing information contained in customer databases, warranties, refunds, lay-away programs, revenue sharing programs, loyalty programs, and financing programs. A litany of others may come into play, too.
These continuing obli