Reuters reports that Sports Direct International Plc, Britain’s largest sporting goods company with about 700 stores throughout Europe, is discussing a bid for Eastern Outfitters LLC (“Eastern Outfitters”), the parent of Bob’s Stores and Eastern Mountain Sports (“EMS”).

Versa Capital Management LLC (“Versa”) is the owner of Eastern Outfitters. Last April, Vestis Retail Group LLC, the former holding company for Bob’s, EMS, and Sports Chalet, filed for Chapter 11 bankruptcy protection. Versa acquired Bob’s and EMS through the bankruptcy.

However, after lower than expected holiday sales and problems with financing, many landlords of the almost 90 operating EMS and Bob’s stores report that January and February rents remain unpaid. EMS and Bob’s Stores, along with Golfsmith and Sports Authority, were among the major sporting goods retailers that filed for bankruptcy protection in 2016.

According to Reuters, industry insiders speculate that Eastern Outfitters is preparing for a Chapter 11 bankruptcy filing this month and that Sports Direct, if there is a bankruptcy filing, would be the stalking horse bidder for the company.

Landlord’s Prepare – Call Defaults / Document Termination / Check Operations

The Bankruptcy Code allows a debtor 120 days to assume or reject a lease if the agreement has not expired or terminated prior to the bankruptcy filing. As such, ensure that your tenants are current with rent. If not, default them now.

Be advised that if your client terminates an agreement prior to bankruptcy it is possible for a debtor to argue that the value of the lease is an avoidable transfer under Bankruptcy Code sections 547(b) and 548(a)(1). These Code Sections permit the filing of a complaint to recoup the value lost to the Debtor.

In a recent case, In re Great Lakes Quick Lube, LLP, 816 F. 3d 482 (7th Cir. 2016), the Seventh Circuit reversed and remanded the case to the Bankruptcy Court to determine the value of transferred leases. The case concerned an action by the creditors’ committee to find two (2) profitable leases that were terminated pre-bankruptcy with three (3) unprofitable leases could proceed as an avoidance action – meaning the creditor could have to give money back to the Debtor for the value of the two (2) profitable leases.

In the interim, when a lease or other agreement is terminated by consent, whether unilaterally by landlord or by Court order, it is advisable that your client document any lack of value. This includes a review of liability for non-payment, covenant defaults, and/or other requirements. Incorporating this reasoning into any agreement, order, or correspondence can provide a coherent defense if an avoidance claim is filed a year or two after the bankruptcy case commences.

In addition to staying current with rent and documenting any terminations, ensure that your operations personnel are apprised of the physical location. For instance, when was the last time your property manager spoke with the store manager to obtain important security codes, HVAC, and utility information? When was the last time a walk-thru was conducted? Having that information on hand can help avoid real world property issues, like freezing or burst pipes, if a debtor up and leaves or fails to maintain the premises. You don’t want to be scrambling for that information after the fact.

An Ounce of Prevention…

As the Boy Scout motto says, “Be Prepared.” Speak with bankruptcy counsel now, to formulate and execute a plan. Taking a proactive approach can help limit exposure, keep you current, and ensure that you are protected during the next bankruptcy.

Stark & Stark’s Bankruptcy & Creditor’s Rights Group can help. Our bankruptcy attorneys regularly represent landlords throughout the country, including recently in the District of New Jersey, Southern District of New York, District of Delaware and Eastern District of Pennsylvania on a variety of issues. Most recently, our Group has represented landlords and trade creditors in the EMS, Golfsmith, RadioShack, A&P, Joyce Leslie and Sports Authority Chapter 11 bankruptcy cases.

For more information feel free to contact the author of this blog.