On February 4, 2015, RadioShack Corporation and various of its affiliates filed for Chapter 11 bankruptcy protection in Delaware. This follow-up alert highlights some additional issues of concern based upon what has occurred in the Chapter 11 case to date.
RadioShack is contemplating a dual-track restructuring strategy to sell its assets to financial and strategic buyers as a going concern, and, at the same time, RadioShack will market the liquidation of all of their stores.
RadioShack filed a motion, scheduled to be heard on February 20, 2015, for the approval of bidding and sale procedures and the sale of its assets. This motion makes clear that RadioShack, in connection with the sale, will attempt to assume leases and reject others. In connection with assumption, RadioShack may attempt to modify leases. In the case of a rejection, RadioShack has taken the position that restrictions on liquidation/store closing sales in the leases are unenforceable. This creates a host of issues for landlords, regarding the assignment of shopping center leases. Generally, in connection with such a sale, RadioShack will likely attempt to assume and assign many of its leases to the purchaser. Landlords need to pay attention to the proposed assignee, as well as any proposed de facto modifications and proposed cure amounts, and object to the sale if the purchaser/assignee is unacceptable as a replacement tenant or if the terms of adequate assurance, cure amounts, and de facto lease modifications are inappropriate. For example, the proposed assignee could violate restrictive covenants with other tenants.
In addition, RadioShack, in connection with the rejection of leases, has filed a motion, which has already received interim approval, to establish uniform “store-closing procedures” and GOB sales that could be disruptive. Landlords should scrutinize these procedures before they are approved on a final basis by the bankruptcy court to ensure that store-closing procedures do not violate applicable leases and disrupt other tenants’ businesses at each affected shopping center. For example, the store closing sales that have been approved on an interim basis permit RadioShack to use sign-walkers, exterior banners, and street signage to advertise store closing sales. The hearing on a final order to establish sore-closing procedures is also scheduled for February 20.
RadioShack Corp. also asked a Delaware bankruptcy judge on Thursday, February 12, to approve procedures to auction off some 1,800 leases immediately, before March rent comes due, including $279,900 owed for five stores on just one street, Manhattan's Broadway.
Issues with RadioShack’s Lenders:
As part of its proposed “first day” relief, RadioShack also sought the approval of the financing needed to see it through its bankruptcy, which is known as debtor-in-possession or “DIP” financing. The DIP financing was approved on an interim basis on February 9, with a final hearing to be held on February 20. As a condition to providing DIP financing, RadioShack has proposed to give its DIP lenders liens on all of RadioShack’s assets—which would include RadioShack’s leases for non-residential real property. The DIP financing has not yet been approved on a final basis, but RadioShack’s landlords need to scrutinize any final order permitting DIP financing to make sure, among other things, that landlords will not lose their ability to setoff mutual amounts the parties owe to each other (such as the right to setoff outstanding pre-bankruptcy rent against security deposits). In addition, landlords will need to be comfortable that the DIP lenders will permit sufficient cash to be used to pay post-bankruptcy rent.
The current interim DIP financing order permits RadioShack to use $10 million of available cash, but the question remains whether this will be sufficient for RadioShack to meet its post-bankruptcy rent obligations.
If you have any questions or are looking for legal representation feel free to call either Peter Goodman at 212-402-9408 or Michael Carney at 212-402-9414.