Wyatt Rose-J.C. Penney, the 118-year-old infamous clothing behemoth, is one of the latest retail companies to fall victim to the newer and cheaper e-commerce revolution. As a result of its struggles against e-commerce powerhouses like Amazon and Walmart—coupled with COVID-19 woes—J.C. Penney filed for Chapter 11 bankruptcy in May of this year. However, in a quick turnaround, J.C. Penney is on course to emerge from bankruptcy by the end of the year. Following a U.S. bankruptcy court decision and approval of a sizeable asset transaction, there is a purchase agreement between J.C. Penney and its liability holders. The detailed agreement outlines a transfer/sale of J.C. Penney’s assets to its two principal landlords and its main debt holders. In other words, the U.S. Bankruptcy Court for the Southern District of Texas approved a purchase agreement that is allowing Brookfield Asset Management Inc. and Simon Property Group to acquire almost all of J.C. Penney’s retail and operating assets. These major acquisitions will be implemented through a combination of cash and new loan debts.
Chapter 11 Bankruptcy and J.C. Penny’s Possible Savior
A Corporate filing under Chapter 11 of the United States Bankruptcy Code is commonly referred to as a “reorganization” bankruptcy. Typically, Chapter 11 bankruptcy proceedings focus on how debts will be satisfied and how equites will be distributed; these determinations depend on the filing company’s future valuation. Bankruptcy valuation, especially with large corporations, is often controversial because it is both subjective and based on predictions. To assist with this issue, Chapter 11 proceedings generally require both a written disclosure statement and a reorganization proposal. These documents must be filed with the court under 11 U.S.C. §§ 1121 and 1125. The disclosure statement is a document that must contain information and data surrounding the debtor’s assets, liabilities, and business activities. This information must reach a level of detail that allows a creditor to make an informed judgment about the debtor’s plan of reorganization. Furthermore, under Section 1107 of the Bankruptcy Code, the law places the debtor in possession of the assets—like a fiduciary—and necessitates that the debtor performs most functions of a standard trustee. For example, the duties of the debtor include continual accounting for property and assets, monthly operating reports, and filing tax returns that are deemed necessary or ordered by the court. Additionally, and importantly for stockholders, Chapter 11 bankruptcy regarding corporations does not put shareholders’ underlying assets at risk.
Impressively, J.C. Penney has efficiently controlled its recent woes through bankruptcy processes. This was only possible because the contractual and procurement teams associated with J.C. Penney’s Chapter 11 bankruptcy filings successfully formulated an internal corporate reorganization plan and an effective sale/asset transfer. These restructuring efforts suggest promising results for both J.C. Penney and its bankruptcy collaborators. Furthermore, Jill Soltau, the CEO of J.C. Penney, stated that J.C. Penney’s “goal from the beginning of this process has been to ensure J.C. Penney will continue to serve customers for decades to come and this court approval accomplishes that objective.” So, in spite of many external headwinds, J.C. Penney’s restructuring efforts are focused on handling more than just its contemporary liabilities and debts; the company plans on rebuilding and continuing its more than a century-old excursion as a retailer. Although the company will prospectively need to close nearly a third of its 846 stores, J.C. Penney’s crucial decision to pursue Chapter 11 bankruptcy likely saved the store from ultimately closing and its “rescue” deal is estimated to save roughly 70,000 jobs.
In sum, although the term “bankruptcy” is usually associated with negative connotations, it may be the reason that a former recognizable name—J.C. Penney—survives a grueling and competitive marketplace. Bankruptcy is never an easy process, but it serves as a mechanism to provide a second chance and save thousands of jobs.
