Last month, Ann M. Miller and Lorie Beers, Managing Directors in Cowen Inc’s ($COWN)Special Situations Group published a constructive piece in the TMA Journal asking, “Chapter 22: Should Retailers Get a Second Chance at a Fresh Start?” They provide (i) a solid overview of the requirements of section 1129(a)(11) of the Bankruptcy Code governing confirmation of a plan (read: where the “feasibility” requirement comes from),* (ii) an acknowledgement of the chapter 22 problem — particularly in retail,** and (iii) a summary of the Gymboree and Payless chapter 22s (which we wrote about here and here, respectively). They write:

Strict constructionists would argue that the Bankruptcy Code requires an affirmative finding of feasibility and that retail debtors are, for the most part, incapable of meeting that burden unless they have changed their business model to account for the Amazon Effect or addressed other challenges with the business model. They would also argue that the burden of establishing feasibility requires an independent evidentiary showing and that the support of the preponderance of the constituencies is not enough.

This view assumes that a Chapter 22 filing is indicative of failure and somehow blemishes the bankruptcy system as a whole. Strict constructionists also argue that sophisticated creditor constituencies game the bankruptcy system inappropriately by using their leverage in the RSA process to extract concessions.

But is that an appropriate view? Shouldn’t those whose recoveries are at stake have the opportunity to roll the dice to see if their plan can work? And why should an extended battle over feasibility, which would add additional costs to the bankruptcy proceeding, be tolerated if no one wants to prosecute such a challenge? (emphasis added)

Regarding the Gymboree and Payless chapter 22s, specifically, they write:

The two cases raise several questions in the area of feasibility. In the case of Gymboree, unless the company addressed the disruption it faced from the Amazon Effect, was any amount of debt reduction capable of producing a feasible plan? Maybe not, but does that mean that the initial Chapter 11 plan confirmation should not have been attempted and the initial case should have moved directly to a sale or liquidation? After all, for nearly two years, many people retained their jobs, landlords had tenants, vendors continued to have a counterparty with whom to have a commercial relationship, and creditors received the value they negotiated for their claims.

In the case of Payless, the problems went beyond disruption. Missteps in the business plan that predicated the first filing continued after emergence, almost promising a subsequent filing. But again, initially at least, jobs were saved, tenancies were preserved, and creditors received what they bargained for. (emphasis added)

These are all valid questions and fair points — especially when you see things like this:

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