Last week, Creative Hairdressers, Inc. (the “Company”), the parent company to 800 hair salons operating around the country as Hair Cuttery, Bubbles, and Cielo salons, filed for relief under chapter 11 of the Bankruptcy Code. While the Company had experienced financial troubles prior to 2020, the COVID-19 pandemic presented an insurmountable hurdle to a business that was already in distress. As a “non-essential” business, each of the salons was forced to close as states issued stay-at-home orders, leaving the Company unable to meet rent obligations. The Company also foresaw that even when the stay-at-home orders are lifted, social distancing requirements will likely remain, making it logistically impractical to resume normal operations.
In a motion filed with its bankruptcy petition, the Company requested authority to “reject” 49 of its leases, effectively abandoning the salons in question. Because such motions require only that the debtor exercise sound business judgment, it comes as no surprise that this week the Bankruptcy Court granted the rejection motion. The Court also approved a streamlined process for the future rejection of additional leases that the Company determines are not profitable and cannot be sold to a third-party purchaser.
The Hair Cuttery bankruptcy is part of an anticipated wave of COVID-19 induced bankruptcy filings by companies with multiple business locations. The number of such future cases is expected to grow substantially both in retail and numerous other business sectors, not to mention personal guarantors and other interested stakeholders who will be impacted by such filings. This is particularly true for businesses that cannot easily adapt their business models to accommodate social distancing guidelines including hotels, restaurants, performing arts venues, health clubs, and sports arenas. As health regulations limit the ability of such businesses to generate sufficient income to cover overhead costs —including rents— a bankruptcy filing may become unavoidable. At that point, landlords may be required to respond almost immediately to lease rejection motions such as the one filed by the Company. Typically, landlords will have claims for unpaid prepetition rent, claims for “administrative” rent accruing during the bankruptcy case, and damage claims arising from a debtor’s decision to reject a lease. Quick action by a landlord to enforce and preserve its claims may be critical.
While the Eastern District of Virginia has not yet seen a spike of chapter 11 cases resulting from the pandemic, it is recognized in the bankruptcy law community as a desirable venue for large corporate debtors. This is due, in large part, to its “rocket docket” procedural rules, which allow cases to be completed expeditiously, and a bench comprised of experienced and knowledgeable judges.
Whether your business is potentially in need of bankruptcy relief or you are a landlord, creditor, or other interested stakeholder affected by such a filing, the Hirschler Restructuring and Creditors Rights Team is here to help.
Kristen M. Chatterton