Struggling companies seeking bankruptcy turned 2023 into one of the biggest years for repeat Chapter 11 filers, suggesting many didn’t make the necessary cuts or business changes to successfully revive themselves the first time around.
With at least 19 businesses with more than $10 million in debt filing Chapter 11 for at least a second time, 2023 had the most so-called Chapter 22 filings since 2020 during the Covid-19 pandemic, which pushed many already-struggling companies over the edge. The past year was among the top for repeat bankruptcies since the turn of the century, according to BankruptcyData.
Whether Chapter 22s are bad is debated. Some bankruptcy attorneys and professors see them as another opportunity for a company that made poor business projections or faced unexpected headwinds to maximize value and save jobs, while still giving creditors a better chance of a recovery than liquidation.
Others see repeat filings as leading to worse outcomes for creditors. If shareholders didn’t lose all of their holdings during the first case, they’re usually wiped out the second time. Skeptics also say a Chapter 22 is an example of the bankruptcy system failing to do its job—either by allowing businesses to emerge without enough strength to continue, or by letting companies that probably should have been shut down continue to exist.
“Chapter 22, in general, is somewhat of a blemish on our system, which I still think is the best system in the world in terms of restructuring companies,” said Edward Altman, a professor emeritus at New York University’s Stern Business School who studies bankruptcies.
Some of the increase in repeat Chapter 11 filings is likely related to a broader uptick in bankruptcies. But lingering debts, operational troubles, failure to keep up with industry trends, and overly optimistic financial outlooks largely accounted for the high number of Chapter 11 rebounds in 2023, according to bankruptcy and economic professionals.
Other factors are industry-specific, especially for retailers like David’s Bridal LLC and Tuesday Morning Corp. that saw consumer habits continue to change.
Operations and Feasibility
Often, companies that emerge from bankruptcy don’t sufficiently restructure their assets to turn their businesses around, said Edith Hotchkiss, a professor of corporate finance and restructuring at Boston College.
“Some of the very quick, first bankruptcies address the capital structure primarily and the operating problems less so,” Hotchkiss said.
Operational issues that weren’t addressed during the first case are one of the most significant reasons a company would file a second bankruptcy, said Andrew Hede, head of turnaround and restructuring at consulting firm Accordion Partners. Problems can include labor issues, too many plants or underperforming retail stores, unaddressed supply chain issues, or manufacturing costs, he said.
“If you don’t address the operational issues, either during the bankruptcy, or shortly after post-emergence, the likelihood of a second filing is significantly increased,” Hede said.
Reorganization plans sometimes bake in overly optimistic sales and market dynamics. Additionally, businesses occasionally fail to navigate or even see sharper shifts in the economy, markets, or technology.
Corporate debtors must provide feasibility analyses to support their plans and convince a judge they’re unlikely to liquidate or require another restructuring after they emerge from bankruptcy, but judges rarely reject plans on feasibility grounds.
Despite the feasibility analyses, the bankruptcy code doesn’t require a debtor to prove its reorganization will be a guaranteed success. Judges who have doubts about a plan’s feasibility may still confirm it if there are no objections and it’s a better alternative to liquidation.
Courts are sometimes inclined to approve a deal that has the support of key stakeholders even if there are concerns about the feasibility of the plan, Altman said.
Drugmaker
Retail Apocalypse
Brick-and-mortar retail operators have been particularly susceptible to landing in Chapter 22 in recent years. Retailers have often fallen back into bankruptcy due to a combination of increasing online competition and rapid changes in consumer preferences and behavior.
“For the recent Chapter 22s, the strongest industry trend is the continued struggles of retailers,” Hotchkiss said. “This is different than industry factors causing Chapter 22s in the past, where some were cyclical industries leading the same firms to enter bankruptcy more than once.”
The Covid-19 pandemic shifted buying patterns and disrupted supply chains. And while there’s been some recovery in retail, fully bouncing back has been difficult.
There’s often little time, money, or personnel to address and fix underlying operating or competitive issues within a Chapter 11, said John Yozzo, managing director at FTI Consulting. Primarily, Chapter 11 expunges debt, right-sizes capital structures, and gets rid of unfavorable contracts, he said.
“Fair to say that chapter 11 doesn’t usually fix operating problems or make an uncompetitive company competitive,” Yozzo said in an email. “Companies that emerge from chapter 11 live to fight another day and jobs are saved but rarely is the debtor suddenly competitive with industry leaders upon emergence.”
After discount retailer Tuesday Morning emerged from bankruptcy in December 2020, it faced industrywide challenges including higher supply chain costs and disruptions and reduced foot traffic, according to court papers. The company ultimately filed again in February 2023 and liquidated.
Shoemaker Rockport Co. blamed similar factors as Tuesday Morning when it filed for bankruptcy in 2023, almost five years after selling its business in its first Chapter 11.
David’s Bridal’s first Chapter 11 plan in 2018 predicted shopping and supply patterns that proved to be inaccurate, creating problems for its capital structure.
The bridal company struggled to maintain enough cash, according to court papers. It also took big sales hits from the pandemic and larger macroeconomic shifts in the retail industry, and saw less demand because of longer wedding planning cycles, more casual wedding events, and fewer overall marriages, court papers said.
The timing of emergence is also critical, especially for cyclical businesses, Yozzo said.
Those issues are exemplified by David’s Bridal, which said the timing of its first bankruptcy during its 2019 peak season negatively impacted its brand to customers. That resulted in a lack of confidence that led to a significant downturn in traffic, appointments, and sales, it said.
“I’m especially skeptical of chapter 11 filings for retailers—can’t recall a failed retailer that became exemplary after a reorg,” Yozzo said in his email. “But retailers seem to hang on forever before they finally hit the wall.”
Bad Faith
Other second-time filers don’t fit into the traditional Chapter 22 mold of a firm that files again following a court-approved Chapter 11 plan.
LTL Management LLC, a
LTL filed its second case after making changes to its funding agreement with J&J—only to see the second bankruptcy tossed out again under the Third Circuit’s previous reasoning. The latest ruling is under appeal.
Stream TV Networks Inc., a 3D technology developer, also took another try at Chapter 11 in 2023 after the Eastern District of Pennsylvania bankruptcy court dismissed its 2021 bankruptcy on the grounds that it was filed in bad faith.
Lingering Debt
Sometimes, the simplest explanation for a repeat bankruptcy is that the company didn’t cut enough debt during the first case.
Data center and cloud computer business Internap Holding LLC, also known as Inap, again went into Chapter 11 in April after it sold off most of its data centers in late 2022.
The company first filed for Chapter 11 in March 2020, but said it still had “significant secured debt” when it emerged. While it divested from both core and noncore businesses and cut its debt further, Inap said the debt was unsustainable as compared to the value of its remaining cloud business.
Inap’s second Chapter 11 showcases how important a company’s remaining debt stack is to its ongoing business when it emerges from bankruptcy.
“No one wants to sort of cut too deep, when probably the right thing for the organization is to have a smaller, more profitable footprint,” Hede said.
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