At the same time, vendors who ship goods to a company in the 20 days preceding a filing can get a priority claim that requires they be paid in full. The 2005 law also put an 18-month limit on how long the bankrupt company has to submit a restructuring plan; previously there was no limit. After the 18 months, creditors or other interested parties can offer their own plans.

Retailers may have stores in multiple locations and hundreds of vendors supplying a variety of items. "Stores immediately lose working capital," says Harvey Miller, a partner and bankruptcy specialist at New York law firm Weil Gotschal. He worked with Macy's in the past and has recently worked with several retailers including Goody's Family Clothing, a 355-store chain that operates in 20 states and filed for bankruptcy on June 9. Miller says Macy's reorganization, which took four years, wouldn't have been possible under the new setup. "In stress situations, you have to analyze by circumstances and not make deals under a formula," he says.

Landlords Say Retailers Overstate Law's Burden Usually under Chapter 11, stores can sublet the leases to bring in much-required cash. However, most of these lease terms are expensive, because they were drawn up in the past decade when retailers were expanding and consumers' appetite for shopping seemed limitless. Today, not too many retailers are opening up or expanding. It's not surprising that Goody's Family Clothing canceled a lease auction that was to be held in the second week of August for 66 of its stores, after it was able to secure bids on just three of them in a previous auction.

"The rule that was meant to protect landlords is now coming back to bite them, because they will be left with neither stores nor payments," says Weil's Miller.

Landlords say that retailers and their lawyers are making the law look much worse than it is. That's because even though the law set a 210-day cap, it did leave some wiggle room and allowed a bankruptcy judge to grant an extension if the landlord consented.

"Now why wouldn't landlords consent to extend leases, when they know it's difficult to find another tenant?" asks Norman Kranzdorf, chairman of the Bankruptcy Task Force of the International Council of Shopping Centers, a trade group that represents mall owners. Besides, he says, landlords are entitled to a smaller claim -- so if a retailer decides to close a store and still has a multiple-year lease outstanding, the landlord can claim payments only for a two-year period rather than for the remainder of the lease as they could previously.

"Sure, retailers don't have the luxury of time as they did before, but it's not that much of a detriment because landlords also lose at the bargaining table," argues J. David Forsyth, a partner at law firm Sessions, Fishman & Nathan in New Orleans, who represents landlords.

Ultimately, though, it's all a question of control, says Elizabeth Warren, law professor at Harvard University. She says that the impact of store closings is bound to be felt across the broader U.S. economy in coming months. "This will have a ripple effect through communities with hundreds of job losses, loss of taxes, and suppliers going out of business," says Warren, who in 2005 testified to Congress against changes to the bankruptcy law. "Bankruptcy is countercyclical -- it is a tool designed to be a cushion during a downturn so that everybody takes a small hit for the short term and emerges stronger for the long term."

Story Source: Business Week