Chapter 11 A Death Knell For Retailers

Retailers beware - don't wait until you're broke to file for bankruptcy.

Otherwise, those payments required by landlords, utility companies and creditors cannot be paid in the strict time frame required by law.

It did not take long for Circuit City to evaluate its financial situation and decide to liquidate its remaining 567 stores in the United States. The announcement came late last week.

"If you go into Chapter 11 broke, you're dead," said Dennis LeVine, a bankruptcy attorney out of Tampa. "If I asked a retailer how much money he has and the answer is 'very little,' I would tell him that 'Chapter 11 isn't going to work for you.'"

Since the laws were changed by Congress in 2005, retailers that file for Chapter 11 must be prepared to pay their bills up front.

No longer will the courts push back payment deadlines for rent and utilities while the chain gets its finances in order.

"Previously, the courts would kick the (deadlines) down the road almost indefinitely," LeVine said. "The laws took away some of the flexibility that came with filing for Chapter 11."

Jim Baab, a spokesman for Circuit City, declined to answer specific questions about the chain's bankruptcy case.

"Due to challenges to our business and the continued bleak economic environment, Circuit City is going out of business and the company's assets will be liquidated to pay off creditors," Baab stated in an e-mail. "The process was extremely difficult and we were left with no other choice but to liquidate."

The Brooksville location is at 13199 Cortez Blvd.

Linens N' Things, which also has a Brooksville location, suffered the same fate last year.

Circuit City was founded in 1949 as the Wards Company. Headquartered in Richmond, Va., the company also operates 765 retail locations in Canada. Those stores have not been affected by the liquidation, Baab said.

The chain is the second-largest electronics chain behind Best Buy, which is expected to open a new location in Spring Hill in the coming months.

Signs advertising the 30- percent discounts at the local Circuit City store have been seen along the highway since Saturday, the first day of the liquidation.

Bankruptcy experts have said the code changes have doomed the large retailers. The same goes for small businesses.

"The laws were designed to speed things along," said Allen Turnage, a bankruptcy attorney in Tallahassee. "The procedural process is much shorter ... The creditors come along and if you fail to meet the (payments), you can go down pretty quickly."

LeVine, who was involved in the JumboSports bankruptcy case a decade ago, said Chapter 11 "can work under certain circumstances."

If a company wants to reorganize its claims and debts, it can still do so as long as it is financially solvent.

He thinks Circuit City was wise when it decided early that it should not proceed in the courts and put itself in even greater debt.

"I applaud Circuit City for assessing the situation and deciding that it wasn't working," LeVine said.

Circuit City's heyday was in the 1980s when it grew to become the top consumer electronics chain in the country.

In the 1990s, Best Buy came along with a warehouse-style model that focused on newer technologies, forcing Circuit City to re-evaluate its old-fashioned showroom approach.

Best Buy paid its employees hourly. Circuit City did away with its commissioned sales staff only a few years ago. The gap between the two competitors continued to grow wider.

"If you're a large chain, it's hard to maintain the balance between growth and capital," LeVine said. "Historically, businesses that are well run are going to survive and the ones run poorly are going to fail ... but you can be the best-run company in the world and if the market changes, you're still going to fail."