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The Struggle facing the Retail World

Restaurants Face Challenges

While retail in general faced challenges in 2019, food services faced an extremely difficult period. We expect these challenges to continue into 2020. With a tight labour market, increased competition, rising minimum wages and a strong economy, restaurants continue to be squeezed. For this reason, we expect that landlords will be receiving requests for modifications, notices of bankruptcy filings and ongoing challenges in filling vacated restaurant units.

Looking at 2019, while a number of restaurants closed units, the Papa Gino’s and Real Mex cases continued to work their way through bankruptcy courts. Meanwhile, the Houlihan’s restaurant chain along with several of its subsidiaries filed for bankruptcy with Landry’s acquiring substantially all of the assets of the debtor. In a transaction of this type, landlords need to be aware of their rights as a number of leases were assumed and assigned. In the event of assumption and assignment, a landlord has strong protections under the Bankruptcy Code, including, among other things, the right to have all defaults cured. In the event the debtor is rejecting a lease, to minimize the loss incurred, it is essential that a landlord takes steps to maximize its recovery and preserve any claim it may have. In particular, landlords must act during the bankruptcy case or risk waiving certain rights and claims.

Lifestyle Companies

The proliferation of Lifestyle (i.e., Health and Fitness facilities) has been quite significant over the last several years. Two well-known fitness centre operators, Town Sports and 24 Hour Fitness, have been noted for a change in their financial condition as discussed below.

Recent reports indicate that Town Sports International Holdings, Inc. recently had S&P reduce the credit rating on the certain debt to CCC. According to reports, Town Sports has significant debt which will become due in 2020 and has suffered a decline in revenue. According to reports, Town Sports is attempting to refinance its debt.

Market reports towards the end of 2018, indicated that the value of bonds issued by 24 Hour Fitness declined into the distressed range. Once again, those who are investors, landlords or creditors of 24 Hour Fitness should carefully evaluate their exposure.

Retailers

The pressure is still being felt across the retail space. Fairway Markets is rumoured to be close to filing a second bankruptcy case. Pier 1 is also facing financial challenges and is said to be closing 450 stores and nearing bankruptcy. While these two retailers are noted due to recent reports regarding their financial condition, they are not alone, and the increased minimum wage will only put further pressure on traditional brick and mortar retailers. Landlords should carefully monitor their retail tenants to avoid allowing them to accrue large arrearages. It is also likely that tenants will request modifications or an opportunity to meet to discuss their lease.

Party City also continues to face financial challenges and maybe slipping towards bankruptcy. The company sharply underperformed its third-quarter guidance. If a party has leases or interests in Party City, they would be well-advised to evaluate their current position and to consider what actions could be taken to minimize the impact of a possible restructuring or bankruptcy.

Major Changes to Bankruptcy Laws in 2020

There are major changes coming to the Bankruptcy Code in 2020. Key among these are changes to the laws affecting Small Business restructuring. Small Businesses are defined as those with less than $2,725,625 in debt. For those companies that qualify, they will be able to obtain relief without being required to abide by the Absolute Priority Rule (i.e., all senior creditors must be paid in full before a junior creditor can be paid or an equity holder can retain its holdings). Moreover, there are rumours that the debt limit could be raised to $10,000,000. If this were to occur, the vast majority of bankruptcy filings could qualify as small business filings. It is unclear if (and when) an increase in this limit might occur.

With changes and new challenges approaching, it is critical to seek counsel with significant experience in bankruptcy, restructuring and out of court workouts to advise you through the process and participate in ongoing negotiations. Rosenberg & Estis, P.C. has represented creditors and debtors in many of the largest and most complex bankruptcy cases, making us the ideal partner for any client-facing these challenges. Please don’t hesitate to call us today.

Merritt J. Green

Brief Survey of Non-Compete Law impacting East Coast States

There has been a recent trend of states moving to limit the application of restrictive covenants, especially post-employment non-compete agreements, on employees.  Within the past year, Maryland, Maine, Massachusetts, and New Hampshire have all passed legislation restricting the enforceability of non-competition agreements against low-wage earning employees.  This is a growing national trend that all attorneys should monitor.  

Provided below is a brief survey of states with laws restricting non-compete agreements and general guidelines for other East Coast states.    

Connecticut:   No state legislation restricting non-compete agreements.  Case law holds that a covenant must be reasonable as relevant to time period, geographic scope, ability of employee to earn livelihood, protection to employer, and public interest.

Delaware:  No state legislation.  Case law holds that a covenant must be reasonable to be enforceable balancing legitimate interests of employer, ability of employee to earn livelihood, and public’s interest.

Florida:  Florida statute 542.335 requires that non-compete agreements be reasonable and necessary to protect the legitimate interests of the employer.  Case law applies balancing test.

Georgia:  Georgia Code 13-8-53 provides, in relevant part, that post-employment contracts that restrict competition shall not be permitted against any employee who does not, in the course of his or her employment:  

(1) Customarily and regularly solicit for the employer customers or prospective customers;  (2) Customarily and regularly engage in making sales or obtaining orders or contracts for products or services to be performed by others; (3) Perform the following duties: (A) Have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; (B) Customarily and regularly direct the work of two or more other employees;  and (C) Have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees;  or (4) Perform the duties of a key employee or of a professional.

Maryland:  On May 25, 2019, Maryland enacted SB 328, which prohibits employers from entering into non-competition agreements with employees who earn equal to or less than $15 an hour or $31,200 annually. Under this new law, for employees earning wages at or below this threshold, non-compete agreements that “restrict[] the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade shall be null and void as being against the public policy of the State.”  The law becomes effective October 1, 2019.

Maine:  As of September 18, 2019, Maine employers are prohibited from having non-compete restrictions for any employee earning at or below 300% of the federal poverty level.  Furthermore, for all employees, no non-compete can take effect before the employee has worked at least one year, or six months after signing (whichever is later). And, employee must be provided three (3) days to consider before signing non-compete.

Massachusetts:  Effective October 1, 2018, Massachusetts banned non-compete restrictions for anyone classified as a non-exempt employee.  To be enforceable, a non-compete agreement must also, be in writing, be signed by both employer and employee, must advise employee of right to seek legal counsel before signing, and must be provided to employee with employment offer or ten (10) business days before the state of employment, whichever is earlier.  A “noncompetition agreement” is defined as “an agreement between an employer and an employee, . . . under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.”  

New Jersey:  The New Jersey legislature has considered bills to restrict employer use of non-compete agreements, but nothing has passed yet.  Courts will enforce non-compete agreements that are reasonable in scope and duration.

New Hampshire:  passed legislation outlawing non-competes for “low wage” workers, defined as hourly rate that is less than or equal to 200% of federal minimum wage ($14.50 per hour).  This law takes effect in September 8, 2019. A “noncompete agreement” is defined as “an agreement between an employer and a low wage employee that restricts such low wage employee from performing:  (1) work for another employer for a specified period of time; (2) work in a specified geographic area; or (3) work for another employer that is similar to such low wage employee’s work for the employer who is party to the agreement.”

New York:  No laws prohibiting non-compete agreements.  A non-compete is only allowed and enforceable to the extent it (1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time period and geographic scope.

North Carolina:  Courts will enforce non-compete agreements if supported by consideration, reasonable about time and territory, and designed to protect legitimate business interest.

Pennsylvania:  No legislation controlling.  Will be enforced if supported by consideration and reasonable to rights of employer, employee and public interest.

Rhode Island:  The Rhode Island legislature passed noncompete law on July 11, 2019 (it is not effective yet, still waiting on governor’s signature).  The law will prohibit non-compete agreements with low-wage employees with average annual earnings of less than 250% of the federal poverty level.

South Carolina:  Non-compete agreements will be enforceable if supported by consideration and are reasonable in not over-reaching employer’s legitimate business interests nor overly burdening employee’s ability to earn a livelihood.

Vermont:  No legislation restricting non-compete agreements.  Will be enforced if reasonable.

Virginia:  Non-compete agreements will be enforceable if supported by consideration and are reasonable in not over-reaching employer’s legitimate business interests nor overly burdening employee’s ability to earn a livelihood.

Conclusion:  Post-employment non-compete agreements are either being outlaws or facing greater judicial scrutiny.  Employers should utilize them sparingly. However, employers still can protect confidential information and client relationships.  Accordingly, attorneys should focus clients on Confidentiality Agreements, trade secret protection, and non-solicitation restrictions (both protecting employees and clients).

Most importantly, whenever considering any post-employment restriction, to be enforceable, it should narrowly define the post-employment restriction to protect the legitimate interests of the employer, in relationship to the services the employee provided the employer during employment, and his or her post employment opportunities.

Merritt Green, General Counsel, P.C.  mgreen@gcpc.com –703-556-0411