Choppy Waters: Pacific Sun Files for Chapter 11 Bankruptcy and What This Could Mean for Retail Landlords

Pacific Sun, commonly referred to as “PacSun” by California surfers and 90’s kids, is in financial distress. The trendy skate and surf shop with 600 stores nationwide is just one of many retailers that overestimated consumer demand and expanded too quickly. While PacSun’s President and CEO, Gary Schoenfeld, noted that the private equity firm Golden Gate Capital will help make it possible to keep operating as usual, our commercial real estate group asks – what can our commercial real estate clients learn from PacSun’s mistake?

In light of the current tightening of credit markets, it is increasingly important for commercial landlords and their attorneys to be prepared for an upswing in bankruptcy filings by distressed retail tenants. There are three typical outcomes for landlords in the case of these large Chapter 11 retail bankruptcy filings. The debtor (a) terminates (“rejects”) the lease, (b) tries to sell the lease to a financial or strategic buyer, or (c) makes an effort to reorganize and remain in the store.  Each of these alternatives have their own risks, challenges and options, and we can present you with choices and guidance as the bankruptcy process unfolds.  If you suspect a tenant is in trouble, or if a tenant has filed bankruptcy, we can quickly advise you concerning how to effectively manage the situation. We will advise you concerning slow or missed rental payments, termination claims, lease assignments, how to react to a new tenant that may purchase the location and other issues.  

The retail sector is witnessing an increased amount of multi-location retail tenant filings in the bankruptcy courts. HaggenQuiksilver and Sports Authority have filed Chapter 11 just in the last six months.  In light of several other large name companies like American Apparel and Wet Seal having filed for bankruptcy, PacSun is surely not be the last to join their ranks.   CH&’s real estate group has extensive experience guiding landlords in minimizing exposure for preferential transfers and preparing them to deal with the possible insolvency of their tenants. We have worked on these issues in several cases in multiple states, including Washington, Illinois, California and Delaware. We are ready to provide you with targeted legal support and we’re on your team to help you make the best choices to avoid the riptides, whirlpools and risks lurking beneath the surface.