The Penn Traffic Company, the Syracuse, New York based grocery retailer, filed for Bankruptcy in Delaware on November 18, 2009. According to documents filed with the United States Bankruptcy Court for the District of Delaware, this is Penn Traffic’s third time in bankruptcy within the last ten years. With annual revenues of $872 million, Penn Traffic is one of the largest food retailers in the Northeastern United States. Aside from operating 79 retail stores, Penn Traffic also provides transportation, warehousing, distribution and retail support for C&S Wholesale Grocers. (Click here to review a copy of Penn Traffic’s Declaration filed in support of various bankruptcy motions).
Events Leading to Bankruptcy
Penn Traffic lists several reasons for its most recent bankruptcy filing. Like many debtors before it, Penn Traffic cites the “global economic downturn” as the leading cause if its financial difficulties. Despite the fact that the company cut costs by $6.2 million last year, Penn Traffic lost over $18.3 million in 2009 and $41.7 million in 2008. The company faces higher operational costs due to a continued decline in the number of customers that come in to its stores. Further, these customers are spending less per individual than in years past.
Besides the recession, Penn Traffic was also hit hard by litigation brought by the SEC in 2007. The SEC litigation followed a two year investigation of the company’s accounting practices. In addition to the SEC civil litigation, the U.S. Attorney for the Southern District of New York brought criminal charges against certain officers of the company. These individuals were later terminated by Penn Traffic and a settlement in the civil action was reached almost a year ago. Even though the SEC litigation is over for the most part, Penn Traffic notes in its bankruptcy Declaration that “the effects of the significant legal and auditing costs continue to date.”
Penn Traffic’s Financials
Penn Traffic has two primary loans – a senior secured credit facility with a balance of $42 million and a supplemental real estate facility with a balance of $10 million. According to Penn Traffic’s bankruptcy petition, the company’s ten largest unsecured creditors include:
- ABC Refrigeration … $405,216
- Coca Cola … $343,102
- Deli Boy Prov. Co. … $326,623
- EMC … $183,846
- G. Weston Bakeries … $315,213
- Karabus Management … $437,328
- Local 23 Health Fund … $518,996
- Nat’l Indus. Portfolio … $344,183
- New York State Fair … $333,160
- Stroehmann Bakeries … $213,105
Objectives in Bankruptcy
The company sought, unsuccessfully, to find additional financing to help it reorganize. Through an agreement with its secured lenders, Penn Traffic is able to use cash collateral to fund its operations. However the continued use of cash collateral is contingent on the company seeking a sale under section 363 of the Bankruptcy Code. Without a sale, Penn Traffic believes it will have no choice but to close all 79 retail stores and 4 warehouses.
The United States Bankruptcy Court for the District of New Jersey, in a recent decision, spelled out the standard for a sale of a debtor’s business outside the ordinary course of business. In re Congoleum Corp., 2007 WL 1428477 at 2 (Bankr.D. N.J. 2007). Under Congoleum, a debtor seeking to sell substantial assets must establish a “sound business purpose.” Factors in support of a sound business purpose include: (i) a sound business reason; (ii) accurate and reasonable notice; (iii) adequate price; and, (iv) good faith. These factors will be relevant if Penn Traffic succeeds in finding a buyer for its assets.
This bankruptcy proceeding is before the Honorable Peter J. Walsh, a former Chief Judge of the United States Bankruptcy Court for the District of Delaware.