You have just received word that one of your tenants is in bankruptcy and plans to conduct a going out of business (“GOB”) sale. GOB sales taint shopping centers with the flavor of failure. They also present opportunities for abuse of consumers, leaving shoppers reluctant to return to the mall where the bad deal occurred. Principally to protect consumers, Washington’s law regulates the conduct of GOB sales.

The merchant must record a notice of its going out of business sale at least 14 days before the sale. The notice must be accompanied by an affidavit of inventory or a compilation of purchase orders issued by the business in the preceding 30 days. Ads for a GOB sale cannot begin to run any earlier than 14 days before the sale and must state the start and end dates of the sale.

No consignment merchandise can be sold. No merchandise can be transferred to the location where the sale is to occur. The purpose of these requirements is to assure that no additional merchandise is acquired to be sold during the GOB sale.

Sales cannot last longer than 60 days and can only be conducted by Washington licensed businesses. In what can fairly be described as “anti-liquidator” provisions, no business can acquire an interest in the business or property for the purpose of conducting a GOB sale. Those conducting the sale cannot do business under the same or similar trade name, or offer the same merchandise in the same location for a period of one year after the sale.

It is a crime (a misdemeanor) to knowingly violate any of these provisions.

Washington’s going out of business laws appear to afford landlords a great amount of protection. However, these laws may be rendered meaningless if the tenant files for bankruptcy. In bankruptcy proceedings involving chain stores, courts have commonly overridden lease restrictions with regard to the conduct of GOB sales. The bankruptcy courts’ objective is to maximize the return for creditors and, in the appropriate context, generate the optimum amount of cash to facilitate a reorganization. The liquidation sale is often a precursor to rejection of the underlying lease, which can facilitate the chain’s consolidation of its stores and operations.

While courts sometimes have analytically lumped state statutory restrictions on GOB sales within the same reasoning as lease restrictions, Washington’s statutes provide ample grounds for different treatment. There is authority for the proposition that bankruptcy courts cannot override consumer protection and criminal statutes; Washington’s GOB statutes have components of each. Although the Attorney General’s office is charged with the enforcement of these statutes, shopping centers should not expect the Attorney General to devote resources to contesting proposed GOB sales absent apparent injuries to consumers.

Evaluating the likelihood of success in challenging GOB sales in a tenant’s bankruptcy depends on the facts and circumstances of each individual situation. From a purely financial perspective, sometimes it may not make sense to challenge a bankrupt tenant’s plans to avoid the state’s GOB sales requirements. Often, the decision to contest a bankrupt tenant’s plans needs to made quickly, because the court proceedings relating to the proposed GOB sale will be scheduled on an expedited basis. A landlord receiving notice of a bankrupt tenant’s plan to terminate its lease and/or to conduct a GOB sale should consult with its business and legal advisors and quickly determine whether it should challenge the plan. Such a challenge may be a prelude to negotiations towards a more palatable outcome, even where the chances of persuading the bankruptcy court to deny or modify the tenant’s plan appear limited. Surely, there is no chance of improving your position if the court grants the debtor relief because no one opposed the plan.