March 11 (Bloomberg) -- U.S. shopping centers and malls are fighting a proposal that would give retailers in bankruptcy more time to decide which stores they will keep.

The International Council of Shopping Centers, a New York- based trade group, wants to retain a 210-day deadline for retailers in bankruptcy to decide which stores to shut, saying it gives landlords flexibility in filling vacancies. U.S. Representative Jerrold Nadler, a New York Democrat, will introduce a plan to lift the limit, one of several changes made to the U.S. bankruptcy code in 2005, as early as this week.

Chapter 11 isn’t “to prop up companies whose time has passed,” Todd Zywicki, a law professor at George Mason University, said today at a congressional hearing in Washington. Cases would “sit in the bankruptcy court and do nothing, much to the frustration of creditors, landlords, and everyone else.”

Those in favor of reversing the changes say the current law prevents bankrupt retailers from restructuring because creditors mindful of the deadline press for quicker sales of companies and assets, making liquidation more likely if a going-concern buyer can’t be found.

At the U.S. House Judiciary Committee’s hearing titled “Circuit City Unplugged: Why Did Chapter 11 Fail to Save 34,000 Jobs?”, lawmakers also examined other 2005 changes to the code, including deadlines for filing reorganization plans and for payments to suppliers. Circuit City Stores Inc. decided in January to liquidate after talks with prospective buyers failed.

One in Five Workers

The National Retail Federation, a Washington-based trade group, asked Congress to repeal the 210-day limit and return to an earlier system under which bankruptcy judges were allowed to extend the period indefinitely, or to extend the limit to a year.

“For businesses and workers, the consequences of this change are devastating,” NRF Senior Vice President Mallory Duncan said in a letter to the committee today. “From the sales floor to the executive suite, one in every five U.S. workers is employed in the retail industry. At any time, but particularly during times of economic stress, preserving those businesses and jobs is important.”

U.S. unemployment climbed to 8.1 percent in February, the most in more than 25 years. The jobless rate will reach 9.4 percent this year and remain elevated through at least 2011, threatening the nation’s longer-term growth potential, a Bloomberg News survey indicated.

‘Good Times and Bad’

The 2005 changes “have created Chapter 11 for good times,” said Jack Williams, a law professor at Georgia State University and a resident scholar at the American Bankruptcy Institute. “The bankruptcy system has to pass the test both in good times and bad times.”

The amendment that requires vendors who sold goods within 20 days of a bankruptcy filing be paid when a company reorganizes is a “final death knell” for some retailers, said Richard Pachulski, a partner at law firm Pachulski Stang Ziehl & Jones LLP in Los Angeles.

The code in current form has swung too far in favor of helping creditors maximize repayment, rather than allowing companies to restructure and exit bankruptcy, Harvey Miller, a partner at Weil, Gotshal & Manges LLP, said in live testimony via video camera from New York today.

Reluctance to File

A company’s chances of successfully reorganizing depend on how early it seeks protection from creditors, Miller said. The 2005 amendments have contributed to a reluctance to file for bankruptcy until it is often too late to emerge, he said.

Weil, Gotshal & Manges has handled multibillion-dollar restructurings from Lehman Brothers Holdings Inc., which filed for bankruptcy with $639 billion in assets, and Enron Corp. to WorldCom Inc.

The current law is “self-defeating” for landlords “because they’re going to have a lot of shopping centers that are not going to have a tenant,” Miller said in a March 9 interview.

The 2005 changes had “unintended consequences” for retailers, said Cory Lipoff, an executive vice president at Hilco Merchant Resources LLC in Northbrook, Illinois. In the past, chains in bankruptcy typically made a first round of store closings, kept the rest open through the holiday season as a test, then made adjustments, Lipoff said. The limit doesn’t allow that, he said in an interview yesterday.

Managing Vacancies

Before 2005, “we were able to work with the landlords to come up with reasonable solutions,” said Lipoff, whose firm advises retailers that are closing stores.

Tenants can still work with landlords to secure extensions for determining which leases to drop, said Garo Kholamian, president of GK Development, Inc., a Barrington, Illinois-based mall operator. Removing the deadline would hinder landlords’ ability to manage vacancies, he said.

“When you take it away, we have no say,” Kholamian said in an interview yesterday. “I’d rather have the space back than this getting dragged out forever.”

One Montgomery Ward store in a strip mall near the Virginia home of George Mason professor Zywicki stayed open for two years and failed to lure shoppers after the chain entered bankruptcy.

“It took down other stores with it,” he said at the hearing. “Foot traffic in the mall just plummeted.”

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net

Last Updated: March 11, 2009 18:10 EDT