Bankruptcy law changes could help struggling restaurants

Running a small restaurant or an independent restaurant has always been a challenge. Even in the best of times, tight margins and fixed expenses mean that many new restaurants never see their first anniversary. Now, restrictions on on-site dining under stay-at-home orders instituted to fight the COVID-19 pandemic have evaporated the profits of many otherwise financially healthy restaurants, while expenses, such as rent. , remain.

While paycheck protection program loans (which can be canceled under the right circumstances) have been a temporary lifeline for some restaurants, they may not be enough to keep restaurants afloat. given past due rents and other expenses that continue to rise while incomes remain depressed due to continued social distancing measures. Confidence in the industry appears to be at an all-time low, with the Independent Restaurant Coalition Estimate that 85% of independent restaurants could close by the end of 2020.

In the past, restaurateurs were often unable to use bankruptcy to save their business because, in a typical Chapter 11 bankruptcy, the court cannot approve a reorganization plan that leaves control to the existing stock owners to unless all creditors’ claims are paid in full or the existing owners invest new capital in the business. This meant that restaurateurs without access to additional capital could not reorganize in a Chapter 11 bankruptcy and were instead forced to liquidate their businesses in a Chapter 7 bankruptcy.

But two recent changes to federal bankruptcy laws now allow owners of smaller or independent restaurants to restructure their debts in bankruptcy and retain ownership of the business without having to pay more capital. In 2019, Congress passed the Small Business Reorganization Act (SBRA), which created a streamlined bankruptcy reorganization process for businesses with unconditional and liquidated debts (excluding certain debts, such as loans to shareholders) totaling up to $ 2,725,625. Under the Coronavirus Aid, Relief and Economic Security Act passed this year in response to the COVID-19 crisis, the debt limit for using the simplified SBRA process has been raised to 7.5 million dollars for bankruptcy cases filed before March 27, 2021.

The SBRA changes the normal reorganization requirements in a Chapter 11 bankruptcy and allows the court to approve a reorganization plan that leaves control to the current owner, without the owner paying additional capital, if the plan incurs future “income”. available ”from the business for a fixed period (between three and five years) to repay the pre-bankruptcy debts of the business. It is important to note that “disposable income” is defined as excluding income reasonably necessary for the continued preservation and operation of the business, which makes a bankruptcy of the SBRA particularly attractive to restaurants whose income does not. are unlikely to improve significantly until the COVID-19 pandemic abates or resolves.

Distressed restaurateurs would be wise to start consulting a qualified corporate bankruptcy lawyer now to optimize the timing of any future filing and proactively assess the path forward for a successful reorganization well in advance of bankruptcy. deadline of March 27, 2021, when the debt limit to start an SBRA bankruptcy will drop to $ 2,725,625. Distressed restaurateurs should also consult a bankruptcy advisor before signing personal guarantees or granting new liens on company assets; although such concessions may keep creditors at bay for some time, they could make any future reorganization in the context of a SBRA bankruptcy more complicated, if not untenable.

In summary, an SBRA bankruptcy proceeding may be the “vaccine” needed to help many small restaurants and independent restaurant groups survive the current COVID-19 crisis. Like any vaccine, however, an SBRA bankruptcy is best used early, before the company is on life support.

Fletcher is a partner of BakerHostetler in Cleveland. His practice focuses on bankruptcy and insolvency matters and commercial litigation.

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