Opinions and Legal Insights

New Bankruptcy Law Offers Hope to Struggling Restaurants

“As an outsider to and observer of the restaurant business, one of the things I most admire about it is the risks people are willing to take.” – John Lanchester

Operating a small, family or independently owned restaurant is a challenge even in good times. Considering the tight margins and fixed costs that restauranteurs confront even during a robust economy, it is easy to understand how COVID-19 closures and re-opening restrictions have compounded their struggles. The plummeting restaurant industry sales due to the pandemic have crushed even previously thriving restaurants —their profits are gone, but their overhead (rent, utilities, etc.) remains.

Are you considering filing for bankruptcy?

Contact our legal team to find out all of the options available to you.

Although the Paycheck Protection Program (PPP) Loans temporarily helped to sustain some restaurants, PPP Loans are proving unable to sustain many restaurants in the long-term.1 Again, overhead remains (and in many cases is increasing due to required pandemic-mitigation measures), while restaurant sales/revenue plummet. According to the Independent Restaurant Coalition’s report dated June 10, 2020:

Simply put, independent restaurants need additional financial assistance to bridge the battle to contain the virus—and they need it now, or this country risks permanently losing as many as 85% of independent restaurants by the end of the year.2

In the not so distant past, restauranteurs who had enough cash were able to reorganize under Chapter 11. However, for those equity owners lacking sufficient capital to satisfy all creditors’ claims in full, or allow the existing owners to inject capital into the business, the existing equity owners lost control of their business.

We know now, though, recent bankruptcy changes offer new hope to owners of these restaurants, such that they may restructure their debts in bankruptcy and maintain ownership of the business without having to use other capital sources. Fortunately, the Small Business Reorganization Act (SBRA) became effective in February 2020, just before the COVID-19 pandemic hit.3

The SBRA added new Subchapter V to Chapter 11 of the United States Bankruptcy Code, creating a streamlined bankruptcy reorganization process for struggling businesses, which more easily permits business operations to continue and business owners to retain ownership of their businesses. This process is generally available for businesses with noncontingent, liquidated debts totaling an amount not exceeding $2,725,625.4

Significantly, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed this year in response to the COVID-19 crisis, the debt threshold for the streamlined SBRA was increased to $7.5 million for bankruptcy cases that are filed before the law sunsets in March of 2021.

Unlike the traditional, high cost Chapter 11 bankruptcy, Subchapter V features include:

  • Expedited Process. The Subchapter V timeline is significantly shortened. Within 60 days of the petition date, a status conference must be conducted, and the business must file a plan within 90 days of the petition date.
  • Efficiency. Subchapter V ensures that only the business itself may propose a reorganization plan.
  • Flexibility. The owner retains control of the business if the owner commits to repay its prebankruptcy debts over a set period of time (three to five years) with the business’s future “disposable income.”5

Owners of restaurants should consult with a qualified SBRA bankruptcy attorney now to proactively understand all of the options available to them. Owners would be wise to call bankruptcy counsel before signing any loan documents that might be unworkable in a future bankruptcy case. In conclusion, a bankruptcy case may be “what the doctor orders” to assist the small, family, and independently owned restaurants and restaurant groups struggling to survive the current crisis. It is best to evaluate these options now and not when there are no other options available. Please reach out to us today.

Footnotes

  1. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, P.L. 116-136, created the PPP,  which dramatically expanded eligibility and relaxed restrictions on the U.S. Small Business Administration (“SBA”) Section 7(a) Loan Program, which is the primary program for providing small businesses with much needed financial assistance.
  2. You can read the Independent Restaurant Coalition’s full report at: https://media-cdn.getbento.com/accounts/cf190ba55959ba5052ae23ba6d98e6de/media/EmH1JsVMRNylmKAeF2FJ_Report.pdf.
  3. Pub. L. 116-54. You can read more about this development in our previous article: Considering Closing Your Small Business? Wait!
  4. Note that certain debts are excluded, such as shareholder loans.
  5. 11 U.S.C. § 1191(c).

Authors

Dan Staeven, Business Attorney at Frost & Associates

Daniel Staeven

Associate

Mary Lundstedt

Associate

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