Retail & Restaurant Bankruptcies: What are creditors’ options when they close?

Store closing banner sign

Within the past year, I’ve driven up to three of my favorite casual dining restaurants—Applebee’s, Paradise Bakery, Sweet Tomatoes—only to find that they had closed. According to the Internet, which is not always up-to-date, some locations are still open. However….

  • Garden Fresh/Sweet Tomatoes Restaurant Corp has filed for Bankruptcy and plans to sell the business to lenders.
  • Paradise Holdings Inc. declared bankruptcy in 2004, but it was purchased by Panera Bread Company in 2009. Some locations are being transformed into Panera restaurants, but not in UT.
  • Applebee’s are mostly owned by independent business owners. Mine is probably one of the many that have found customers are going for faster fare or splurging on a trendier experience.

According to a May 2017 article on Restaurant Industry Chapter 11 Bankruptcies published in Law Journal Newsletters, “The past year has brought a wave of restaurant businesses filing for reorganization in Chapter 11. With inherently low profit margins, increased competition, limited pricing flexibility and a propensity for expansion without the support of underlying business fundamentals, the industry is particularly susceptible to business failure.”

What recourse do creditors have when a restaurant chain declares bankruptcy and closes some or all of their locations in the process? “Often, restaurant businesses will file Chapter 11 to facilitate a sale of the business as a going concern….while also providing the means to sell assets free and clear of the claims of creditors, and assuming and assigning leases and executory contracts to the purchasers. But the market for these restaurant assets does not exactly appear robust. In the Garden Fresh case, an auction sale was canceled after no qualified bids were submitted.”

Bankruptcy attorney Theodore Lyons Arujo answered, “If the corporation no longer exists, there is no party to sue. If they get a judgment against the corporation and there are no assets, there is nothing for them to collect.” Debt collection attorney Barry F. Gartenberg said, “If the creditor is a creditor of the corporation, and the corporation is legally dissolved and has no assets, there is (generally) nothing the creditor can “get to.”

Large Retail Chains Failing

Shocking most of us, Toys “R” Us recently won court approval to start using a bankruptcy loan from lenders led by J.P. Morgan Chase & Co., something the company’s attorneys argued was vital to the troubled toy retailer’s survival. The proceedings are designed to give Toys R Us time to reorganize its finances, by protecting it from creditor demands as it deals with huge debt.

As Americans do more and more of their shopping online instead of at the store, many traditional retailers are feeling the hit. Some are being forced to close a number of stores—or go out of business altogether. Already 2017 has been a year of massive store closings, led by these chains: Macy’s, Gymboree, Payless ShoeSource, Radio Shack, J.C. Penney, Sears, Kmart, The Limited, Abercrombie & Fitch, Guess?, American Apparel, rue21 and others.

When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.

In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company.

In Chapter 11, in most instances the debtors remains in control of their business operations as a debtor in possession, and are subject to the oversight and jurisdiction of the court. Unless a separate trustee is appointed for cause, the debtor acts as trustee of the business and has a number of options to restructure the business.  Financing and loans can be acquired on favorable terms by giving new lenders first priority on the business’s earnings. The court may also permit debtors to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While it is in place, creditors are kept from any collection attempts or activities against the debtor, and most litigation against the debtor is put on hold, until it can be resolved in bankruptcy court. Creditors may file with the court to seek relief from the automatic stay. All creditors are entitled to be heard. Chapter 11 can also be used as a mechanism for liquidation.

If you are a secured creditor in a bankruptcy case, you retain certain rights regarding the debtor’s assets. You also have a right to challenge a debtor’s submitted payment plan or right to discharge. Talk with an experienced bankruptcy attorney to discuss your case. You can find one on The National List Website, or call The National List of Attorneys at 800-227-1675 to discuss assignment to an attorney experienced in creditors’ rights.

Where shall we go to dinner? I hope all your favorite restaurants haven’t closed, and that any retail establishments you have an interest in—either for personal shopping, as an investment, or as a contractor/products or services provider—are going to be profitable for years to come!

by Marti Lythgoe, Editor, The National List of Attorneys

Categories: Bankruptcy, commercial bankruptcy, Commercial collections, Creditors' Rights, Debt Collection, National List, NL Insider, old debt, retail bankruptcy

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