Since COVID-19 hit, there has been a wave of bankruptcies in the food and beverage industry, and more are expected to follow. See, e.g., In re TooJay's Management LLC et. al., No. 9:20-bk-14857 (Bankr. S.D. Fla. April 29, 2020); In re Garden Fresh Restaurants LLC (Sweet Tomatoes), No. 3:20-bk-02477 (Bankr. S.D. Cal. May 14, 2020); and In re Bar Louie dba BL Restaurants Holding LLC, No. 1:2020bk10156 BL (Bankr. Del. Jan. 27, 2020). Although brands such as Sweet Tomatoes, TooJay's, Bar Louie and others have chosen bankruptcy, there are other options that restaurants facing financial distress can also consider.

Out of Court Workouts

At the first sign of trouble, retailers should communicate openly and honestly with their landlords, suppliers and lenders to explain the situation and to offer an exit strategy. Creditors may be understanding and willing to work through troubled situations given the economic reality that COVID-19 has substantially reduced sales. Expect creditors to request financials. If the business has multiple locations and lots of angry creditors, consider hiring an outside turnaround consultant or bankruptcy lawyer to advise from the outset. An independent financial consultant may bring credibility and comfort to skeptical creditors by providing accurate financial projections and a turnaround plan.

Liquidation Options

If it simply is impossible to survive, restaurants may liquidate their assets outside of court with the consent of their secured creditor or their lenders may orchestrate a Uniform Commercial Code secured party sale of collateral. If the owner simply wants to walk away, the restaurant can assign its assets to an independent fiduciary to liquidate for the benefit of creditors. A restaurant may also liquidate in a Chapter 7 bankruptcy as Sweet Tomatoes did, although smaller restaurants should certainly consider other alternatives since Chapter 7 cases sometimes result in litigation against the owners.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is an important tool that enables a cash flowing operation to restructure its balance sheet and to de-leverage if the assets are worth less than the secured debt. Bankruptcy also provides an important tool for restaurants with multiple lease locations that are no longer profitable. Under Section 365 of the U.S. Bankruptcy Code, a debtor can assume and continue performing under good locations, or reject leases for bad locations while capping a landlord's claim essentially at one year's rent. In addition, bankruptcy affords a quick sale process by which certain restaurant locations or the entire operation can be sold free and clear of liens pursuant to Section 363 of the Bankruptcy Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.