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Bankruptcy Challenges Facing Restaurants in the COVID Era

Posted on May 15, 2020 in by Scott Brown

We’ve all read about the recent bankruptcy filings of large national retailers such as JCrew and Neiman Marcus, with predictions of many more to come, but there’s been far less press about restaurants and restaurant chains that have filed bankruptcy or are likely to file bankruptcy. 

A number of restaurant chains were teetering on the edge before COVID hit, in large part due to rising labor and leasing costs, debt load, and the changing habits of Americans who are trying to eat healthier. With government orders limiting restaurants to takeout-only operations, the challenge to maintain profitability has become even more so. Others, such as Cosi and CraftWorks Holdings (the owner of Gordon Biersch and Logan’s Roadhouse) filed earlier this year before COVID was declared a pandemic.

Last week, South Florida had its first major restaurant bankruptcy filing when TooJays Deli, with 28 restaurants around Florida, filed for Chapter 11. According to the declaration, the filing is to preserve the value of assets and operations, restructure debts, and work with existing landlords to help the company get through the pandemic. Later in the week, Garden Fresh, the owner of  buffet-style Sweet Tomatoes and Souplanatation announced that it was permanently closing all 97 locations due to the pandemic and planned to file bankruptcy. Additionally, there are press reports about many more restaurant bankruptcy filings in the works.

The dichotomy between TooJay’s and Cosi is interesting because, among other things,  TooJay’s waited to file until days after it received a $6.4 Million Paycheck Protection Program loan, while the Small Business Administration denied Cosi’s PPP application based on its status as a Chapter 11 debtor. Cosi sought relief from the Bankruptcy Court, but Delaware Bankruptcy Judge Brendan L. Shannon reluctantly denied Cosi’s request for a temporary restraining order to prohibit the Small Business Administration from disqualifying Cosi’s PPP application. 

The new rule posted by the Small Business Administration clarifies which businesses are eligible to receive loans, stating “If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application, or at any time before the loan is disbursed, the applicant is ineligible to relieve a PPP loan.”

Stay tuned as we wait to see whether loosening social distancing regulations throws a lifeline to restaurants and whether the Small Business Administration, either on its own or as a result of Court intervention, decides to change its policy of denying PPP loans to debtors.

Read more on Law360.

If you have questions about options available to your business during this time, please contact one of Bast Amron’s Insolvency Litigators.