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Chapter 11 Reorganizations in the Restaurant and Hospitality Industry

Restaurant and Hospitality Industry

The restaurant industry is no stranger to hardship - particularly evident in recent years - having faced mandatory closings, reduced occupancy requirements, labor shortages, and increased labor costs as a result, and various other operational challenges resulting from the Covid-19 pandemic. For these reasons, many restaurants have decided to explore Chapter 11 to obtain much-needed debt relief.  

A discussion of restaurant bankruptcies ought to begin with a discussion of bankruptcy exit strategies. The most successful restaurant reorganizations are most likely to occur when debtors, guided by experienced counsel, have analyzed their exit options before filing their bankruptcy petitions. Planning is, indeed, key.  

Prepetition planning is important because of the limited time debtors have to decide if they want to retain leases, sell assets, or reorganize. For example, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) imposes a limit of 210 days from the date of the petition for a debtor to assume or reject its storefront lease. Moreover, if considering a liquidation, debtors must understand their liquidity position and debt covenants, including the lender’s rights pursuant to a loan agreement. This prepetition planning allows a debtor to isolate areas of potential contention and tackle them upfront, which will ultimately reduce costs and ensure a smoother road through the bankruptcy process to the goal of confirmation of a reorganization plan.  

Chapter 11 provides many benefits and protections to debtors. The most significant of these available protections include the automatic stay, which prohibits collection and enforcement activities against the debtor. The automatic stay means that a creditor cannot evict the debtor from its leased premises or enforce a prepetition judgment against it. Lease rejection is another benefit. The debtor possesses the ability to reject contracts and leases that are unprofitable or burdensome. The threat of rejection can be used as leverage to negotiate more favorable terms with the debtor’s landlord.  

While advantageous, Chapter 11 bankruptcies are not without challenges. Chapter 11 is more costly than an out-of-court workout. Management also risks being displaced by the appointment of a Chapter 11 operating trustee. The debtor must also seek court approval for all decisions outside the ordinary course of business, such as the rejection of material contracts. A debtor may additionally face a lack of available financing. A lack of post-petition liquidity may prevent a debtor from successfully reorganizing. This is why prepetition planning, such as maximizing use of a debtor’s borrowing base on prepetition loans is important.  

A smooth transition into Chapter 11 usually requires filing first day motions to seek the relief necessary to address both administrative and operations issues. First day motions accomplish restoring confidence of trade suppliers, maintaining employee morale, and minimizing the impact of the filing on business operations. With respect to boosting employee morale, a debtor can plan the filing to minimize the amount of prepetition wages owed to employees. For example, filing the petition at the onset of a given payroll cycle will ensure employees receive wages for work performed prepetition.  

As a final note, trade creditors should be aware of the protections available to them under the Bankruptcy Code to maximize recovery on their claims. Trade creditors should consider their possible status as critical vendors or letters of credit to support payment obligations, to name a few.  

Whether you are an owner of a restaurant considering a Chapter 11 bankruptcy or a creditor that has supplied goods to a customer that is now in bankruptcy, contact KI Legal’s Bankruptcy and Restructuring attorneys to learn how the bankruptcy process can best cater to your needs. Call (212) 404-8644 or email to discuss.  



This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.


KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit

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