In Case You Missed It: Bankruptcy Legislative Update

Perhaps you were riveted by @realDonaldTrump’s live Twitter feeds from the #SocialMediaSummit on Thursday. Or the counter-narrative. Or maybe you tuned out and made cat treats. However you spent the day, it would have been easy to miss the bankruptcy bills that were quietly reported out of Committee for consideration by the House of Representatives:

The Small Business Reorganization Act of 2019 (HR 3311)

The Small Business Reorganization Act (fondly known as the “SBRA”) would add an exciting new Subchapter V to Chapter 11 of the Bankruptcy Code.  This new subchapter would provide a streamlined Chapter 11 process for small businesses. “Small” means “very small,” e.g., businesses with less than roughly $2.5 million in liablities.

But wait, there’s more! SBRA would allow small business owners to preserve their ownership interests – avoiding liquidation under a receivership or assignment or pesky new value problems under a traditional Chapter 11. The idea is that, with proper planning and execution (yes, there’s always a catch), a small business can use SBRA to successfully emerge from bankruptcy within several months with a bright, shiny court-approved plan of reorganization. You can read more about it on The National Law Review.

And take heart. Bipartisanship is not yet dead. No. Seriously. SBRA was proposed by Congressman Ben Cline (R-Virginia) and David Cicilline (D-Rhode Island) along with House Judiciary Ranking Member Doug Collins (R-Georgia) and Congressman Steve Cohen (D-Tennessee).

Small businesses are the backbone of our economy, and I want to make sure they have the tools to keep their doors open. The Small Business Reorganization Act would help business owners maintain more control over their life’s work while overcoming difficult times. I appreciate the leadership of Congressmen Cicilline, Cline and Cohen on this important legislation.

Doug Collins

The Family Farmer Relief Act of 2019 (HR 2336)

Though Chapter 12 provides special support to family farmers, its $4.1 million debt limit keeps many from using it. The Family Farmer Relief Act of 2019 would allow more family farmers to use the program by raising the debt cap to $10 million.

[This] provides the restructuring and seasonal repayment flexibility that many farmers need in today’s lagging farm economy and will help to align bankruptcy law with the scale and credit needs of U.S. agriculture.

Zippy Duval, American Farm Bureau Federation President

This Farm Bureau-supported bill was introduced by Sens. Chuck Grassley (R-Iowa) and cosponsored by Sens. Amy Klobuchar (D-Minn.), Ron Johnson (R-Wis.), Patrick Leahy (D-Vt.), Thom Tillis (R-N.C.), Doug Jones (D-Ala.), Joni Ernst (R-Iowa) and Tina Smith (D-Minn.).

The National Guard & Reservists Debt Relief Extension Act of 2019 (HR 3304)

Currently, National Guard members and reservists who serve on active duty are are exempt from the Bankruptcy Code’s means test. This protection is set to expire at the end of the year, but HR 3304 would extend it for an additional 4 years.

Without question, this commonsense measure warrants our support and its prompt consideration by the full House.

Jerry Nadler

The Honoring American Veterans in Extreme Need Act of 2019 (HR 2938)

The “HAVEN Act” would exclude certain veterans’ disability benefits paid by the Department of Veterans Affairs and the Department of Defense from income under the Bankruptcy Code’s means test. In other words, veterans’ disability would be handled in much the same way as Social Security payments.

This legislation is supported by the National Conference of Bankruptcy Judges, the American Bankruptcy Institute, the National Association of Consumer Bankruptcy Attorneys, and the National Consumer Law Center. It is also supported by the Veterans of Foreign Affairs, the American Legion, and the Disabled American Veterans, among others.

Bankruptcy Venue Reform Act of 2018

Occasionally you ask about the most recent efforts at venue reform. The Bankruptcy Venue Reform Act of 2018 was introduced on January 8, 2018. It was read twice and referred to the Committee on the Judiciary where it is currently gathering electronic dust. You can track its slow progress on Congress.gov.

Mette K.

Restaurants Unlimited on the Bankruptcy Auction Block

Seattle-based Restaurants Unlimited, Inc., operator of 35 restaurants across six states, has filed for Chapter 11 bankruptcy protection in Delaware along with three affiliates. The Bankruptcy Court has scheduled a “first-day” hearing to take place today, July 9th, at 3:00 p.m. The hearing agenda is available here.

Update: The committee formation meeting has been set for July 23rd at 10:00 a.m. at 405 King Street, 2nd Floor Wilmington, Delaware. It promises to be a lovely, muggy, summer day with highs in the 90s and a chance of thunderstorms. I apologize. Seek out air conditioning.

Company Background

Restaurants Unlimited, an eatery chain owned by private-equity firm Sun Capital Partners, Inc, offers both fine dining and polished casual dining in “iconic” locations under the following local brands: 

  • Clinkerdagger
  • Cutters Crabhouse
  • Fondi Pizzeria
  • Henry’s Tavern
  • Kincaid’s
  • Maggie Bluffs
  • Manzana
  • Newport Seafood Grill
  • Palisade
  • Palomino
  • Portland City Grill
  • Portland Seafood Company
  • Scott’s Bar & Grill
  • Simon & Seafort’s
  • Skate’s on the Bay
  • Stanford’s
  • Stanley & Seafort

What Went Wrong?

The filing is the most recent in a spate of restaurant bankruptcies as consumers take advantage of falling grocery prices while restaurants grapple with increasing operating costs and market saturation. In particular, Restaurants Unlimited attributes its filing to steep minimum wage hikes across the Pacific coast—with additional hikes projected for 2020—and the national trend away from casual dining. The company’s unsuccessful, $10 million expansion into two new locations exacerbated these problems. The resulting liquidity crisis saw the company falling behind on rent obligations and vendor payments, defaulting on $40 million in secured debt, and shuttering six locations.

Other recent restaurant filings include Real-Mex, Pappa Ginos, Bertucci, Rock & Brews, Palm Restaurants, Garces Restaurant Group, Joe’s Tavern Brick House, and Taco Bueno.

On the Auction Block

Restaurants Unlimited commenced its bankruptcy case to sell its business through an auction process. The company’s prepetition lenders, Drawbridge Special Opportunities Fund and NXT Capital, and their agent, Fortress Credit Co., are providing $10 million in post-petition financing to support these efforts. In fact, the company first engaged an investment banker to locate to a buyer or secure new financing in 2016. Those efforts failed, and in spring 2019, Restaurants Unlimited hired Configure Partners to run a bankruptcy sale process. Will it have any better luck this time? Although the company does not have a purchase offer in hand, it reportedly has received some initial indications of interest and is “optimistic.”

Financing: At a Price

While post-petition financing will provide the company with much needed liquidity, it comes at a steep price. The financing comes in the form of a senior secured, super-priority, multi-draw term loan with $3.25 to be drawn on an interim basis before final court approval. While there is no roll-up of prepetition debt, the facility includes a 5% closing fee, a 2% commitment fee, and various other fees, as well as a proposed lien on avoidance actions (which would otherwise be available to pay unsecured creditors) and waiver of the debtor’s surcharge rights and the “equities of the case” exception under Bankruptcy Code section 552(b).

The financing is subject to the following proposed milestones, all of which are designed to culminate in a sale by the end of September–despite the fact that the company has not yet located a buyer.

  • July 10: Entry of interim DIP order
  • Aug. 20: Obtain stalking horse bid
  • Aug. 21: Entry of bid procedures order
  • Sept. 13: Bid deadline
  • Sept. 17: Auction
  • Sept. 20: Entry of sale order
  • Sept. 26: Sale consummation

The lien challenge deadline is the earlier of 60 days after selection of counsel to a creditor’s committee or75 days after the petition date. The investigation budget is $25,000.

Critical Vendors

Meanwhile, Restaurants Unlimited is seeking authority to pay up to $3.5 million in “critical vendor” claims consisting of amounts owed to logistics providers, PACA/PASA claimants and an estimated $1.3 million in 503(b)(9) claimants. An initial $500,000 could be paid if approved on an interim basis. Restaurants Unlimited estimates that it owes roughly $8 million to trade vendors, landlords and other unsecured creditors. Of that amount, approximately $4.1 million is owed to its 10 largest unsecured creditors:

Sysco$1.830,000
Pacific Seafood Co.$930,000
Charlies Produce Company$471,000
Microsoft Leasing$180,000
Aramark$160,000
Newport Meat$120,000
LA Specialty Produce Co. d/b/a SF Specialty$120,000
Retail Properties of America$104,000
Baseball Club of Seattle, d/b/a Seattle Mariners$100,000
Attilio Merlino & Assoc., Inc., d/b/a/ Merlino Foods$100,000

Additional Information

Additional information is available free of charge here.

Mette K.