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Why The Best Restaurants In New York City Choose Chapter 11 Bankruptcy
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.
“If I could just another chance, I could fix the mistakes we’ve made and turn this restaurant around.”
I talk to a lot of restaurant owners that are in dire financial straits, and the quote above is something I hear a lot. It’s especially true of first-time restaurateurs who find themselves in a financial hole, but believe that a few tweaks could have their restaurant running in the black. The good news is that filing for Chapter 11 bankruptcy may be give a restaurant owner the chance to turn things around.
It’s not just first-time owners that run into trouble in New York; celebrity chefs and famous dining spots are filing for bankruptcy at an increasing rate. And while much of the media focus on New York restaurant bankruptcies is on large ownership groups, sole proprietors that operate a single restaurant can benefit from the benefits of a Chapter 11 restructuring too.
Recently, I had a chance to meet with a restauranteur just like that. He was the owner of a small neighborhood Italian restaurant that he had inherited from his parents. And despite having the same location for decades, the restaurant was still renting its space instead of operating in a building he owned. Now, a new building owner has turned this restauranteur’s life upside down. The man tells me that he is locked in a dispute over the multiyear lease, and the dispute has the restaurant on the verge of being evicted. This is despite the restaurant having little to no debt outside of the disputed lease amount.
And that’s one of the tough things about a small business; while a large number of debts can lead to a snowball effect, it is entirely possible that a dispute with a single large creditor can threaten a decades-old restaurant.
The restaurant owner needed help. I was happy to tell him that by filing for Chapter 11 bankruptcy protection, the efforts to evict him would be halted immediately. While relieved, he had lots of questions:
- How much time would he get to renegotiate?
- Does his landlord have the ability to force an eviction even after bankruptcy is filed?
- Is it possible to restructure a business without filing for bankruptcy?
He had questions, and I had the answers. If you have questions about whether Chapter 11 protections are right for your business, The Bailyn Law Firm, P.C. has answers for you, too.
The Restaurant Industry is no Stranger to Bankruptcy
Opening a successful restaurant in New York is quite a feat. In fact, the failure rate of New York eateries was of sufficient interest to the public that a documentary on the subject was made in 2011. According to Eat This New York, 80% of restaurants fail within the first five years in New York City. This is much higher than the rest of the country. And while the failure rate of restaurants in the United States has been ticking down, surviving in the competitive industry has become exceedingly difficult.
One of the biggest issues New York restaurants face is the skyrocketing cost of rent within New York City. In fact, the amount some spaces charge has doubled in less than ten years. The increase in rent has led to iconic New York eateries shuttering.
Consider the restaurant group founded by celebrity chef Jose Garces. Despite Garces’ notoriety from his time on the Food Network and his extensive success opening restaurants in Philadelphia, his attempt to break into the New York market was disastrous. His first attempt, a New York location for his hit tapas restaurant Amada, ran into enormous cost overruns and never turned a profit. His second attempt, which opened even as Amada struggled to stay afloat, was hanging on by a threat in May of 2018 when Garces filed for bankruptcy protection. By filing for Chapter 11 protection, his restaurant group was able to hit the pause button in an attempt to restructure. That eventually led to the decision to shutter Amada and negotiate a sale of the rest of his assets in New York. The second restaurant continues to operate during the bankruptcy; an outcome that would have been unlikely if Chapter 11 protections were not in place.
Restructuring your Restaurant
Regardless of your plans for the future, hitting the pause button on your creditors and getting the breathing room you need to restructure your restaurant can be life-changing. Whether you want to rebuild your business from scratch or stabilize it long enough to find a buyer, Chapter 11 could be the answer for you.
As the restaurant owner I mentioned above learned, a single dispute with a major creditor like a landlord can be enough to destabilize your business. In fact, as New York rents go up, many landlords are looking for ways to break leases in order to charge even more to new tenants. Whether you think your rent issues are a good-faith dispute that can be negotiated or if you believe your landlord is treating you unfairly, the protections provided by a Chapter 11 filing can buy you time to sort things out.
When you file for bankruptcy, you are protected by what’s known as the automatic bankruptcy stay from the moment that you file. Once the stay is in place, your creditors must cease all collection efforts and comply with the bankruptcy process. While the bankruptcy case is underway, your restaurant will be able to stay open and operate like normal.
Your landlord isn’t your only creditor, however. And without a relationship with your suppliers, continuing to operate your restaurant will be virtually impossible. You can’t have a restaurant without food suppliers, right?
During a Chapter 11 bankruptcy, you will have some options when it comes to debts you owe to your suppliers. If you don’t intend to continue operating, many of these debts can ultimately be discharged. But if your goal is to restructure and continue operating, you and your bankruptcy attorney may be able to negotiate a new relationship with your suppliers. This could include everything from debt forgiveness, to payment plans, to renegotiated interest rates. Many suppliers will be happy to receive even pennies on the dollar, while others will agree to write off some debt if it means keeping you as a paying customer going forward. A Chapter 11 restructuring can be the opportunity you need to learn from your previous mistakes and reshape your debts in a way that is sustainable.
Another major cause of restaurant closures that we haven’t mentioned yet is tax debt. Much like with bars that seek bankruptcy protection, tax debt can ultimately lead to the shuttering of an otherwise successful New York restaurant. In fact, the New York tax authority can shut down a restaurant for an unpaid tax bill by changing the locks and forcing the owner out.
A bankruptcy filing will halt tax collection efforts against you and even re-open your business if it has been closed by the tax authority. The bad news is that while temporary relief is possible, you cannot discharge your tax debt in bankruptcy. This goes for sales tax you owe to the State of New York as well as the IRS.
The good news is that these tax entities will often negotiate with you like any other creditor. If your tax debt is so overwhelming that you have no chance of paying it back while staying in business, your tax creditor may give you a break. This can come in the form of a structured payment plan or even a partial forgiveness of the taxes you owe. Having an experienced New York bankruptcy attorney in these situations can go a long way in restructuring your tax debt in a way that will let you stay in business.
Structured Settlements vs. Chapter 11 Restructuring
One important question the restaurant owner I was speaking with had is something most potential clients ask: is bankruptcy really necessary?
It’s a valid question. There’s nothing stopping you from attempting to negotiate with your creditors outside of the bankruptcy process. In fact, my firm routinely helps businesses with out-of-court workout, loan modifications, and bankruptcy avoidance litigation. In some cases, it makes sense to avoid bankruptcy. This is especially true if you have long-standing relationships with your creditors or if the amount of your debt is not overwhelming. But in many cases, the protections provided by the automatic stay are necessary to ensure your business gets the fresh start it needs.
The big drawback with these non-bankruptcy options is that you are powerless to stop your creditors from attempting to collect against you. Out-of-court workouts are great, but one creditor that refuses to go along with the process can be enough to render the entire process a failure.
At the end of my conversation with the restauranteur, I could tell he was weighing his options. While he was obviously hesitant about filing for bankruptcy, the reality is that resolving the conflict with his landlord may only be possible with the protection provided by a Chapter 11 filing.
The thought of filing for bankruptcy may seem daunting, but in many cases it is the only chance a business has to keep the doors open. If you would like to discuss your options with the Bailyn Law Firm, contact my office immediately to set up your consultation.
Fill out the form below or call us at 646-326-9971 for a free in-office consultation.
Bradley R. Bailyn, Esq. , Founder
Bradley R. Bailyn, Esq., is a New York City-based attorney, author and speaker with practice area expertise in commercial real estate and bankruptcy law. Prior to founding The Bailyn Law Firm, Mr. Bailyn served as in-house counsel for multiple companies, where he advised on all legal aspects of major business and financial transactions including private equity, spin-offs, real estate, and restructuring transactions, for more than thirteen years.
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