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Filing for Chapter 11 bankruptcy allows a company to negotiate with its creditors. In the case of a restaurant chain, landlords are often the largest creditors.
In most cases, the purpose of filing for Chapter 11 bankruptcy is to help a company cut its costs in order to find a way to operate on a continuing basis with a stronger financial footing.
Related: Another Fast Food Chain Loses Locations in Chapter 11 Bankruptcy
This requires the support of the people you owe money to. And even when a buyer emerges and the company looks like it will survive, its creditors can reject the deal, or at least demand concessions.
Then it’s up to the bankruptcy court judge to decide what’s best for the majority of people. In some cases, that company may be the one to make a “take it or leave it” deal. That’s what happened with the acquisition that allowed David’s Bridal to stay open.
Not all creditors were compensated in this case, but no one raised an objection that made liquidation a better option for creditors, vendors, and customers than continuing operations with some past bills unpaid.
In the case of Red Lobster, the famous restaurant chain found a buyer, but that did not resolve its Chapter 11 bankruptcy case.
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Red Lobster has suffered.
For Red Lobster to find a path to sustainable operations, it needs to cut costs. When it filed for Chapter 11 bankruptcy protection in May, the chain closed 99 locations in 28 states. Those restaurants, the company felt, had no chance of turning a profit, and the closures were clearly permanent, with Red Lobster quickly auctioning off the kitchen equipment at each location.
Basically, Red Lobster can only raise prices so much depending on the type of restaurant. It can’t afford to pay exorbitant rents in markets where demand for space has driven up costs.
The chain does not have national pricing, but its business model is primarily based on offering value seafood meals.
As part of the bankruptcy process, Red Lobster also wanted to keep more than 100 locations open but only if they got concessions from their landlords. In most cases, that wasn’t just rent relief. The company also wanted landlords to waive their bank rent.
Now, after the company announced that its new owner will be RL Purchaser LLC, a fictitious bidding company made up of Red Lobster lenders, the company continues to close locations.
Red Lobster will continue to shrink.
RL Purchaser has proposed paying $376 million for the seafood chain. Essentially, the company’s largest creditors will take control because they see this as the best way to recover at least some of the money they are owed.
The deal still has to be approved by a bankruptcy court. The company has also filed a number of court documents designed to help it get out of leases at 23 other locations before the end of August.
“Red Lobster has requested a hearing on August 29,” according to the KDSK.com.
Scheduling the hearing that day is intended to get the company out of its locations in time to avoid another month of rent payments to them, said attorney Edward Peterson of the Tampa, Florida-based law firm Johnson Pope, who is not involved in the proceedings, according to the local news station.
More bankruptcy:
- Home Depot Competitor Files for Chapter 11 Bankruptcy
- Popular Italian Restaurant Chain Files for Chapter 11 Bankruptcy
- Another troubled transportation company files for Chapter 11 bankruptcy
As lockdowns continue, many fans of the chain are worried it will close entirely. The company has tried to calm those fears with new ads featuring rapper and reality TV personality Flavor Flav and boldly declaring “Yes, we’re open” on its website.
Of course, Red Lobsters restaurants have yet to reopen at the more than 100 locations that have already closed, and that fate will likely soon be met by 23 more Red Lobsters restaurants, assuming the bankruptcy court approves the closures.
