communicate the prospects for an
ongoing relationship with the brand.
In many circumstances, vendors that
supply critical food products will have
a claim against the estate prioritized
ahead of other creditors under either
Bankruptcy Code Section 503(b)( 9) or a
the Perishable Agricultural Commodities
Act (PACA). Section 503(b)( 9) applies to
the value of any goods received by the
debtor within 20 days before the date
of the bankruptcy petition, and PACA
covers all suppliers delivering fresh
fruits and fresh vegetables to a debtor.
Real Property Lease Portfolio
A primary advantage available to food
service operators in a Chapter 11 is the
ability to optimize a concept’s store
footprint by exiting underperforming
locations. At the same time, however,
there are challenges that may hinder
a debtor’s ability to exit certain
locations or that may negatively
impact recoveries to creditors.
Because of the nature of the operations
within the food service sector, many
debtors will have a material portion of
prepetition claims covered by Section
503(b)( 9) and PACA, creating a high
administrative solvency threshold
for an estate. When compounded
by a financing market that has been
slow to rebound for asset-light,
trendy business models, this higher
threshold for administrative solvency
can serve as an impediment to a
restaurant reorganization and exit.
Debtors may leverage this classification
of prepetition claims to enhance their
liquidity position by negotiating post-petition trade terms with vendors that
have material administrative claims.
To receive post-petition trade credit,
debtors must proactively communicate
with their vendor base regarding: (i)
a viable plan to exit Chapter 11 and
instill confidence that the debtor is
administratively solvent; and (ii) the
expected timing for each vendor to
receive payment on account of any
Section 503(b)( 9) or PACA claim.
Additionally, maintaining substantial
cash reserves or availability under a
debtor-in-possession (DIP) financing
facility is often a prerequisite
for successfully negotiating
credit terms with vendors.
If they plan to use DIP financing for
liquidity needs, operators must allow for
appropriate prepetition planning. Given
the often asset-light balance sheets of
restaurants, stand-alone DIP financing
can be difficult to secure if underlying
cash flows do not suggest comfortable
enterprise value coverage. Accordingly,
working in advance with a debtor’s
prepetition lender or logical exit investors
may prove to be the optimal approach
to securing post-petition financing.
To maximize growth and investment
capital during the last decade, many
restaurant operators monetized their
unencumbered real estate assets
via sale-leaseback transactions.
Sophisticated counterparties often
structured sale-leasebacks to govern
numerous locations under a single
master lease. In such cases, it is often
difficult to reject selected real property
leases if other stores covered by a master
lease will be assumed post-bankruptcy.
Bankruptcy courts have repeatedly
stated that debtors cannot retain only
the beneficial aspects of leases and
instead must assume or reject an
unexpired lease in its entirety. As a result,
debtors may be required to continue
operating undesirable restaurant
properties covered by a master lease.
continued on page 14
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