Filing for Chapter 11 bankruptcy allows a company to negotiate with its creditors. In the case of a restaurant chain, the owners are often the primary creditors.
In most cases, the purpose of a Chapter 11 bankruptcy filing is to help a business reduce its costs in order to find a way to operate on a more solid financial footing.
Related: Another fast food chain loses locations in Chapter 11 bankruptcy
That requires the support of the people who are owed money. Even when a buyer emerges and it seems the company will survive, its creditors may reject the deal or at least demand concessions.
The bankruptcy court judge then has to decide what is best for the majority of people. In some cases, this may be a business making a “take it or leave it” deal. That's more or less what happened with the purchase that allowed David's Bridal to stay open.
In that case, not all creditors were compensated, but none raised an objection that made liquidation a better option for creditors, suppliers and customers than continuing operations with some past invoices unpaid.
In the case of Red Lobster, the popular restaurant chain has found a buyer, but that hasn't resolved its Chapter 11 bankruptcy case.
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Red Lobster has had difficulties
To find a path toward sustainable operations, Red Lobster needs to cut costs. When it filed for bankruptcy in May, the chain closed 99 locations in 28 states. These were restaurants where the company felt it had no chance of being profitable, and the closures were clearly permanent, as they were quickly followed by Red Lobster auctioning off each location’s kitchen equipment.
Basically, Red Lobster can only raise prices so much based on the type of restaurant it is. It can't afford luxury rents in markets where demand for space has driven up costs.
The chain does not have national pricing, but its business model is essentially that of a value provider of takeout seafood meals.
As part of its bankruptcy process, Red Lobster also wanted to keep more than 100 branches open, but only with concessions from its landlords. In most cases, this was more than just rent forgiveness. The company also wanted its landlords to forgive bank rent.
Now, after sharing that its new owner will be RL Purchaser LLC, a broker-dealer formed by Red Lobster lenders, the company continues to close branches.
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, as they see this as the best way to recover at least some of the money they are owed.
The bankruptcy court still has to approve the deal. The company also filed a series of court documents designed to help it exit its leases at 23 more locations before the end of August.
“Red Lobster has requested a hearing for August 29,” according to KDSK.com.
“Attorney Edward Peterson of Tampa, Florida-based Johnson Pope law firm, who is not involved in the proceedings, said the scheduling of the hearing for that day is intended to get the company out of its locations in time to avoid incurring another month's worth of rent payments,” the local news station added.
More bankruptcies:
- Home Depot rival in trouble files for Chapter 11 bankruptcy
- Popular Italian restaurant chain files for Chapter 11 bankruptcy
- Another struggling transportation company files for Chapter 11 bankruptcy
With the closures ongoing, many fans of the chain are worried about the possibility of it closing altogether. The company has tried to assuage those fears with new ads featuring rapper and reality TV host Flavor Flav and boldly declaring “Yes, we are open” on its website.
Of course, it's not open at the more than 100 locations that have already closed, and another 23 Red Lobsters are likely to soon follow suit, assuming the bankruptcy court approves the closures.
