A Chapter 11 filing allows a company to negotiate with its creditors. In the case of a restaurant chain, landlords are often the biggest creditors.
In most cases, the purpose of a Chapter 11 bankruptcy filing is to help a company lower its costs in order to find a way to operate on an ongoing basis with a stronger financial footing.
Related: Another fast-food chain losing locations in Chapter 11 bankruptcy
That requires the support of the people to whom you owe money. Even when a buyer emerges and it appears the company will survive, its creditors can reject the deal or, at least, demand concessions.
It's then up to the bankruptcy court judge to decide what's best for the most people. In some cases, that can be one company making a "take or leave it deal." That's sort of what happened with the buyout that allowed David's Bridal to stay open
Not every creditor was made whole in that case, but none presented an objection that made liquidation a better option for creditors, vendors, and customers than continued operations with some past bills going unpaid.
In the case of Red Lobster, the popular restaurant chain has found a buyer, but the company has not resolved its Chapter 11 bankruptcy case.
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Red Lobster has struggled
In order to find a path to sustainable operations, Red Lobster needs to lower costs. When it filed for Chapter 11 bankruptcy protection in May, the chain closed 99 locations in 28 states. Those were restaurants where the company felt it had no chance of becoming profitable. The shutdowns were clearly permanent as they were followed quickly by Red Lobster auctioning off the kitchen equipment in each location.
Basically, Red Lobster can only raise prices so much based on the type of restaurant it is. It can't pay high-end rents in markets where demand for space has pushed costs up.
The chain does not have national pricing, but its business model is essentially being a value provider of sit-down seafood meals.
As part of its bankruptcy process, Red Lobster also had more than 100 locations it wanted to keep 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 back rent.
Now, after it shared that its new owner will be RL Purchaser LLC, a stalking horse bidder made up of Red Lobster’s lenders, the company continues to shut down locations.
Red Lobster will continue to shrink
RL Purchaser has proposed to pay $376 million for the seafood chain. Basically, the company's largest creditors will take control as they see that strategy as the best path to getting back at least some of the money they are owed.
A bankruptcy court still has to approve that deal. The company also filed a number of documents in the U.S Bankruptcy Court for the Middle District of Florida, designed to help it get out of its leases in 23 more locations before the end of August.
Red Lobster has requested a hearing for Aug. 29, according to KDSK.com, a St. Louis television station.
According to attorney Edward Peterson of Tampa, Fla.-based law firm Johnson Pope, the scheduling of the hearing for that day is intended to get the company out of locations in time to avoid incurring another month’s worth of rent payments for them, the KDSK report said. Pope is not involved in the proceedings.
More bankruptcy:
- Struggling Home Depot rival files for Chapter 11 bankruptcy
- Popular Italian restaurant chain files for Chapter 11 bankruptcy
- Another distressed trucking company files Chapter 11 bankruptcy
With the ongoing closures, many Red Lobster fans are worried that the chain will close completely. The company has tried to assuage those fears with new ads featuring rapper and reality TV personality Flavor Flav and boldly declaring "Yes, We're Open" on its website.
More than 100 Red Lobster locations have been closed and not going to reopen, however. Soon, that fate will likely be met by 23 other Red Lobsters, assuming the bankruptcy court approves the closures.
