Monday, November 11, 2019

Student Borrower Bankruptcy Relief Act of 2019


Congressman Wm. Lacy Clay (D) Missouri has introduced two new bills to tackle America’s student loan debt crisis.


Wednesday, November 06, 2019

The Failed or Closed Restaurant and its Lease

Continuing our blog posts about failed or closed restaurants,
when client’s contact us about a failed or closed restaurant, we
ask them to prepare and bring us an Income Statement and a Balance
Sheet for the restaurant.

The purpose of the Income Statement or Profit and Loss Statement is to
show the revenue and expenses for the restaurant for the current year and
to determine the profitability of the restaurant, if any.

The purpose of the Balance Sheet is to determine what money or property is
owed by the restaurant (liabilities), such as back rent to the Landlord,
sales tax, wages due to employees or money owed to suppliers.
We also want to know what property or assets the restaurant has to
satisfy the claims of creditors.

In our experience of representing  failed or closed restaurants, a couple of
 facts become apparent:

Restaurants have little to no inventory, the perishable goods must be used or
 thrown out.
-The accounts receivable are generally credit card based and collected by the
restaurant in 5 to 20 days
-The  used pots, pans and knives have little value
- Fixtures or property attached to the walls or the floor belong to the Landlord and
-The bar stools, tables and other property is generally auctioned off by the restaurant
owner  in a going out of business sale or sold by an auctioneer for 10 to 15 cents on the dollar.

There is however one asset that is often overlooked by restaurant owner and that is the lease. 
The lease needs to be reviewed to determine if the rent is below market, at market or above
market and how many years are left on the lease (the term).

A lease with less than three years remaining on its term, generally has little to no value.

Simerly a lease that is at market or over market generally has no value.
However an “under market” lease with 3 or more years on its term, 
may have a significant value.

The approach that we suggest for the under market lease  is that the assignment and
sublet provisions of the lease be reviewed, then the restaurant owner should contact
the landlord and indicate that they are considering closing their business and they
would like to assign or sublet the lease to a third party or have the landlord “by them out”
out their lease.

The restaurant owner with an under market lease, may want to contemplate hiring a
real estate broker to review the lease, to negotiate with the landlord and to market 
the lease to third parties.

The general standard in New York for the approval of an assignment or sublet of a
lease by a tenant is known as “not unreasonably withheld”. In plain English what
this means is that if a tenant finds a suitable party, that wants to take over the lease,
the landlord must be “reasonable” in approving or not approving /consenting to an
assignment of the lease or the Landlord can be sued.

The Landlord will want the lease to be sublet to a third party and not assigned, so that
the landlord will have recourse against the existing restaurant owner and the new
 restaurant tenant. If the restaurant lease is able to be assigned or sublet, then the 
tenant’s security deposit (which generally is two to three months of rent) will be
preserved and ultimately returned to the restaurant owner.

That money (sublet money & security deposit) can often times create a significant
amount of money, that can be used to pay creditors, such as sales tax, or monies due
the landlord that are guaranteed by the restaurant owner.

A number of issues related to failed or closed restaurants have been discussed in prior blog posts.
Clients with failed or closed restaurants, that have questions regarding the closing of the restaurant,
or a bankruptcy filing by the restaurant or restaurant owner or a sublet or assignment of the lease
should contact Jim shenwick at 212-541-6224 or at
Jim Shenwick has experience in workouts, bankruptcy filings and office leasing. 

Sunday, November 03, 2019

The Closed Restaurant and Guarantees and Good Guy Guarantee of the Restaurant Lease

In our continuing series of posts on failed or closed restaurants, many clients have asked us to review the custom 
and practice and the law regarding guarantees and  good guy guarantees for restaurant leases.

 Most restaurants in New York are owned by a limited liability company (“LLC”) or a Subchapter S corporation. 
That entity will set up and run the restaurant and the LLC  or S corporation stock will be owned by an  individual.

 In negotiating the restaurant lease, all Landlords will require that the owner of the LLC  or the S corporation 
guarantee the lease.

There are two types of lease guarantees in New York. A full or complete Guarantee for the payment of  rent or 
additional rent by the restaurant under the lease. Under this type of Guarantee, if a restaurant fails to make
lease payments for 6 months  or any period of time and owes $50,000 for  rent and additional rent  under the lease 
and these monies are not paid by the restaurant, the Landlord can demand that the guarantor pay those monies and if 
payment is not made, the Landlord can  sue the individual that owns the restaurant/guarantor for that sum of money. 
This is an example of an unconditional or unlimited guarantee by the restaurant owner to the Landlord.

 The second type of guarantee is what is known as a “Good Guy Guarantee (“GGG”)”, which is a specialized type of guarantee 
which limits the payment  of the guarantor under  the restaurant lease, if certain conditions enumerated in the GGG are met.  
If the restaurant performs those conditions, the guarantor is released from its  obligations under the Lease. 

An example is provided below. 

Example, many GGG require that the following conditions be performed by the restaurant in order for the GGG clause 
to come into effect and to limit the restaurant owners exposure to the Landlord for future rent. 1.  the restaurant  
must be current on its payment of rent and additional rent, when the GGG sends a letter to the landlord indicating that 
the restaurant is closing, 2 . written notice must be given to the Landlord (as specified in the lease) regarding the 
date of the  closing of the restaurant a certain number of days in advance of the closing date  (usually 45 to 60 days), 
3.the restaurant must be left in  “broom clean” condition and 4. keys for the restaurant must be delivered to the Landlord. 

Under this scenario, if all 4 conditions are satisfied, the guarantor is released from its guarantee under the Lease. 

However, the restaurant remains liable for the remaining rent and additional rent due under the Lease, unless the Landlord 
releases the restaurant from future rent (by the parties entering into a Lease Surrender Agreement) or the restaurant’s lease 
is subleased or assigned to a 3rd party in accordance with the terms of the Lease and  with the consent of the Landlord. 

As can be seen from the above examples, a GGG is a more limited form of guarantee. 

Under New York custom and practice, the guarantee whether it is a regular guarantee or a GGG can be incorporated into the 
terms of the lease,  but it must be signed and dated by the guarantor and the guarantor is usually required to give his or 
her social security number  and home address to the Landlord.

The guarantee or good guy guarantee can also be its own  separate document  and it is usually two to five pages long.

Before a restaurant closes, the lease and the guarantee, should be reviewed  by an experienced attorney to determine what 
conditions must be met. Any clients having questions regarding a closed or failed restaurant and lease guarantees or good guy 
guarantees should contact Jim Shenwick at 212-541-6224 or  email him at Jim Shenwick negotiates leases, 
practices bankruptcy law and represents failed or closed restaurants. 

Sunday, October 27, 2019

Restaurants and Workouts with Creditors

Restaurants and Workouts with Creditors

Many readers of our blog, who read last week's post titled

“Restaurant Closings in New York City and Bankruptcy”
have asked us to do a post regarding workouts with creditors
after the restaurant has closed.

Let's review a typical fact pattern,  that we see regarding failed restaurants.
The restaurant is owned by an LLC or a subchapter S corporation and the member’s
interest in the LLC or the stock in the S corporation are 100% owned by Mr. X.

The restaurant closes and the following debts are due and owing:
Suppliers or trade vendors are  owed $150,000
The landlord is owed $75,000, which amount is subject to a “guaranty” or a “good guy guaranty” by Mr. X.
$45,000 is owed for New York State sales tax.
The FICA/Futa tax penalty for the employee component (trust fund money) is $30,000 and
Former employees of the restaurant are owed $20,000 im past due wages.

For purposes of this example  the restaurant has elected to close and not
file for Chapter 7 or Chapter 11 bankruptcy.
What should the restaurant owner (Mr X) do? Let’s analyze how each debt
and how it should be treated.

First, with respect to the suppliers or trade vendors, if those debts have not been guaranteed
by Mr X. they do not have to be paid because they are the obligation of the restaurant.
If the suppliers or vendors are not paid within 30 to 45 days of the restaurants closing,
they can sue the restaurant and they will be able to obtain a judgment against the restaurant,
but not against Mr. X.

Second,  the debt to the landlord is an obligation  of the restaurant and of the guarantor, Mr X. If the landlord is not paid,
the Landlord will sue the restaurant and Mr X. Since the restaurant is closed, it does not need to  be concerned about a
judgment from the Landlord, but the judgment against  Mr. X would need to be addressed thru a  workout with the landlord
or by a bankruptcy filing by Mr. X. The debt to the former Landlord should be addressed by Mr. X after the payment or a
workout with New York State sales tax and the FICA/FUTA tax penalty, for reasons discussed below.

Third, the $45,000 owed to New York State sales tax is a trust fund or a responsible person tax and it would not
be dischargeable in a bankruptcy by Mr. X and  an arrangement should be made to pay that tax through the sale
of the restaurants furniture fixture & equipment or the collection of its accounts receivable, or from Mr. X’s savings.

Fourth, the FICA/FUTA  $30,000 tax is a trust fund and similar to sales tax it would not be dischargeable
in Mr. X’s bankruptcy filing and it should be paid or payment arrangements should be made with the IRS

Fifth,  under New York State law  past due wages due to former employees are an obligation of the restaurant and
Mr X personally. If these wages are  not paid by Mr. X  the former employees can sue him and obtain a judgment,
but the judgment will be dischargeable in a Chapter 7 bankruptcy filing by Mr. X.
With  respect to the terms of a workout there are two ways to work out a payment plan with a creditor, one is
with a lump-sum payment and the other is a series of payments over time, otherwise known as an “installment agreement”
or an “out of court settlement or workout”.

A creditor will give a larger discount for a lump sum payment, than an installment payment. For example,
if a creditor is owed $30,000, Mr. X may be able to negotiate a lump sum payment of $5,000 as a final and full payment,
with a release from the creditor to Mr. X.

In an installment payment arrangement Mr. X would agree to pay a creditor who is due $30,000, $10,000 overtime,
in ten $1000 monthly installment payments.

Restaurant owners with a failed or a closed restaurant should consult  with an experienced bankruptcy or in debtor-creditor attorney
as soon as possible in the process. Jim Shenwick, Esq.  can be contacted at 212-541-6224 or at

Saturday, October 19, 2019

Restaurant Closings in New York City and Bankruptcy

Restaurant Closings in New York City and Bankruptcy

As reported by many newspapers and websites, a significant 

number of restaurants are closing in New York City. These 

closings are due to the high cost of rent, insurance,  

overhead and the increase in the  minimum wage to $15 per 

our for the  restaurant staff. A restaurant consultant who 

meet with me stated that a Ray Kroc associate told an 

individual not to open  a restaurant unless they were prepared 

to clean the bathroom and wipe the floor themselves due to 

the thin margins in many restaurants. 

At Shenwick & Associates,  we have seen a significant uptick in 

bankruptcy filings by restaurant and restaurant owners and we have 

developed a legal strategy to deal with these situations.

We focus on the financial issues related to the restaurant first 

and then to the owner of the restaurant second. Most restaurants 

are owned by LLC  or Subchapter S corporations. We first  review 

the assets and liabilities for the restaurant and a recent budget 

showing revenue and expenses for the  year to date. We review that 

information with  the owner and determining whether the restaurant 

should  close or  file for bankruptcy and we then focus on issues 

related to the owner of the restaurant.

Restaurants are eligible to file for chapter 7 or chapter 11 bankruptcy. 

Chapter 7 is a liquidation where the restaurant is closed or chapter 11 is a 

reorganization where the business can attempt to reorganize its 

debts. In the Southern and Eastern District of New York (Manhattan, 

Brooklyn, Queens and Nassau county)  historically on average only 1 out 

of 10 businesses are  able to successfully reorganize 

(file and confirm a chapter 11 plan of reorganization). There are many reasons 

for the low percentage of success, but many of those factors related to the 

cost and expense of filing chapter 11 bankruptcy and the inability to obtain 

financing and capital from third parties or banks.

The option that most restaurant owners face is  either to close the restaurant 

or file Chapter 7 bankruptcy for the LLC or S Corporation that owns the  restaurant. 

In Chapter 7 bankruptcy a bankruptcy trustee closes the restaurant and liquidates 

any inventory, furniture fixture or equipment and attempts to collect accounts 

receivable. The chapter 7 trustee then takes those monies, if any  and distributes 

them to creditors after paying legal fees and court costs.  

It's the restaurant does not have significant amounts of furniture fixture or 

equipment or accounts receivable, the owner may be better off closing the 

restaurant itself and selling or auctioning off any furniture fixture and equipment 

and attempting to collect its own accounts receivable. Additionally, 

if the restaurant lease has a term of 3 years or more and is below market the 

restaurant owner may be able to assign (sell) the lease to a 3rd party. 

A Chapter 7 bankruptcy trustee is permitted to bring lawsuits to  recover 

monies that may have been paid to third parties (preference actions) 

or recover money or property paid to a third party

(fraudulent conveyance actions)  and the bankruptcy trustee will want to 

review the books and records for the restaurant, its checking account

and tax returns. The owner of the restaurant 

will have to go to  one meeting at the courthouse (called the 341 hearing) and 

cooperate with the  bankruptcy trustee. 

These factors often affect whether a restaurant will file for chapter 7 

bankruptcy or just close.

Notwithstanding the fact that the restaurant is owned by an LLC or 

Subchapter S corporation, members of the LLC, including the officers, 

directors,  shareholders or the individuals that signed 

the checks  may be liable for certain debts of the restaurant after it 

closes (discussed below). 

Some of those debts may be “responsible person taxes” which are trust fund 

taxes such as sales tax or FICA/FUTA  taxes withheld from an employee's wages 

or the FICA/FUTA tax penalties. 

Sales tax and FICA/FUTA  taxes are not dischargeable in personal bankruptcy, so 

those debts should be paid prior to the restaurant closing or paid from the sale 

of furniture, fixtures and equipment, collection of accounts receivable or from the 

sale of the lease. 

Next, if a member of the LLC or a shareholder guaranteed a lease obligation, or 

guaranteed debts  to a supplier, they be personally liable ( discussed below). 

There are 2 types of lease guaranties, good guy guaranties and lease guarantees 

and the type of guaranty can affect the amount owed by the restaurant owner. 

If a supplier to the restaurant is not paid, the restaurant is generally liable, 

however in certain instances, the supplier will look for a “deeper pocket” and sue

the individual arguing “alter ego” or “piercing the corporate veil” and attempt to

sue not only the restaurant but the owner of the restaurant as well.

The owner of the restaurant, may also be liable personally for wages not paid to 

the restaurant staff under the New York State Business Corporation law.

A restaurant owner with significant business debts may need to file a Chapter 7 

bankruptcy or attempt an out-of-court workout with respect to the monies that it 


To determine whether a restaurant owner should file bankruptcy or attempt to do an 

out-of-court workout with its creditors, we need to see a list of assets or property 

that the restaurant owner owns, a list of  liabilities or money or property 

owed to third parties and an after-tax monthly budget, showing what the restaurant

owner earns what it pays in personal and business expenses.

Unfortunately, in many instances after the restaurant is closed, the restaurant owner 

needs to file a Chapter 7 or Chapter 13 personal bankruptcy and

James Shenwick is available  to help address these issues.

Jim Shenwick 212 541 6224, 

Pensions and Chapter 7 Bankruptcy filings

With the increase in bankruptcy filings, many clients have contacted us regarding
the treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow from their pension prior to filing for bankruptcy, if necessary.

Under the law, both Roth and traditional IRA’s are exempt  up to $1,283,025 in a chapter 7 bankruptcy filing.

401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.

Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.

Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.

Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at