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 jshenwick@gmail.com




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 

owes. 

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, jshenwick@gmail.com 

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 jshenwick@gmail.com

Thursday, October 17, 2019

How New York’s Taxi Titans Roiled Cities Hundreds of Miles Away from New York TImes October 7, 2019

How New York’s Taxi Titans Roiled Cities Hundreds of Miles Away

In the early 2000s, a group of New Yorkers did something unexpected.

They bought a bunch of taxi medallions that allowed them to own and operate vehicles hundreds of miles away, in Chicago. Medallions in that city were considered such an inexpensive commodity that Chicago had, at times, given them away free.

This turned out to be an early sign of a takeover of taxi markets across the country by some New Yorkers who were about to teach drivers in other cities a painful lesson.

The real taxi money wasn’t made by charging passengers; it was made by raising the price of medallions and financing loans to drivers who wanted to buy them.

The scheme started in New York.
In May, The Times’s Brian M. Rosenthal exposed the financial maneuvers that helped lead to the collapse of the taxi industry in New York City.

His series detailed potential market manipulation of taxi medallion prices and showed how some of the people who manipulated those prices also made money by providing drivers with high loan amounts, long loan lengths, steep fees and interest-only terms.

The Department of Justice and the New York attorney general soon opened investigations into the industry. The city arrested a debt collector, waived $10 million in fees owed by medallion owners and strengthened regulations.

The taxi titans expanded their operations to Chicago …
Symon Garber, a New York fleet owner, along with a group of partners, began buying medallions in Chicago and lending to other buyers. They eventually bought 800 of the city’s 7,000 medallions.

Michael Levine, a legend in New York’s taxi industry, bought more than 500 medallions in Chicago. Mr. Levine also was involved in a company that provided at least 750 loans to medallion owners.

At least 40 other New Yorkers bought Chicago medallions, including Michael Cohen, President Trump’s former lawyer, records show.

… and to Boston, Philadelphia and elsewhere.
Then some of the same people who roiled New York’s industry expanded their operations. Medallion prices soared to $700,000 in Boston, $550,000 in Philadelphia, $400,000 in Miami and $250,000 in San Francisco.

But in Chicago, New Yorkers eventually bought almost half of that city’s medallions, records showed. The average cost of a medallion there — less than $50,000 in 2006 — rose to nearly $400,000 before prices began plummeting in 2013.

Today, a Chicago taxi medallion is worth $30,000 or less.

“In retrospect, it should’ve set off alarm bells” that New Yorkers were entering Chicago’s market,” said Michael Negron, who was a policy adviser to Rahm Emanuel, a former Chicago mayor. “Outside investors were coming in to upend the industry, and everybody kind of missed it.”

The New Yorkers who bought medallions in Chicago and elsewhere said in interviews with Mr. Rosenthal that they were never accused of breaking any laws. They said that as New York medallion prices rose, it made sense to pursue new opportunities.

Pensions and Chapter 7 Bankruptcy filings

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 money from their pension prior to filing for bankruptcy.

Under the law in New York 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 jshenwick@gmail.com




jshenwick@gmail.com • Shenwick & Associates