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