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