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Law360 (March 30, 2020, 6:28 PM EDT) -- Bankrupt restaurant chain owner CraftWorks Parent LLC received approval Monday in Delaware for amended procedures intended to mothball its operations and reduce its case administration costs after it was forced to shut down its 261 locations in response to the global outbreak of COVID-19.
During a hearing conducted via telephone and videoconferencing, attorneys for the owner of restaurant chains including Logan's Roadhouse and Rock Bottom Restaurant and Brewery told the court that it needed to put its business on "life support" in hopes of reviving operations once the pandemic clears up and the restaurant sector returns to normal.
"We're trying to do what's best to adapt to some unprecedented times … ," CraftWorks attorney Steven J. Reisman of Katten Muchin Rosenman LLP said. "As we all know, the unprecedented and unforeseen outbreak of COVID-19 has wreaked havoc on the economy as a whole over the past two weeks and particularly on the restaurant industry and this restaurant chain."
After President Donald J. Trump declared a national emergency in mid-March because of the spread of the novel coronavirus and many states and cities enacted serious restrictions on nonessential businesses, Reisman said CraftWorks was forced to shutter all of its 261 locations and lay off most of its 18,000 employees.
That eroded its revenue stream to essentially nothing, he explained, and led to the proposal of temporary case procedures that initially sought to bar the filing of any objections or motions in the Chapter 11 case without first conferring with the debtor and getting permission from the court.
A New Jersey bankruptcy judge approved a similar pause in the Chapter 11 case of sporting goods retailer Modell's, whose store-closing sales were interrupted by the COVID-19 restrictions. In Delaware, home furnishing retailer Art Van Furniture will seek approval of temporary case procedures along the same lines Tuesday after its going-out-of-business sales were barred by the same restrictions.
U.S. Bankruptcy Judge Brendan L. Shannon responded to the CraftWorks proposal last week via letter to the parties saying he was unlikely to approve such severe measures because they would impair the due process rights of creditors and others.
CraftWorks revised its proposal ahead of Monday's hearing, and Judge Shannon approved the new procedures, which urge, but don't require, parties to the case to contact CraftWorks' counsel to attempt to resolve any issues before bringing them to the court.
"We are in difficult and uncharted territory. One of the luxuries I have … is we have experienced and able professionals that have done many of these things before, just never under these circumstances," Judge Shannon said. "To the extent there are practical solutions going forward to resolve business issues that make sense, you can expect the court will be a willing partner."
The company filed for Chapter 11 protection in early March, listing $235 million in debt and carrying a stalking horse bid into court from first-lien secured lender Fortress Credit Co. LLC. Fortress is also the lender under the $23 million new money postpetition loan, which was also expected to roll up $115 million in existing secured debt held by Fortress.
The debtor owns 261 restaurants under the Logan's Roadhouse, Old Chicago Pizza & Taproom and Rock Bottom Restaurant and Brewery brands, among others, and franchises another 77. Prior to the bankruptcy filing, CraftWorks shuttered 37 underperforming restaurants, according to court filings.
It was driven into bankruptcy by its overleveraged balance sheet, according to CEO Hazem Ouf, who said in a first-day declaration that a November 2018 acquisition of the Logan's chain strained its financial position. The balance sheet was further eroded by rising labor costs, increased competition in the casual dining industry and the drag of unprofitable locations with high rent obligations.
According to debtor's counsel, Ouf and another executive have been replaced after they were alleged to have made $7 million in sales tax payments without authorization on March 19. Reisman said it appeared the payment was made surreptitiously in an effort to avoid personal liability for the tax obligations. CraftWorks and its leadership are investigating the transactions, some of which were able to be reversed.
CraftWorks Parent LLC and its affiliates are represented by Domenic E. Pacitti, Michael W. Yurkewicz and Morton R. Branzburg of Klehr Harrison Harvey Branzburg LLP, and Steven J. Reisman, Bryan M. Kotliar and Peter A. Siddiqui of Katten Muchin Rosenman LLP.
The case is In re: CraftWorks Parent LLC et al., case number 1:20-bk-10475, in the U.S. Bankruptcy Court for the District of Delaware.
--Editing by Jack Karp.
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