In the best of times, a chapter 11 reorganization is an uncertain and stressful process for all involved. When the disruptive effects of COVID-19 are added to the mix, and many businesses face significant economic difficulties, one can begin to appreciate the daunting task facing bankruptcy courts, debtors, creditors, and their lawyers.

The pandemic has challenged many industries, but has had a particularly destructive effect on those relying on foot traffic, such as retailers and restaurants. For many, declaring bankruptcy is the only life line left, and, given the ongoing economic uncertainties, a successful chapter 11 reorganization has become all the more important. This continues to occur on the national level, with Ruby Tuesday becoming one of the latest major restaurant chains to file for chapter 11 protection in order to address the financial impact of COVID-19. Restaurants facing chapter 11 can perhaps look to the recent successful confirmation of American Blue Ribbon Holdings’ (“ABRH”) chapter 11 reorganization plan for a glimpse of how COVID-19 may have changed the process.

In Re American Blue Ribbon Holdings, LLC

ABRH is the parent company of several popular restaurant chains, including Village Inn and Bakers Square. On January 27, 2020, it filed for chapter 11 bankruptcy, shortly before the outbreak of COVID-19 in the United States. Eight months later, on September 16, 2020, the U.S. Bankruptcy Court for the District of Delaware issued its order confirming the chapter 11 reorganization plan. How did COVID-19 change the arguments and decisions made during this process, if at all?

To confirm a chapter 11 reorganization plan, a court must generally consider whether a plan is:

  • Feasible;
  • Proposed in good faith;
  • In the best interests of creditors; and
  • Fair and equitable.

Each of these principal considerations can present a difficult hurdle for a plan proponent to overcome under court and creditor scrutiny. In this case, the confirmation of the plan hinged on the feasibility of their proposed plan. As defined in the Bankruptcy Code, feasibility simply means that confirmation of the plan “is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor” unless proposed in the plan. See 11 U.S.C. § 1129(a)(11).

Verlander Enterprises, a creditor and Village Inn franchisee, questioned the feasibility of the plan in its objections. As a franchisee, Verlander was contractually obligated to purchase pies from ABRH’s designated supplier, Legendary Pies. Verlander alleged COVID-19 had caused Legendary Pies to shut down one of its plants and make other operational changes that were negatively impacting their products and ultimately Verlander’s sales.

As originally constituted, the plan provided that ABRH would assume eleven of the existing franchise agreements with Verlander, which meant that Verlander would have had to continue its duties as a Village Inn franchisee. Verlander objected to this portion of the plan by arguing that, given the debtors’ financial state and damage to its brand, the operational changes at Legendary Pies, and the continuing uncertainty surrounding operating a successful restaurant business during a pandemic, ABRH “ha[d] not—and cannot—provide adequate assurance of future performance.” Because of these factors, Verlander argued, ABRH’s plan was likely to be followed by liquidation or the need for further financial reorganization and so was not “feasible” under the standards of 11 U.S.C. § 1129(a)(11). Predictably, ABRH forcefully objected to Verlander’s claims, arguing they were merely attempts to use the bankruptcy process to amend the franchise agreements in its favor, and the plan would not result in further liquidation or reorganization. How this argument would have been evaluated by the court remains unknown, however, because on the final day of the confirmation hearings, counsel for ABRH notified the court that a settlement had been reached that would allow Verlander to move on from being a Village Inn franchisee, thus clearing the way for one of the few major restaurant reorganizations during the COVID-19 era.

Takeaways

As more and more companies turn to chapter 11 for relief, the economic recovery will partially turn on whether businesses can effectively use a reorganization plan as an opportunity for the future. During the bankruptcy process itself, however, companies and their counsel should consider the ways the ever-present pandemic can affect traditional arguments. While ABRH was able to confirm its plan without encountering novel difficulties, its experience shows the ways COVID-19 can have a disruptive ripple effect on all the parties involved, from franchisees to manufacturers and suppliers, which may further complicate a successful chapter 11 reorganization.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

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Photo of Javier F. Sosa Javier F. Sosa

Javier F. Sosa is an associate in the Litigation Department and a member of the International Arbitration practice and Bankruptcy Litigation group. He has experience with various stages of litigation, including drafting pleadings, coordinating discovery, briefing dispositive and discovery motions, and preparing witnesses…

Javier F. Sosa is an associate in the Litigation Department and a member of the International Arbitration practice and Bankruptcy Litigation group. He has experience with various stages of litigation, including drafting pleadings, coordinating discovery, briefing dispositive and discovery motions, and preparing witnesses for depositions and trial. Javier has represented clients in state and federal courts, as well as in both domestic and international arbitration proceedings.

Javier has been part of the team representing the Financial Oversight and Management Board for Puerto Rico in the successful restructuring of Puerto Rico’s unsustainable debt. He has been instrumental in managing the claims reconciliation process for hundreds of thousands of claims totaling trillions of dollars in asserted liabilities. Additionally, Javier has represented the Oversight Board in adversary proceedings and Title III confirmation hearings involving various entities, including the Government of the Commonwealth of Puerto Rico, the Employees Retirement System, the Puerto Rico Public Buildings Authority, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Electric Power Authority.

Javier serves as the co-chair of the Firm’s Hispanic/Latinx Lawyer Affinity Group and maintains an active pro bono practice focused on immigration.

Javier earned his J.D. from the George Washington University Law School, where he served on The George Washington International Law Review and the GW Law Moot Court Board. While in law school, he interned at the Department of Justice, Civil Division, Torts Branch, Environmental Tort Litigation Section.

Before attending law school, Javier worked for the United States House of Representatives Committee on Rules and the Institute for Justice, where he focused on public interest issues, including defending against eminent domain actions and civil forfeiture seizures. He is also a graduate of Yale College, where he was a member of the Yale Varsity Football Team.