Advice for Winding Down Your Restaurant

Jordan Fisch & Jill Bienstock

The poor economy has left some with no choice but to shutter their restaurants. Many choose to simply surrender their keys to the landlord, while others elect to file for bankruptcy. Others liquidate outside of court because a bankruptcy proceeding may place the restaurant under the control of a trustee. The following focuses on some issues you may face when liquidating out of court.

Lease: When you close your doors, you may not be prepared to vacate the premises. Because many leases have “going dark” provisions, making even brief periods without operations a lease default, tenants should try to negotiate with landlords a short period to continue occupancy. Additional time may be needed to conduct an auction or remove the restaurant's assets. Additionally, owners may be personally liable for certain lease obligations. Many landlords require personal guaranties from restaurant owners, allowing them to pursue guarantors when tenants vacate. What a landlord may pursue an owner for varies depending on the guaranty. For example, a “good guy guaranty,” the most common form of owner-guaranty, provides that the owner-guarantor may be liable to the landlord for all lease liabilities through the date of surrender, including rent, utilities and taxes.

Employees: A central concern when closing a restaurant is the termination and treatment of your employees. Confirm whether you have state or federal notice obligations. The Worker Adjustment and Retraining Notification Act (WARN Act), if applicable, requires advance notice of any impending layoffs. A licensed attorney can help you determine whether the WARN Act, or any state variation of it, applies to you and will guide you through compliance. You should also consider what contractual obligations you have to your employees for health insurance or severance benefits, and what steps are necessary to terminate and wind down any profit sharing or benefit plans. Lastly, you must consider whether you have properly withheld payroll taxes. Failure to do so may result in personal liability.

Liquor/Asset Liquidation: If you have wine and/or liquor on hand when you close, you cannot simply hold a fire sale of that alcohol to raise capital. In New York, for example, you must obtain a liquidation permit from the State Liquor Authority (SLA), even when using a liquidator. To obtain a liquidation permit, you must be current with your alcohol suppliers. Because New York law requires that alcohol suppliers notify the SLA if a customer fails to pay by the last day in the payment period, the SLA may be aware of a delinquency and may require that suppliers confirm when a default is cured.

As part of the wind-down process, restaurateurs often hire a liquidator/auctioneer to auction the restaurant's equipment, china, flatware and the like. It's important to evaluate the liens of your secured creditors and whether there is any personal liability under guaranties of any loans before undertaking a sale of the restaurant's assets.

Settlements: After liquidating the restaurant's assets, you should review your books and records to confirm available capital, compared to your total liabilities. Since you may not be able to pay 100 percent to your creditors, you can attempt to settle the restaurant's debts for a percentage of what is owed. However, you also should be prepared to address claims brought by vendors under the Perishable Agricultural Commodities Act (PACA) or Packers and Stockyard Act (PASA), which create statutory trusts where there are insufficient assets to pay suppliers. We suggest that you consult an attorney to determine your risk for a PACA or PASA claim. Before closing your restaurant, seek the advice of an experienced, licensed attorney for individualized guidance based on your goals and circumstances.

Jordan Fisch and Jill Bienstock are attorneys with Cole, Schotz, Meisel, Forman & Leonard, P.A. in New York City. Fisch may be reached at [email protected]. Bienstock may be reached at [email protected].