FAT Brands Bankruptcy Highlights Restaurant Chain Restructuring
The recent bankruptcy filing by FAT Brands shows how restaurant chains use court proceedings to restructure.
FAT Brands filed for bankruptcy in January, joining Red Lobster and Rubio's Coastal Grill in recent proceedings that reflect broader stress in the restaurant sector. The parent company of 18 brands operates a system of approximately 2,200 locations worldwide with about 670 franchise partners.
A bankruptcy filing does not necessarily mean every restaurant closes or every brand disappears. The process allows a company to restructure, sell individual concepts or assets, transfer certain agreements to new owners, or reject contracts it no longer intends to perform. The Bankruptcy Code permits a buyer to acquire selected assets, including restaurant brands and intellectual property, free and clear of many prior claims, provided the court approves. The scope of what a buyer assumes depends on the purchase agreement and the court’s sale order. Bankruptcy does not automatically spell the end of a restaurant brand; in many cases, the process is designed to preserve the portions of a business that still have value.
How bankruptcy allows restructuring without total shutdown
Franchise agreements are generally treated as 'executory contracts' under the Bankruptcy Code. Before keeping or transferring such an agreement, the company must address any existing defaults, typically by paying what is owed. It must also show the court that whoever takes over the agreement can perform.
These agreements affect the right to operate under the brand, royalty and advertising obligations, access to operating systems and approved suppliers, and territorial rights. Brand and trademark rights can become complicated when a franchise agreement is rejected. A franchisee may still have certain rights after rejection, including the right to continue using the brand’s intellectual property for the remaining term of the agreement, provided the franchisee continues making required royalty payments. Whether this protection applies depends on how the franchise agreement is structured and the jurisdiction. Attorney Michael J. Niles noted, "Franchisees should not assume that rejection automatically ends every right under their agreement."
Franchisees must act quickly on cure amounts and deadlines
Franchisees should review both their agreements and bankruptcy notices as soon as a filing occurs. They must pay close attention to cure amounts, which are the amounts the debtor says must be paid or otherwise resolved before an agreement can be assumed or transferred. Disputes can arise over what must be paid. The deadlines to challenge cure amounts can be short. Missing a deadline can significantly limit the options available later.
Stakeholders should immediately determine what contracts govern their relationship with the company, how much they are owed, and what deadlines apply. They should closely review proposed sale documents, cure notices, claim deadlines, and objections.
Real estate and leases determine which locations survive
In restaurant bankruptcy cases, real estate can be one of the biggest factors separating locations that survive from those that do not. Bankruptcy gives a debtor an opportunity to evaluate leases and decide which ones are worth keeping. If a lease is transferred to a new operator, existing defaults must be addressed and the new tenant must demonstrate that it can meet the lease obligations.
Shopping center landlords have additional protections. Before a lease in a shopping center can be transferred, the court must be satisfied that the assignment will not disrupt the center’s tenant mix, violate use restrictions, or breach exclusivity provisions. If a lease is rejected, the restaurant may lose the right to continue operating at that location and the landlord may be left with a claim against the bankruptcy estate. A landlord’s damages for early lease termination are generally limited to roughly one year of rent, plus any unpaid rent owed as of the filing date. "Landlords should factor this cap into their assessment of exposure," said Michael J. Niles.
Suppliers also face specific rules. Goods received by the restaurant company in the ordinary course of business within 20 days before the bankruptcy filing may qualify for priority payment. Suppliers may have the right to reclaim goods received by the company while it was insolvent, provided a written demand is made within the legal time frame. Payments made within 90 days before filing on account of earlier debts can be clawed back, though payments made in the ordinary course of business are often protected.
Goods and services provided after the bankruptcy filing generally carry priority status, meaning the supplier must be paid in full before the case concludes. Courts also frequently authorize the company to pay certain pre-bankruptcy debts to critical vendors whose continued supply is necessary. Suppliers in this position have more leverage than they might expect. Those who received large or unusual payments before filing should review them with counsel.
Stakeholders should prepare for multiple outcomes: a brand may be sold intact, individual locations may change hands, contracts may be rejected, or a concept may ultimately disappear. Franchisees, landlords, and suppliers who identify their rights, deadlines, and exposure before a transaction closes will be positioned to protect their interests. Those who wait will have fewer options.
