Trust in Bankruptcy Lawyers to Save Krystal's

Yes, Krystal’s filed for Chapter 11 Bankruptcy.

But, don’t worry. A bankruptcy filing doesn’t mean that the South’s favorite tiny hamburger is going away. In fact, there’s a good chance it’ll be a stronger chain after all this.

Krystal’s financial problems appear to be a relatively new problem, based on documents filed in the main Bankruptcy case.

As part of the case, the lead company filed a Declaration by its Chief Restructuring Officer, who has been trying to help Krystal correct course (and hired very recently, in November 2019).

Of the nearly 300 locations, the company closed 44 locations in 2019, including 13 closures on December 15, 2019 (in anticipation of the bankruptcy filing, I’d assume).

The quick summary? “Shifting consumer tastes and preferences, growth in labor and commodity costs, increased competition, and unfavorable lease terms.”  You can download and read a full copy of the Declaration here:

The Declaration tells the story of the events leading up to the bankruptcy filing, starting with the invention of the “iconic square hamburger patty slider” in 1932. It’s written by bankruptcy lawyers, so don’t expect a glowing press release.

The summary of the problems is this:

  • Increased competition due to “proliferation of fast casual restaurants as well as online delivery platforms…”
  • “Difficulty finding and retaining qualified employees…”
  • Entry into an expensive store rebuilding program, at a cost of about a million dollars per location.
  • Default under a Forbearance Agreement on a $50 million loan.
  • A “security incident” involving one of the company’s “payment processing systems.”

In a nutshell, the Bankruptcy docket tells a familiar story, about how a changing industry landscape is creating havoc in long-standing businesses.

This is obviously early–in fact, all the filings I looked at are what is called the “First Day Motions.” But, given the amount of debt involved and brand recognition–and, yes, I’m talking about the out-pouring of concern on twitter–I suspect Krystal’s can figure this reorganization out.

And, honestly, I’ve eaten a lot of Krystal’s during my time. If part of the reorganization is shutting down bad stores and remodeling others, I think it’s a good plan.

Medical Debts: The Burden that Keeps on Crushing Debtors

A few months ago, I wrote about a hospital in Memphis that made national news for suing its employees for unpaid medical bills.

At the time, I was critical of the practice, both because it was terrible public relations for the employer and also such a hardship on the employees.

This new decision from the Bankruptcy Court for the Central District of Illinois suggests that this practice may hurt the employees worse than I anticipated.

In that case, the Chapter 7 debtor was faced with $164,053.95 in unsecured debt, of which $82,000 was for medically necessary services. To avoid the “means test” and stay in Chapter 7, she argued that her debts were not “primarily consumer debts” under Section 707(b)(1). The US Trustee objected, arguing for a conversion to Chapter 13.

The debtor had an interesting argument: medical debts are not “consumer debt,” as defined under the Bankruptcy Code, because medical debts are not incurred voluntarily, and “similar to tax debts that have been held by several courts not to be consumer debts.” See In re Westberry, 215 F.3d 589 (6th Cir. 2000).

Ultimately, considering the purpose and nature of medical bills, this Bankruptcy Court found the debts to be consumer debt, subjecting the debtor to the means test and forcing the case into a Chapter 13.

It’s a well reasoned opinion, but it has some pretty harsh applications to debtors in places like Memphis, where medical debts can crush debtors.

Sure, relief under the Bankruptcy Code is still available to this debtor, but, in situations like this, a debtor will have to deal with those debts in a chapter 13 plan, which requires the debtor to make payments over a 3 to 5 year plan. The rate of success in those cases is low, meaning that the case could get dismissed and the debtor isn’t able to get the debts discharged.

Everybody Loves “It City”: United States Supreme Court to hear dispute over land deal in The Nations in November.

The Nashville Bankruptcy Bar got some exciting news from the United States Supreme Court recently, as the Big Court granted certiorari to consider a novel issue of law: Whether an order denying a motion for relief from the automatic stay is a “final order” under 28 U.S.C. § 158(a)(1).

For you real law nerds out there, here’s a copy of the case schedule.

You’ll note that cert was granted in May 2019, and the oral argument is set for November 13, 2019. (I have no idea why this news from May 2019 is just now hitting the local news.)

But, to our local bar, this is newsworthy because the United States Supreme Court is said to grant “cert” in extremely rare circumstances, said to be less than 0.01% of matters presented to it. Continue reading “Everybody Loves “It City”: United States Supreme Court to hear dispute over land deal in The Nations in November.”

Auto Masters files Large Bankruptcy Case in Middle District

Bankruptcy filings are down in the Middle District of Tennessee Bankruptcy Courts. In the busy years, this district could expect anywhere from 13,000 to 15,000 cases to be filed annually under Chapter 7, 11, and 13. So far for 2017, only 7,000 cases have been filed. It’s a slow time for Bankruptcy, both because the economy in middle Tennessee continues to hum along strong–and because most people who were going to file Bankruptcy did over the last 4-5 years.

Our case filings got a big boost last night, as local car dealer and financier, Auto Masters, LLC,  filed for Chapter 11 Bankruptcy, along with 7 of their related entities.  This includes: Auto Masters of Franklin, LLC; Auto Masters of Clarksville, LLC; Auto Masters of Hermitage, LLC; Auto Masters of Madison, LLC; Auto Masters of Nashville, LLC; Auto Masters of Smyrna, LLC; and Auto Masters of West Nashville, LLC.

This is one of the largest debtor cases filed this year, and it’s no surprise to see the debtor is represented by Griffin Dunham, of Dunham Hildebrand, PLLC, one of Nashville’s more sophisticated (and litigious) debtor/creditor attorneys.

These filings closely follow the filing of a receivership lawsuit filed on Wednesday, October 11, 2017, by Capital One, NA, alleging default and requesting court review of Auto Masters’ business operations.

Expect a flurry of activity on these cases, since this case involves so many financial lenders, creditors, and impacted customers. This will be a big one.

 

 

Big New Case in Nashville Bankruptcy Court

For Nashville Bankruptcy lawyers, most weeks look the same: Chapter 7 and Chapter 11 hearings are on Tuesday mornings, and Chapter 13 matters are heard on Wednesdays (this is new: Monday used to be Chapter 13 docket day).

Today, however, there was a flurry of activity over in Bankruptcy Court, with a “Who’s Who” of local bankruptcy lawyers in court. Typically, June dockets aren’t very busy, with summer vacation season in high gear.

Today was the hearing setting for “first day” Motions in the Amnon Shreibman Chapter 11 Bankruptcy Case (12-05272). There were about nine matters set for hearing, with most being the Debtor’s various Motions for Use of Cash Collateral. Where a secured lender either holds a claim secured by cash or the proceeds of other collateral, the Debtor has to ask for and obtain Bankruptcy Court authority to spend that cash (and must provide adequate protection to the secured lender for the use of the cash).

After seeing the commotion, I’ll say this: nothing gets the local Bankruptcy lawyers as excited as a debtor who says they have assets in the $50,000,000 to $100,000,000 range. This is going to be a big case.

All this reminds me of this weekend’s New York Times article, The Trouble With Bankruptcy Lawyers, which discussed proposed legislation to limit legal fees in big bankruptcy cases. Sometimes, those fees can exceed $1,000 an hour.

Your Next Landlord Could be A Hedgefund: Are Rental Properties Making a Comeback as a Good Investment?

I’ve said for years that the contractors and investors who got burned by the economic downturn will eventually hit rock bottom, dust themselves off, and end up making as much money on the backside of the recession as they lost on the front end. This is because the same market inefficiencies that were exploited in the past are being replaced by equally exploitable new ones.

The builders who once built speculative homes on inflated market appraisals are going to be the contractors who do the work for the investors who buy the properties from the banks at 40 cents on the dollar.

The Las Vegas Sun did a story last week on how hedge funds are buying Las Vegas real properties at bargain rates, making minimal investments/improvements, and renting the properties for an 8% to 12% annual return.  Then, once the economy rebounds, the investors could expect appreciation to add more value to the investment.

As far as investments go, being a landlord is fairly labor-intensive. And, if the past 4 years has shown us anything, it’s hardly a fool-proof move.

Potential landlords would be smart to read this excellent article in the Wall Street Journal, Do You Really Want to be Landlord? The article has both horror stories and advice, as well as a forecast that rents are likely to increase over the next few years.

I got out of the landlord business two years ago, when my tenant couldn’t unclog her drains and called me every other day.  The 30 minute drive, coupled with time spent waiting on plumbers, gave me all the time to reconsider the pros and cons.

 

Santa Fe Holding Company Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process

Yesterday in the Middle District of Tennessee Bankruptcy Court, the Trust (DBMC Restaurants f/k/a DBMC Investments, LLC) created in the Santa Fe Holding Company, Inc. bankruptcy began the process of filing adversary proceedings to recover preferences. So far, about 30 cases have been filed.

This is a process that generally happens after a Chapter 11 Plan is confirmed, in which the post-confirmation entity takes action on the various lawsuits it held as of the bankruptcy filing.

Here, the pleadings, styled “Complaint to Avoid and Recover Avoidable Transfers,” make claims under 11 U.S.C. 547, which is a provision of the Bankruptcy Code that, under certain circumstances, allows a trustee to recover payments made to creditors within 90 days of the bankruptcy filing.

The basic theory is that, the debtor is presumed to be insolvent during those 90 days, and any payments made during that period were selective disbursements (a.k.a. preferential payments) to certain preferred creditors. By these actions, the trustee recovers these preference payments, puts the money into a big pot, and then distributes it evenly to all creditors.

Sounds pretty fair in theory, right? Well, in practice, these actions drive creditors crazy. “Not only did this company bankrupt on the debt, now, two years later, they’re suing me to take back some of the last money they paid me?” My response? “Yes.”

There are a number of defenses to these actions (see 11 USC 547(c)), and I’ll touch on those in a later post. Right now, I’m going to go look at the dockets to see who all is getting sued. So far, this includes: Continue reading “Santa Fe Holding Company Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process”