Claim Jumper Acquisition Company, LLC – Elements of Kelly Restaurant Group File For Bankruptcy with Between $10mn and $50mn in Liabilities; Sysco, IRS and Landry’s Amongst Largest Unsecured Creditors

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October 3, 2022 – Claim Jumper Acquisition Company, LLC  and seven affiliated debtors (collectively, the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Western District of Pennsylvania, lead case No. 22-21941 (Judge Gregory L. Taddonio). The Debtors, operators of four restaurants under the Claim Jumper Steakhouse & Bar, Joe’s Crab Shack, Brick House Tavern + Tap, and Nashville Hot Chicken Shack, are represented by Daniel R. Schimizzi of Whiteford, Taylor & Preston, L.L.P. Further board-authorized engagements include: (i) Morris, Nichols, Arsht & Tunnell LLP as general bankruptcy counsel, (ii) Wyse Advisors LLC as financial advisors (with Mike Wyse to serve as Chief Restructuring Officer) and (iii) Stretto as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $1.0mn and $10.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ five largest unsecured creditors as: (i) Sysco Corporation ($8.9mn trade claim), (ii) Department of the Treasury Internal Revenue Service ($5.0mn payroll taxes claim), (iii) Landry’s, Inc. ($1.9mn Accrued Royalty/Settlement), (iv) California Dept of Tax and Fee Administration ($1.9mn sales tax claim) and (v) Jordan Farah, Class Action Rep. ($1.4mn judgment claim).

The Debtors are part of the Kelly Restaurant Group ("KRG") which operates "10 restaurant brands with over 60 locations throughout the country including Claim Jumpers Bar & Grill, Champps Kitchen & Bar, Fox & Hound Sports Tavern, Craft Republic, Joe's Crab Shack , Brick House Tavern + Tap, Grady's BBQ, McCormick's & Schmick's, and Kings Family Restaurants."

KRG is one of two branches of "The Kelly Companies," the other being the "Kelly Investment Group." The Kelly Companies provide: "The first of the Kelly Companies was formed over 20 years ago, in 1993 by Michael Kelly. Today, Kelly Investment Group is the primary private equity company handling all M&A activity for the Kelly Companies of Southern California…. Our Real Estate Group [apparently part of the "Investment Group"] actively seeks distressed investment opportunities in real estate properties and projects throughout the U.S."

Goals of the Chapter 11 Filings

According to the Wyse Declaration (defined below), "The Debtors and their advisors are preparing to commence a robust marketing process to seek a plan sponsor or one or more purchasers to maximize value for creditors and to facilitate the Debtors’ emergence from these chapter 11 cases. The Debtors will accept bids in the form of either a purchase of the Debtors’ assets or as a plan sponsor proposal, resulting in either an asset sale restructuring, whereby the Debtors will enter into a sale transaction for the sale or disposition of the Debtors’ assets, or a plan of reorganization….

During these chapter 11 cases, the Debtors intend to maximize the value of their estates by closing additional underperforming restaurant locations, rejecting leases associated with such locations that are not marketable and abandoning furniture, fixtures and equipment of de minimis value."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Wyse Declaration”), Michael Wyse, the Debtors’ chief restructuring officer, detailed the events leading to Claim Jumper’s Chapter 11 filing. The Wyse Declaration provides: “Since the beginning of the COVID-19 pandemic, the Debtors have struggled through a challenging business environment. Despite significant efforts to address the situation, the Debtors ultimately have not been able to overcome the difficulties from the COVID19 pandemic, greatly exacerbated by regulatory responses to the pandemic, soaring food costs and a tight labor market.

Declining Market Conditions

The Debtors were not immune from the overall shift in customer spending from casual dining to fast-food and fast-casual restaurant concepts, which had begun a few years prior to the Acquisition. Many industry observers also point to other macro headwinds such as the emergence of alternative delivery methods, including at-home meal kits, grocery delivery, and third-party delivery services that have increased the availability of dining options. The Debtors’ operating performance and financial condition suffered as a consequence of these declining market conditions.

The COVID-19 Pandemic

Beginning in the early spring of 2020, restaurants throughout the world have been negatively affected by the COVID-19 pandemic, many to the point of permanent closure. The lack of predictability in the spread of the virus coupled with the necessary responses of governments to try to limit exposure by preventing gatherings decimated the restaurant industry, whose business model largely depends on providing social environments for people to meet and enjoy dining out….

As a result, the COVID-19 pandemic put an unprecedented strain on the operating performance and financial condition, and personnel of the Debtors. Government actions such as mandated restaurant closures, shelter in place orders, carry-out only orders, reduced hour orders and social distancing/self-quarantining orders and guidance created a situation whereby the Debtors’ revenues dropped so substantially that it could no longer sustain its normal operating costs. Rental obligations, as a fixed expense, were particularly difficult to manage since they were not reduced in line with revenue deterioration. Consequently, in early 2020, the COVID-19 pandemic and other factors forced the Debtors to close all of the dining rooms across all the Debtors’ restaurants.

Restaurant Closings and Lease Rejections

Largely as a result of the COVID-19 pandemic, the Debtors were ultimately forced to close 37 of their 62 restaurant locations and are in the process of closing 7 more (the 'Closed Locations'). Within the last 180 days, the Debtors closed 9 locations and terminated approximately 220 employees associated with operations at those locations. Although the Debtors were able to renegotiate their lease obligations with respect to certain locations, several landlords, who were also affected by the pandemic, refused. And some have initiated legal proceedings against the Debtors for rent due under the applicable leases.

Accordingly, the Debtors have determined, in their business judgment, to reject the leases for the Closed Locations. To that end, the Debtors intend to file an omnibus motion seeking to reject such leases nunc pro tunc to the Petition Date. Additionally, in connection with closing the Closed Locations, the Debtors removed or caused to be removed all personal property from the Closed Locations that the Debtors believe has a material value above the cost of removal and sale or relocation or repurpose (i.e., property that has a material net value to the Debtors). The Debtors have determined, in an exercise of their business judgment, that all other personal property remaining (the 'Remaining Property') at the Closed Locations is too difficult or expensive to remove and store relative to its value. Accordingly, the Debtors are requesting authority to abandon the Remaining Property at the Closed Locations.”

Prepetition Indebtedness

As of the Petition Date, the majority of the Debtors’ liabilities consists of unsecured trade debt and tax liabilities. The Debtors have no secured funded indebtedness. The Debtors’ significant debt obligations comprise the following principal components:

  1. Trade Debt The Debtors owe material amounts on an unsecured basis to their trade creditors. The Debtors estimate that, as of the Petition Date, claims of trade creditors total approximately $12.7 million.
  2. Taxes The Debtors owe significant amounts to taxing authorities for unpaid taxes, certain of which claims may be entitled to priority status under the Bankruptcy Code. The Debtors estimate that, as of the Petition Date, claims of taxing authorities total approximately $11.2 million.
  3. Leasehold Obligations The Debtors operate numerous brick-and-mortar restaurant locations, which they lease from various landlords. Symptomatic of the Debtors’ ongoing financial distress, prior to the Petition Date, the Debtors were unable to remain current on the rent payments due under each lease. Accordingly, as of the Petition Date, the Debtors have a total outstanding balance for rent due under such leases in the approximate amount of $4.1 million.
  4. Miscellaneous Unsecured Debt The Debtors estimate that as of the Petition Date claims of miscellaneous unsecured creditors total approximately $12.2 million. Such claims include claims for amounts owed on account of royalties, employee obligations and programs, credit card fees and legal settlements. 

About the Debtors

The Debtors operate four well-known restaurant concepts, Claim Jumper Steakhouse & Bar, Joe’s Crab Shack, Brick House Tavern + Tap, and Nashville Hot Chicken Shack that offer a variety of high-quality food and beverages in a distinctive, casual, high-energy atmosphere.

Corporate Structure

The Debtors all are directly or indirectly majority owned by non-debtor Del Mar Group, LLC (“Del Mar”). Del Mar indirectly owns 99% of the equity of Claim Jumper Acquisition Company, LLC (“CJ Acquisition”), a Nevada limited liability company, Claim Jumper Restaurant (Sacramento), LLC (“CJ Sacramento”), a Nevada limited liability company, C Jumper Restaurant, Inc. (“C Jumper”), a Texas corporation, KRG JCS, LLC (“JCS”), a Nevada limited liability company, KRG JCS Redondo Beach, LLC (“JCS Redondo”), a California limited liability company, and KRG BHTT, LLC (“BHTT”), a Nevada limited liability company, with the remaining equity of each privately held by non-debtor Del Mar Group Holdings, Inc. (“Del Mar Holdings”).

CJ Acquisition directly owns 100% of the equity of Claim Jumper Restaurant (Phoenix), LLC (“CJ Phoenix”) and Claim Jumper Restaurant (Tualatin), LLC (“CJ Tualatin”), both Nevada limited liability companies.

Each of the Debtors, except C Jumper, is an operating entity, however, the restaurants formerly operated by CJ Phoenix, CJ Sacramento and JCS Redondo are now closed. C Jumper is a defunct entity that has no material assets or liabilities.

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