Cosi, Inc. – Court Approves Debtor-Requested Dismissal of Chapter 11 Cases as Debtors Reevaluate Path to Critical Restaurant Revitalization Fund Financing

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May 11, 2021 – Further to an emergency supplemental motion filed by the Debtors requesting dismissal of their cases, the Court has dismissed each of the Debtors Chapter 11 cases with immediate effect [Docket Nos. 343 and 347, respectively]. 

This sudden flurry of events comes after the Debtors' discussion with the Small Business Administration (the ("SBA") as to their prospects for receiving Restaurant Revitalization Fund ("RRF") funding without being able to apply for that funding with a confirmed Plan in hand. On May 7th, the Debtors submitted an amended Plan and Disclosure Statement (such is the frenetic pace of events they have actually filed an amended Disclosure Statement which is dated the same date as their dismissal order), based on an argument (hope) that they could progress the RRF application without an actual Plan confirmation order and hoping that the Court hearing their cases might be able to provide them with some sort of "conditional approval" of the Plan that would otherwise satisfy SBA criteria (with those criteria, like the Debtors efforts to navigate the characterization of their Plan's staus, not entirely clear). 

The issue for the Debtors was (and remains) that they need to access RRF funding before it runs out and would almost certainly not be able to do so if they had to progress through a standard bankruptcy process (essentially 75 days minimum) before having a Plan confirmed Plan. Without the RRF funding, the Debtors make very clear, they would have to liquidate in Chapter 7.

As we discussed in respect of the May 7th filing, the Debtors arguments and request for a helping "conditional" hand from the Court was likely to be met with raised eyebrows at best at a scheduled and repurposed May 11th hearing; and indeed the U.S. Trustee assigned to the cases was quick off the mark to object to the May 7th Disclosure Statement exactly on those grounds, ie that there is no such thing as a "conditional" Plan confirmation under U.S. bankruptcy law [Docket No. 344]. The U.S. Trustee sums up as to the Debtors' "extraordinary request for 'conditional' plan confirmation in order that the Debtors may apply for funding under the Small Business Administration’s Restaurant Revitalization Fund" as anathema to basic bankruptcy principles and an attempt to circumvent "one of the most crucial steps to plan confirmation, solicitation of plan acceptances by creditors who are entitled to vote to accept or reject the Plan."

As it turns out, a May 7th call (presumably only a few hours after the Debtors had filed their Plan and Disclosure Statement) from the SBA to Debtors' counsel has pre-empted the Debtors' opportunity to present its "conditional" arguments to the Court, with the SBA now clarifying that "the SBA has decided to take the position that only debtors with confirmed plans (i.e. confirmed on a final basis) will be eligible for a grant under the RRF Program." The SBA rejected counsel's offer to do a bit of "wordsmithing, in the form of order accompanying [such that] the Motion would cause the SBA to reconsider its position."

Why not instead, the SBA helpfully suggested have the Court "simply dismiss their cases and then immediately apply for the RRF Grant"? ["Why could you not have called two hours earlier" undoubtedly being screamed by Debtors' counsel at their mute button]. Why not indeed, especially given an earlier 2020 court decision "where the court denied relief in accessing certain PPP funding, this Court raised the option at that time of seeking dismissal as a way of availing themselves of critical government aid toward survival." What is not clear, however, is why the Debtors had not embraced the Court's advice then in the PPP context or re-visited this dismissal strategy a bit earlier in respect of RRF funding. The answer may lie in the then assesses relative chance od success of a dismissal strategy.

As te Debtors' now shelved Disclosure Statement points out: "The Debtors thought they found a life-line in the Paycheck Protection Program, only to find the door to this program closed to those most in need of the funding – chapter 11 debtors."

In concluding that the change of strategy "is not without tremendous risk, and it is possible that it will not succeed and the Debtors will end up liquidating in chapter 7," the Debtors once again note that they are "simply out of options and out of time to pursue any other path to save jobs, save their business, and provide a meaningful distribution to their creditors. Any other course of action would almost certainly result in liquidation. In contrast, the requested approach gives the Debtors more than a fighting chance."

Background

[As previously reported] In April 30th filings, including an emergency motion (granted) to use a scheduled May 11th hearing as an opportunity to have their Disclosure Statement approved, the Debtors make clear that they have one last chance at survival: the ability to acess up to $10.0mn of funding that may be available from the newly established Restaurant Revitalization Fund (the "RRF"). The Small Business Administration has been accepting applications to tap the $28.6bn RRF from May 3rd but has warned that the "RRF is underfunded, and is likely to run out of funds soon after the application process begins." The issue for the Debtors is that they believe the safer reading of existing (and unclear) SBA guidance is that access to the RRF will require them to have a confirmed Plan and that their path to Plan confirmation will need to be shorter than the "conventional confirmation timetable of at least 75 days."

In a declaration in support of approval of the Disclosure Statement [Docket No. 335], the Debtors’ CRO lay out the "life-threatening" challenges facing the Debtors and their need for a truncated Plan confirmation timetable: “The urgent need to apply promptly upon the opening of the application process presents a life-threatening challenge for the Debtors. Since the Debtors began formulating the Plan, the SBA issued guidance in the form of the Program Guide and the Sample Application. As described in the Motion, the SBA’s available guidance is not clear [The SBA clearly not understanding that the terms "approved" and "confirmed" are enormously important terms of art in the bankruptcy context]. The Sample Application asks whether the applicant is “Operating under an approved plan of reorganization under either a Chapter 11, Chapter 12 or Chapter 13 bankruptcy,” and adds that if so, the applicant is eligible. See Sample Application at p. 4. The Sample Application also states that if the applicant has “[f]iled for either a Chapter 11, Chapter 12 or Chapter 13 bankruptcy but no plan of reorganization has been approved (Applicant is not eligible).” 

The Program Guide refers to whether the Debtors are 'operating under an approved (confirmed) plan of reorganization under a Chapter 11 bankruptcy.' FN3 See Program Guide at pp 4-5. However, at the April 13th public meeting with the Independent Restaurant Coalition, in the context of a discussion about the requirement that an applicant must not be “permanently closed,” but may be “temporarily closed,” Mr. Kelley stated, 'With respect to bankruptcy, if there’s been a liquidation, then that would be ‘permanently closed,’ you’re out. But if you’re working on your reorganization plan, you are in.' This statement appears at approximately 19:20 of the above-cited video. Considering all of the circumstances, I believe that to be able to answer the above-referenced question from the Sample Application, or a comparable question, on the 'live' application form in a manner that will not prompt denial of the Debtors’ application, the Debtors will need to have some form of conditional confirmation from the Bankruptcy Court of their Plan at the time when they submit their application, so that they can, in good faith, indicate that they are “operating under an approved plan of reorganization under either a Chapter 11, Chapter 12 or Chapter 13 bankruptcy.

Under a conventional confirmation timetable of at least 75 days, the RRF will very likely have run out of funds well before the Debtors reach the confirmation stage."

FN3: While the Program Guide adds the parenthetical “(confirmed)” following the word “approved,” the Sample Application uses only the word “approved” by itself and without elaboration, and makes no mention of the word “confirmed” or any variation thereof. To the best of my knowledge, the “live” application is identical to the Sample Application in this respect.

Its not just the SBA that is fudging the approved/confirmed distinction, with the Debtors asking for "some form of conditional confirmation" from the Court fully aware that even with an accelerated timetable they cannot get the Plan confirmed in the two weeks they believe they have left. The Debtors provide: "if ‘word on the street’ is correct, the Debtors have a mere two weeks to be in a position to check the box certifying that they are ‘operating under an approved plan of reorganization…"

About the Debtors

According to the Debtors: "Cosi is an international fast-casual restaurant. Cosi is recognized for its signature flatbread made from a generations-old recipe and a part of many Cosi favorites. Così offerings include breakfast, lunch, dinner, snacks and other desserts and catering.

Menu items are made using fresh ingredients and distinctive sauces and spreads to create “craveable” dishes. The Cosi menu features made-to-order sandwiches, hand-tossed salads, melts, bowls, soups, bagels, breakfast sandwiches and other breakfast products, flatbread pizzas, snacks and desserts. Guests can also enjoy handcrafted beverages, coffee and coffee-based-based and a variety of other beverages. Cosi offers a diverse catering menu that includes the restaurant favorites and specialty offerings.

Così® restaurants are located in urban and suburban settings, traditional and non-traditional locations, including retail spaces, office buildings, universities, hospitals, and more, and are designed to be welcoming and comfortable with an eclectic environment, based on the original Così® restaurant still operating in Paris, France. Così® partners create a welcoming environment where guests are invited to relax and enjoy great food. 

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