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April 29, 2020 – TooJay's Management LLC and 30 affiliated Debtors (“TooJay's” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Florida, lead case number 20-114792. The Debtors, owner operators of 28 deli-styled restaurants in Florida, are represented by Michael Goldberg of Ackerman LLC.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Truist Bank ($6.4mn PPP loan claim), (ii) U.S. FoodService Inc. ($1.9mn trade claim) and (iii) Three Atlanta LLC ($109k media consulting services claim).
These Debtors have taken a $6.4mn Paycheck Protection Program ("PPP") before filing their Chapter 11 filings. The Debtors are straightforward about the critical nature of this funding (now listed as their largest unsecured claim) which will be used for salaries and rent. As widely reported, the US Small Business Administration (the "SBA") has taken the position that a debtor in bankruptcy is not eligible for PPP loans. Although the CARES Act, of which the PPP is an element, makes no mention of a bankruptcy bar, the SBA argues that section 7(a)(6) of the Small Business Act requires qualifying small business loans, including PPP loans, to be “of such sound value or so secured as reasonably to ensure repayment,” thus, the SBA argues, disqualifying a company in bankruptcy.
The point is now being argued is several courts and, in at least one, a bankrupt Debtor (see, Hidalgo County Emergency Service Foundation v. Carranza (In re Hidalgo County Emergency Service Foundation), Adv. No. 20-2006 (Bankr. S.D. Tex.) (Doc. 18)) has for the moment prevailed.
Until we have further clarity, otherwise qualifying distressed companies will undoubtedly pursue the course of these Debtors (if and when possible, ie when the program is actually functioning as proposed and no as a free-for-all) and grab their unsecured loan before filing for Chapter 11. What a mess.
Goals of the Chapter 11 Filing
The Piet Declaration (defined below) states: "The Debtors are filing this chapter 11 petition in order to preserve the going concern value of the Debtors’ assets and operations, restructure debt as necessary to the operations of the Debtor's business, and negotiate a plan of reorganization and to work with all of their existing landlords to address the impact of the temporary revenue reduction arising from state and city [COVID-19 related] regulations mandating the closure of the dining room at all restaurants."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Piet Declaration”), Maxwell Piet, the Debtors' President and CEO, detailed the events leading to TooJay's' Chapter 11 filing.
The Piet Declaration states: "Prior to the COVID-19 pandemic and subsequent closures required by local governments, Debtors' businesses were operating profitably and there were plans to expand the chain into additional parts of Florida and the southeast region of the United States. Beginning in March 2020, the COVID-19 pandemic has caused the temporary or indefinite closure of the majority of Debtors’ restaurants and seriously affected the Debtors’ operations, revenues, and workforce. Although Debtors have taken proactive measures to reduce expenses wherever possible, including reducing the number of full-time employees and the fixed operating costs associated with Debtors' businesses making it challenging for Debtors to maintain profitability and other key financial health metrics that they are required to maintain by their lenders. As of March 29, 2020, Management was down to 290 full-time employees, compared to 1,114 at the end of February of 2020, and compared to 1,635 employees as of March of 2019. The reduction in sales has made it difficult for TooJay’s to maintain the level of profitability to which it has historically enjoyed and which it needs to continue operating its businesses.
In the interest of stabilizing their operations until closures related to COVID-19 are lifted, Debtors recently obtained an approximately $6,400,000 loan under the Paycheck Protection Program, which they plan to use on payroll and other expenses allowed under the program, including future rent."
About the Debtors
According to the Debtors: "TooJay’s began with a single location on the island of Palm Beach in 1981. The brand was born out of the passion for creating classic recipes and flavors of an authentic deli served with lots of love and amazing hospitality. Now, with locations across Florida, our focus is still the same – serving hearty portions of homemade comfort foods, handcrafted sandwiches and made-from-scratch soups, salads and baked goods. Our extensive menu provides options everyone loves from kids to the whole family."
The Piet Declaration adds: "Debtors are in the business of owning and operating twenty-eight (28) TooJay’s restaurants throughout the state of Florida, as well as a commissary and bakery. TooJay’s is a restaurant that focuses on providing the recipes and flavors of an authentic deli. Many TooJay’s restaurants are located at outlet malls or other large mixed-use retail properties. TooJay’s has an extensive menu and focuses on handcrafted sandwiches, made-from-scratch soups, salads and baked goods and is open for breakfast, lunch, and dinner. TooJay’s revenue streams come from its restaurants, take-out orders, delivery, and catering services."
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