What a week for the food and restaurant industry!

On October 4, 2011, Real Mex Restaurants and Chef Solutions Holdings filed for bankruptcy relief in Delaware under Chapter 11 of the Bankruptcy Code. The very next day, Friendly’s Ice Cream, known for its old-style East Coast ice cream parlors and restaurants, also filed for protection from its creditors under Chapter 11.

These three companies run the gamut in the food industry. Real Mex Restaurants is one of the largest full service, casual dining Mexican restaurant chains in the United States. In 2006, an affiliate of Sun Capital Partners, based in Boca Raton Florida, purchased Real Mex Restaurants for $359 million. An affiliate of Sun Capital also invested in Friendly’s, the owner and franchiser of about 490 restaurants and ice cream parlors along the East Coast. Chef Solutions, on the other hand, provides prepared foods under brand names such as Orval Kent, Pennant, Yoder’s and La Francaise.

The filing of any one of these Chapter 11 Cases triggers concern among suppliers and customers as to whether a supplier should continue to ship goods to the Chapter 11 debtor and on what terms. They are also concerned with whether the debtor will secure financing to continue to produce goods for their respective customers.

Therefore, suppliers and customers of a Chapter 11 debtor should take immediate action to protect their rights upon learning of a bankruptcy filing. For example, if you are one of the critical vendors of a company in bankruptcy, you may be entitled to negotiate a deal where you are paid a portion of your pre-petition claims in exchange for agreeing to certain credit terms on a going forward basis. You also may be entitled to a priority claim for goods shipped and delivered within twenty days of the filing date. Finally, if you received any payments within ninety days of the filing of the Chapter 11 Case, you may receive a demand letter, or possibly a complaint, requiring that you return all payments received within that time period.

These preference demands are subject to many defenses often reducing or eliminating any potential exposure you may have. Therefore, it is critical at the outset of a Chapter 11 Case to understand your rights, preserve any claim you may have to a distribution and protect yourself against a lawsuit for payments you received within ninety days of the bankruptcy filing.

With the present economic conditions and rising food prices, sales have declined greatly in the food and restaurant industry. Many more middle class households are deciding that it is more economical to eat at home. When you mix in above market rents you have a recipe for disaster. While we expect the wave of bankruptcy filings to continue, it is important to stay vigilant in monitoring the companies for whom you do business and protect, to the best of your ability, your right to recover any amounts due.

Many of these issues can be addressed in advance of the bankruptcy filing when you notice that the days from invoice to payment have increased along with the total outstanding receivables. It is important to stay ahead of the game; otherwise, you may find that you have bitten off more than you can chew.