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Commercial bankruptcy helps pizza chain slice up its debt

Just about a month ago, our Wayne County bankruptcy law blog talked about the case of a cosmetics company that made a major announcement. By choosing to pursue Chapter 11 bankruptcy, the company was going to try to reorganize and eventually resume operating without being held back by debt. Sound too good to be true? A major national chain restaurant has done just that.

It's likely that many Wayne County residents will be familiar with Sbarro pizza. The chain has over 800 restaurants in this country and abroad. Back in March, it sought to shed a vast amount of debt through a commercial bankruptcy filing.

Now, with the exit plan approved by a judge, the company walks away from almost $150 million in debt. Its lenders, a number of investment management firms, do receive controlling equity in the newly reorganized business. Unsecured lenders like suppliers and landlords will divvy up $1.25 million.

Readers may be wondering at this point why different types of lenders are treated differently. Chapter 11 does define categories of lenders and prioritize them in terms of who gets paid back first. Employees who are owed back wages, for example, are among the top priorities; so are the IRS and state tax agencies. Every secured creditor gets a class unto itself, while unsecured creditors are all lumped together into one. Ultimately, the creditors do get to vote on the business reorganization plan as well.

Sbarro did have to make some difficult decisions, including moving its East Coast headquarters to the Midwest; about 40 employees at the old site will be out of work as a result of the move. But the company was optimistic that the move would save money, and they were proud that none of their restaurant staff -

some 2,700 employees in this country alone - would be affected.

Source: Nation's Restaurant News, "Sbarro emerges from Chapter 11," Mark Brandau, June 2, 2014

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