When a company files Chapter 11 bankruptcy, it gives up full control of its fate.
The bankruptcy court gets a say in its plans and its lenders have a say in how their money gets spent.
Both of those can lead to threats to survival, as the bankruptcy court can sometimes force a company to use its cash to pay bills it had not intended to pay. If the lender does not approve of that use of the money, it can freeze additional funds or withdraw its support altogether.
Related: Iconic nationwide restaurant chain closes some locations (but that's not the whole story)
That can create a house-of-cards situation where a company can go from having a reasonable path to survival to a Chapter 7 liquidation. For a Chapter 11 bankruptcy to work, unless a buyer or new funding is found, a lot of players need to cooperate.
In the case of Red Lobster, the national restaurant chain, which has closed nearly 100 restaurants, faces two challenges that could ultimately make it a much smaller chain or affect its overall survival.
Red Lobster needs lower rents
Rising rents have forced many businesses to move or close.
That's not a giant deal if you have to move your office because a lease renewal would cost too much. In many cases, you can go to a cheaper part of town, reduce your space or give up having an office altogether.
Restaurants can't easily do that since relocations are expensive and most chains need to be in heavily trafficked parts of town.
When it comes to rent, landlords also have tough choices to make. Even if they think they can get more money from a new tenant, that doesn't guarantee that they will, and any gains they figure to make can get eaten up quickly if a space stays vacant.
Red Lobster has said in a court filing that it might end up closing more than 100 additional units if its landlords won't negotiate lower payments.
Now, a new court filing from Red Lobster showed that a total of 228 restaurants cannot make money with their current lease situations. After 93 Red Lobster outlets have already closed, this suggests that the company could shutter an additional 135 restaurants.
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Red Lobster has another problem
Melmed Law Group has filed a lawsuit requesting class-action status on behalf of all California Red Lobster employees who, the complaint says, were immediately and illegally terminated without notice or advance warning amid recent store closures.
"Hundreds of employees across California have been affected by these abrupt terminations, which we contend violate state and federal labor laws," the law firm sent in an email to TheStreet. "We believe this case highlights critical issues regarding employee rights and corporate responsibility, and we are committed to seeking justice for the affected workers."
The lawsuit alleges that Red Lobster did not give employees proper warning under the Worker Adjustment and Retraining Notification Act and the California Worker Adjustment and Retraining Act. The lawsuit will have a Federal Class and a California Class of plaintiffs.
The complaint seeks damages amounting to "60 days' back pay and benefits pursuant to the WARN Act and for wages and unpaid benefits for as much as 60 days under the California Warn Act. The law firm is also asking for its attorneys' fees to be paid by Red Lobster.
More bankruptcy:
- Popular movie theaters owner files Chapter 7 bankruptcy
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- Popular restaurant chain shares bad Chapter 11 bankruptcy news
"This action also seeks a declaratory judgment that the claims of Plaintiff, on behalf of similarly situated former employees, be recognized as administrative expense claims or, alternatively, priority claims," the lawsuit reads.
Red Lobster has not commented on the lawsuit, nor has it returned TheStreet's request for comment on the issue, made through the comment form on its website.
Being forced to pay back wages and benefits for hundreds of workers, and potentially thousands overall, might not be an expense the company can afford or a situation its lenders will support.
