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Law360 (October 22, 2020, 4:59 PM EDT) -- A Delaware bankruptcy judge on Thursday gave Ruby Tuesday a 60-day rent payment deferral after hearing that the casual dining chain has promised its landlords a cut of a retirement plan trust fund the company is seeking to claim to pay down its debts.
At a remote hearing, U.S. Bankruptcy Judge John Dorsey ruled that Ruby Tuesday needs to delay its $5.5 million in rent payments and that it had provided its landlords with adequate assurance that they will pay up by the time the Chapter 11 case is done.
Ruby Tuesday filed for Chapter 11 protection on Oct. 7, listing $42 million in secured debt along with $18.8 million in unsecured debt. It blamed the COVID-19 closure of all but one of its 421 locations, coupled with a shift in customer preferences away from casual dining.
The company said it intends to restructure its debt through a debt-for-equity swap with its secured lenders, but it will also explore a sale of its operating assets with those same lenders potentially serving as a stalking horse bidder.
During the pandemic, Ruby Tuesday decided to permanently close 71 restaurants and is seeking to further shutter 185 locations with an eye toward emerging from bankruptcy with between 175 and 200 restaurants, according to the company.
At Thursday's hearing, Judge Dorsey granted the chain's request to establish lease rejection procedures before hearing its arguments for a 60-day rent deferral, starting on the Chapter 11 filing date.
Counsel for Ruby Tuesday said that while nearly all its restaurants have reopened, all of them are under some kind of capacity restriction. Despite efforts to promote takeout, dining revenues remain down 30%.
Ruby Tuesday counsel Richard Pachulski said that though the company is working to increase revenue — noting it was down 80% when the closures began — at this point, it can't pay its November rent without going to its debtor-in-possession lender for more money.
"The lender will not provide it, and we will have to convert the case," he said.
A number of landlords had filed objections to the proposal, but Ruby Tuesday said nearly all had dropped their objections after the company promised to set aside $2.74 million for rent payments out of the possible recovery from liquidating its so-called "Rabbi Trust."
On Nov. 12, Judge Dorsey is scheduled to hear Ruby Tuesday's arguments that it is entitled to liquidate the nearly $22.5 million "Rabbi" trust fund established in 1992 as part of two so-called "top hat" deferred compensation plans. The company is arguing that the trust agreement calls for the trust to be treated as an estate asset in bankruptcy.
One landlord, SFC RD Funding IV, remained unconvinced, contending that this pledge was not adequate protection and that Ruby Tuesday's DIP budget did not provide for payment of the deferred rent upon the expiration of the 60 days, which it claimed is required by the Bankruptcy Code.
"SFC should not be forced to act as an involuntary creditor," SFC counsel Katherine Anderson Sanchez said, arguing that the deferred rent could leave the company administratively insolvent.
Judge Dorsey, however, found that the chain had provided adequate protection and that the Bankruptcy Code did not require immediate payment, instead turning the deferred rent into an administrative claim.
Ruby Tuesday is represented by Richard M. Pachulski, Malhar S. Pagay, James E. O'Neill and Victoria A. Newmark of Pachulski Stang Ziehl & Jones LLP.
SFC is represented by Leslie C. Heilman, Laurel D. Roglen, Craig Solomon Ganz and Katherine Anderson Sanchez of Ballard Spahr LLP.
The case is In re: RTI Holding Co. LLC et al., case number 20-12456, in the U.S. Bankruptcy Court for the District of Delaware.
--Additional reporting by Vince Sullivan. Editing by Steven Edelstone.
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