De Facto Chapter 11 for the Unconsolidated 'Identity of Interest' Enterprise (Case Study)

GGI in Distress

In September 2007, an institutional lender (“Lender”) made a $7 million secured loan (the “Loan”) to GGI and nine separately owned affiliate restaurant companies (the “Restaurants” and collectively with GGI the “Co-borrowers”). The Loan was joint and several to the Co-borrowers, and was secured by substantially all of the Co-borrowers' assets other than leasehold interests and fixtures. GGI and each of the Restaurants were individually owned by members of the Glazier family, and despite the absence of a formal holding company structure, the Co-borrowers operated as a single economic enterprise with GGI serving as manager. Receipts from the Restaurants were automatically swept, or directly deposited into a central GGI bank account, and GGI returned cash to the Restaurants on an as-needed basis to pay individual rent, food, labor and other expenses. GGI's shares, and the Restaurants' membership equity interests were pledged by the Glazier owners as additional collateral for the Loan. While the Loan was not personally guaranteed by any of the Co-borrowers' owners, the owners could be exposed to liability for unpaid taxes, and wages if the enterprise were to fail. An unfortunate victim of the recession, the Co-borrowers between 2008 and 2010 opened and closed five new restaurants. The restaurant closures left the group economically challenged, and unable to make the principal payments mandated by the Loan documents.