Where do lobsters go to borrow money? The prawn shop. Or in the case of Red Lobster, the “Stalking Horse”, in its recently filed Chapter 11 Bankruptcy. 

In 2003, Red Lobster lost millions of dollars on an all-you-can-eat “Endless Crab” promotion as a result of the unanticipated rising crab prices. Hindsight is 20/20, they say; however, 20 years later, Red Lobster repeated history with an “Ultimate Endless Shrimp” promotion, which has caused the chain to seek the protection of a Chapter 11 Bankruptcy. But have no fear; the Cheddar Bay biscuits will prevail due to the chain’s strategic use of Stalking Horse funding, a financial arrangement aimed at facilitating the company’s restructuring efforts. This article focuses on what Chapter 11 Bankruptcy entails for Red Lobster and its customers and the role of Stalking Horse funding in this process.

The restaurant industry, like many others, has faced significant challenges in recent years. Factors such as changing consumer preferences, economic downturns, and, most notably, the COVID-19 pandemic have taken a toll on businesses. Despite its long-standing reputation and loyal customer base, Red Lobster has not been immune to these pressures. Prior to the bankruptcy filing, Red Lobster had been grappling with declining sales and increasing debt. The pandemic exacerbated these issues, forcing the company to temporarily close many of its dining rooms and rely heavily on takeout and delivery services to stay afloat. While these measures helped mitigate some of the losses, they were not sufficient to fully offset the impact of reduced foot traffic and dining restrictions.

Chapter 11 Bankruptcy is a legal process that allows businesses to reorganize their debts while continuing operations. Unlike Chapter 7 bankruptcy, which typically involves liquidating assets and ceasing operations, a case filed under Chapter 11 allows companies to develop a plan to repay creditors over time while restructuring their operations to become financially viable.

For Red Lobster, filing for Chapter 11 Bankruptcy represents a strategic move to address its financial challenges without shutting its doors entirely. By restructuring its debt and operations, the company aims to emerge from Bankruptcy stronger and more resilient, poised for long-term success.

In conjunction with its Chapter 11 filing, Red Lobster secured Stalking Horse funding to support its restructuring efforts. Stalking Horse funding refers to a financing arrangement in which a potential buyer or investor provides an initial bid or offer for a bankrupt company’s assets. This bid sets a floor price for the sale of the company’s assets, establishing a baseline for other interested parties to submit competing bids. In Red Lobster’s case, the Stalking Horse funding is a crucial source of capital for its operations during the bankruptcy process. Additionally, it provides the company with a degree of financial stability and allows it to continue serving customers while pursuing its restructuring plan.

With the Chapter 11 bankruptcy filing and Stalking Horse funding in place, the chain can now focus on executing its restructuring plan. 

Stalking Horse funding, however, is not the sole solution to being successful with a Chapter 11 reorganization. A Chapter 11 reorganization may also involve various measures, such as renegotiating leases, closing underperforming locations, and optimizing menus and operations to improve efficiency and profitability. A Chapter 11 reorganization is not exclusively available to national dining chains or large corporations – small, closely held businesses can also seek the protection of Chapter 11. If you or someone you love is operating a business and needs the same relief and fresh start to keep the business up and running, please do not delay in contacting CGA Law Firm for help and for a creative and caring solution to staying in business. 

E. Haley Rohrbaugh

Attorney

Haley Rohrbaugh is an attorney with CGA Law Firm with extensive years of legal experience in both Florida and Pennsylvania. She joined the Bankruptcy Law Group at CGA in 2010, where her primary focus is in Chapter 13, Chapter 11, and Chapter 7 Bankruptcy, though she also assists clients in business formation and representation, and estate law.

Read Haley’s Bio Page in full HERE.