Word rippled quickly through the Wilmington area after popular Indochine restaurant recently filed for Chapter 11 bankruptcy protection. Many customers of Indochine’s main restaurant off Market Street, as well as its four Indochine Express locations and its Café Chinois, wondered whether that meant the eateries were definitely closing for good.

Not necessarily so, said Algernon Butler III, a Wilmington-based board-certified specialist in business and consumer bankruptcy law.

“The choice of Chapter 11 (of the Bankruptcy Code) is specifically to let a company reorganize so they can stay in business,” said Butler, who is not representing Indochine in the process.

Butler, a partner in the firm of Butler & Butler LLP, explained that a company that wants to liquidate and cease operations either files for a Chapter 7 bankruptcy or for a dissolution of the company outside of the bankruptcy process. A Chapter 11, on the other hand, enables the company to create a plan to resolve crippling debt, negotiate with creditors and perhaps downsize or streamline operations.

In a Business Journal article about the filings, Indochine owner Solange “Niki” Thompson said Oct. 10 that it would be business as usual at her restaurants in the Wilmington area. “It just needs to be reorganized in a more efficient way,” she said, adding that she hopes customers continue to support her establishments through the process.

The past few years have been tough for the restaurant industry, with the COVID pandemic closing or restricting business operations. When restaurants were able to reopen, labor shortages and increasing costs of labor and food proved challenging, Butler said.

“There are a lot of restaurants in bankruptcy right now,” he added.

Richard Cook is the attorney for another local eatery, Fork ‘N’ Cork, which he said will soon emerge from the Chapter 11 process. He said Fork ‘N’ Cork had issues similar to those of Indochine.

“There is legacy debt coming out of COVID, when restaurants had decreased or no income, and then increased costs coming out of COVID,” said Cook, an attorney who is also board-certified in business and consumer bankruptcy law and owns Cape Fear Debt Relief in Wilmington.

Fork ‘N’ Cork filed for Chapter 11 in February of this year and had its reorganization plan approved by the N.C. Eastern Bankruptcy Court.

“With the consent of creditors, we confirmed our plan in July,” Cook said. “Provided Fork ‘N’ Cork makes its payments, everything will be okay. It got more affordable interest rates and a reduction in principal balances.”

Chapter 11 is very flexible in its options for businesses, Butler said.

“They would be able to close one or more locations and in an organized manner if they felt those restaurants were underperforming or unprofitable,” he said.

Speaking generally, Butler said, “The bankruptcy vehicle offers protection, such as the lease obligations you can reject. It’s also not uncommon in appropriate cases for a business owner to hire a consultant or other professional – could be a financial consultant.

“Sometimes a business just needs a stronger bookkeeping and cash management department. Bankruptcy courts can approve such things if it’s in the best interests of the organization.”

Butler noted that the company filed four separate bankruptcy petitions: one for the main restaurant and others for the Leland, Oleander and Southport Express entities. All four petitions listed $0 to $50,000 in assets and $1 million to $10 million in liabilities, according to court records.

In reviewing the documents, Butler saw a large Small Business Administration loan and another large loan from a bank. In addition, he said, Indochine appears to have more than a dozen Merchant Cash Advance loans.

“These are very high-interest loans that are easy to obtain. The collection practices are very aggressive,” he said.

Cook knows all about these so-called MCAs, and he has conducted seminars about them for other bankruptcy attorneys in the state. Fork ‘N’ Cork had some of those loans on its balance sheet.

MCAs have the ability to autodraft, which means the lenders conduct sweeps of the borrower’s bank accounts weekly if not daily, to collect the payments. Effective interest rates, both attorneys said, are often 50% or even more. They are like payday loans, but for businesses. Whereas North Carolina outlawed these high-interest loans aimed at consumers in 2006, there is no similar law prohibiting MCAs, according to Cook.

“They create a death spiral: You have to renew or take out other MCAs to pay off the original,” he said. “(These account sweeps) ensure they are getting paid, but that frequently means other creditors are not getting paid.”

At the top of the debt pile is taxes: sales and use taxes as well as payroll taxes, Cook continued. Companies in financial trouble can incur massive tax debts, which must be paid in full within five years.

“There’s no haircut on these tax debts,” he said.

In his work with Fork ‘N’ Cork as well as other small business bankruptcies, Cook has seen MCAs at the heart of most. He filed lawsuits as part of Fork ‘N’ Cork’s bankruptcy to claw back monies paid to the MCA lenders. One has settled; another is ongoing.

“We seek to invalidate the claim, so they are not among the creditors at the table,” he said.

Unfortunately, the attorney said, there has not been much discussion in North Carolina about outlawing these aggressive lending practices. In June, the Triangle Business Journal ran a story about them, using Fork ‘N’ Cork as a case in point. Cook said Bloomberg has done a series of editorials about them. But lawmakers have not shown much appetite for tackling the practice.

“If banks were issuing MCAs they would not be allowed,” Cook added. “But small business owners often don’t have sophisticated advisers.”

Butler said that restaurants are frequent, but not the only, target of MCA lenders. But the bankruptcy filing stops the bank account sweeps immediately, which should improve the filer’s cash flow.

Now that Indochine has filed for bankruptcy protection, the court will set a date – usually three to four months in the future – by which they must file their written plan for reorganization, according to Butler.

“Those months give the business an opportunity to let the dust settle, reduce costs and increase profits, solve some problem that brought them into the process, and improve cash flow by not having to pay those MCA debts,” he said. “The plan will list each of its creditors: the larger secured creditors first, such as banks and the SBA. The plan will describe how much each creditor is going to receive in the new payment terms.

“Negotiations for an adjustment of the interest rate or an extension of payment terms are frequent,” Butler continued. “Those ultimate terms depend on a lot of factors. One large one is, what collateral does the creditor have? There must be an evaluation of a company’s assets. Banks that have more important collateral can be more flexible.”

The key is how the debtor works with its creditors, Butler noted.

“Chapter 11s are most successful when the plan is collaborative,” Butler said, “working with creditors, as opposed to adversarial.”