Case Studies in Using a Restaurant Receiver for Resolving Disputes

The viability of using a restaurant receiver to resolve a dispute depends on many factors, most of which have not been studied at length. Those who lose the battle are rarely willing to contribute to the academic study. And, those who are able to do not really think much of academic studies.  A restaurant, with any intent on being a successful and continuing business, often needs to structure itself as a Limited Liability Corporation (LLC) early on. For a million and one reasons there simply needs to be some formally structured relationship between owners, partners, managers, and/or investors. Taxation, simplicity of paperwork, personal liability, and so on make it silly (and quite irresponsible) not to form an LLC. Still, restaurateurs can stumble and fall because they do not usually have outside lenders to audit the assets periodically. It is also true that – as often as not – a restaurant has a managing and controlling member on-site who provides little if any information to the other members of the LLC. As often as not, this situation creates the promise of conflict. Sometimes, the only way to resolve the counterproductive ongoing dispute is the introduction of a neutral party – a restaurant receiver. It is the receiver’s job to operate and monitor the restaurant performance, so it will target real and workable solutions for the ongoing problems. Case Study #1: The other members of the LLC have reason to believe the restaurant manager at ABC Restaurant is not reporting financial transactions correctly or fully. Even though the restaurant is profitable, the reported expenses seem bloated. Transaction detail – purchase orders or receipts – justifying the expenditures is questionable or not available at all. It is easy enough for non-financial people to make financial mistakes. Accounting and taxation may not be their strength. But, it is also true that a cash and credit card business is vulnerable to skimming, fraud, and theft. When the operating manager is also the business controller, she/he is positioned to maneuver cash/credit in to separate accounts. In situations where criminal activity may be suspect, a court appointed receiver may be necessary. In these situations, where financial controls are at risk or in debate, a neutral third party may be prudent and/or required. On the other hand, the managing member may be the key to the restaurant’s marketing success, such as a celebrity chef or personality. Simply removing them may significantly affect sales. However, the LLC receiver can be the one who suggests a restructuring or reassignment of duties from a neutral position that encourages long-range success. Making it an issue of turnaround rather than accusation can work wonders. Case Study #2: Things have reached a critical stage at XYZ Restaurant. The managing member has a very adversarial personality, and the restaurant is facing a number of employee lawsuits. If that is not enough, the manager has told the LLC members that she/he will sue them if they do not butt out. An unemotional, neutral, third party restaurant receiver will take over the checkbook and litigation in the interest of saving time and legal fees. Once in position, the receiver can identify, parse, and suggest resolutions to the personality issues. A restaurant receivership may be the best solution since courts are reluctant to order receivership in such cases where other recourse may be available. Of course, if the alienation has reached a point of no return, such a suggestion may be more productive. According to a Cornell University study “Why Restaurants Fail” – restaurant failures are highest by the 2nd and 3rd year of operation. Restaurant receiverships may be a viable option to keep the doors open until the problem is identified and resolved in order to avoid bankruptcy or a complete business shutdown. Holding a frank and open discussion – about the options presented by a restaurant receiver when disputes between members of the LLC arise – lays the groundwork for such opportunities – or necessary responses – in the future of the business.