Is a Restaurant Receiver the Next Logical Step for LLC Dispute?

When there are disputes between a managing member or other members of a LLC (Limited Liability Corporation), the appointment of a restaurant receiver is one solution. Unlike hotel receiverships, where often this action is more common and brought on by the senior lender prior to foreclosure and in order to preserve the assets and the income, restaurant entities are normally funded by its investors and there are no outside lenders to periodically audit the assets. There are also situations with restaurants in particular, where the managing member is always in control and provides little if any information to other LLC members. This inevitably can create an ongoing dispute. Often, the only recourse is to bring in a neutral third party to operate and oversee the restaurant or to help in resolving the ongoing litigation. Here are two examples where having a restaurant receiver take control may be appropriate and the pros and cons associated with it: I. The LLC suspects that the managing member is not reporting all of the income to them for distribution. The restaurant is profitable yet the increased sales versus added expenses seem out of line. Little reporting or justification is provided to the non-managing members. Pros Due to both the high use of credit cards and the somewhat cash nature of the business, it is easy to redirect some of the receipts into another bank account. Often, the managing member is both the manager and controller in a small to medium size food and beverage operation. He or she can manipulate one or more of the POS (point-of-sale) registers to record credit card transactions as well as make daily cash bank deposits into a separate account. In these situations, the appointment of a full-purpose court appointed receiver may be necessary. Particularly and in these instances, it is important that control of the operation, especially the money and corresponding transaction, is given to a neutral third party. Cons The managing member may be an integral part of what attracts customers to the restaurant, such as a celebrity chef, sports star or local public figure. If they are removed from involvement in the day to day operation, it could affect sales and goodwill significantly. II. There have been a large number of employee related lawsuits at the restaurant. The managing member has been unable to resolve the litigation due in part to their own adversarial nature. He or she is now threatening even more litigation against the LLC members if they intrude and the legal fees are mounting every day. Pros The appointment of a court receiver to bring a “cool head” to these employee disputes could resolve the issues much more quickly. A neutral third party taking control of the checkbook and overseeing all litigation matters can also save thousands of hours of time and legal fees. It may also be more economical even after the receivership fees are deducted, especially if the managing member’s lawyer is no longer a part of the lawsuits. Cons Many judges do not like to appoint receivers in a full-purpose capacity to take control of a business unless there is no other suitable recourse available. In the court’s eyes, this may be more involvement than is necessary given the focused nature of what the receiver’s duties would be like in this situation. Still, limited purpose restaurant receiverships may be more appropriate and less costly. Whether this will be more amenable to all parties and they can agree to this kind of stipulation, may prompt even more litigation. If you an attorney, investor or lender’s counsel considering a restaurant receiver as a resolution, there are several articles on the issues regarding all types of receiverships at the California Receiver Forum web site. Or, please post other suggested resources and information here for our readers.