On March 19, lauded chef Thomas Keller announced that his famous, Michelin-starred restaurant, The French Laundry in Yountville, California, would temporarily close. The decision, which was made in correspondence with a shelter-in-place mandate in Napa County, weighed heavily on Keller, who shared his feelings about his restaurant and the state of the industry in general in a heartfelt Instagram post.
“The French Laundry has always been much bigger than one person as we have drawn on the contributions of so many people,” Keller wrote. “We are proud of that and will remain so during these uncertain times.”
Less than a week later, Keller’s attorney, John Houghtaling, filed a lawsuit on behalf of Keller in the Superior Court of California County of Napa against his insurer, Hartford Fire Insurance Co. The suit calls for a declaratory judgment on behalf of Keller’s business interruption insurance policy, as first reported by Restaurant Hospitality.
Essentially, the chef-owner of The French Laundry – as well as Per Se, Bouchon, Bouchon Bakery and Ad Hoc + Addendum – is seeking a legally binding decision on whether or not Keller’s insurance policy permits recovery of business losses due to COVID-19.
“To avoid payments for a civil authority shutdown, the insurance industry is pushing out deceptive propaganda that the virus does not cause a dangerous condition to property,” Houghtaling said in a release. “This is a lie, it's untrue factually and legally. The insurance industry is pushing this out to governments and to their agents to deceive policyholders about the coverage they owe."
Keller isn’t alone in seeking relief from his insurance company following the outbreak of COVID-19. Within a week of the chef seeking recovery in court, he banded together with famous chefs Daniel Boulud, Jean-Georges Vongerichten, Wolfgang Puck and others to form Business Interruption Group. The collective is pushing for the federal government to intervene with insurers to allow business owners to recover costs for civil authority coverages that don’t include a communicable disease or virus rider.
Wendi Alper-Pressman, a St. Louis-based attorney at law firm Lathrop GPM, first learned about Keller’s case while watching the evening news. Her firm, she says, offers robust insurance recovery services, and in listening to Keller’s attorney detail the situation on TV, she started thinking about how other restaurant owners could benefit from this strategy.
“His attorney said that Tom has a virus rider – he purchases a virus rider and he’s not getting coverage from the insurance company,” Alper-Pressman says. “Most businesses have what’s called business interruption coverage, and Tom Keller purchased some kind of rider which said that if the business is interrupted due to a virus – for example, if a worker tests positive for hepatitis – it would cover something like that if you had to shut down a restaurant for two weeks. That’s what was probably in the insurance company’s mind when they sold that rider, so then the question becomes whether or not you can then use that rider [now amid COVID-19.]”
If the language in the virus policy is vague, Alper-Pressman says it’s entirely possible it could be found applicable for COVID-19 recovery costs.
“The insurance companies are saying, ‘Oh, this would be terrible,’ and [Keller’s attorney is] saying, ‘You have $357 billion in reserves from policy premiums that you’ve collected for all these years,’” Alper-Pressman says. “So that’s something [restaurant owners] should not overlook. As almost everybody knows, insurance companies rarely roll over. The policy language is really important.”
She says if local restaurant owners are curious whether or not their business insurance coverage could contain such a rider or policy, they should seek out an attorney to thoroughly analyze their policy.
“Restaurant owners should take a really hard look at their insurance policies,” Alper-Pressman says. “They shouldn’t necessarily take their [insurance] brokers’ word that they don't have coverage for this event – they might. And that sort of policy review [from a law firm] doesn’t include a fight with your insurance company, but it does include a robust analysis of what your options are.”
While chefs like Keller are hoping to gain recovery costs from insurers, others are urging the federal government to expand the aid and forgivable loans provided in the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was recently signed by President Donald Trump.
Three St. Louis restaurateurs weigh in on the steps they're taking to save their businesses.
The act currently offers payroll forgiveness through the Payroll Protection Plan for two months for small business owners who meet certain criteria, which many restaurant owners say won’t be nearly enough time to ride out the COVID-19 crisis. Until restaurants are back up and running with their usual payroll, opting into the forgivable loan means they can’t use the money effectively. If they don’t use it in those eight weeks, the loan isn’t forgivable.
“It makes sense in theory; they’re trying to incentivize people to bring their workers back, but for a restaurant owner, you would have to bring your workers back, pay them and then let them go again if you’re not reopened [in eight weeks],” says Spencer P. Desai, attorney and principal at law firm Carmody MacDonald in St. Louis. “So the program has to be reworked, and there’s been a push on Congress to try to rework that so that the eight-week window is extended for businesses that aren’t able to be open right now. That’s probably the biggest challenge facing restaurants.”
Desai says that for restaurant owners who do want to take advantage of PPP now or under a possible reworked version of it, it covers a range of permitted uses besides just paychecks for employees.
“You can go back up to a year, and you calculate what your monthly payroll was, and you can throw in healthcare and all kinds of other stuff, then you come up with a number and multiply it by two-and-a-half, and that is what you’re eligible for for PPP,” Desai says. “And the loan itself is generally forgivable, but you have to be able to use it in certain buckets, we’ll call it.”
Those buckets, as Desai calls them, include payroll costs as well as costs related to the continuation of group healthcare benefits during periods of paid sick, medical or family leave, and insurance premiums; employee salaries, commissions or similar compensation; payments of interest on any mortgage obligation (not including any prepayment of or payment of principal on a mortgage obligation); rent payments or utilities. Those last three permitted uses are limited to 25 percent of the total loan amount. Owners can also use PPP toward interest on any other debt obligation that was incurred before the covered period, which is also limited to 25 percent of the loan amount.
For owners whose businesses can’t survive the tidal wave of unrecovered costs caused by COVID-19, there’s another solution – to file for bankruptcy. It might sound like a drastic choice, but under a brand-new subchapter of Chapter 11, attorneys say that small businesses could benefit from this strategy.
On Feb. 19, as COVID-19 was just beginning to worsen in cities across the U.S., the unrelated yet well-timed Small Business Reorganization Act (SBRA) went into effect. The act reduces costs and streamlines the process for small business owners who file for bankruptcy in the hopes that the business owners can retain control and their ownership interest. That last provision is critically important, as it eliminates the absolute priority rule in traditional Chapter 11 bankruptcy filings that can bar owners from retaining control of their businesses unless they pay back creditors in full.
The act originally defined a small business as one with aggregate debts under $2.7 million, but a provision within the federal CARES Act expanded that to $7.5 million for one year. If other legislative efforts prove insufficient to provide qualifying restaurants or restaurant groups with relief, this expansion could be a possible path forward for larger restaurants.
“Unfortunately a lot of people just equate bankruptcy with throwing in the towel and letting the business die,” says St. Louis attorney Thomas H. Riske, a principal at Carmody MacDonald. “This new subchapter was added basically to make Chapter 11 bankruptcy more cost effective for small businesses and make it more positive for small business owners to go through the Chapter 11 process.”
Riske and his Carmody MacDonald colleague, Robert E. Eggmann, are hopeful that the SBRA will level the playing field for small business owners. Under traditional Chapter 11 bankruptcy filings, for example, a mom-and-pop restaurant would be held to essentially the same standards for filing as a billion-dollar company.
“I listen to [Momofuku restaurant group owner] David Chang’s podcast, and he’s saying this is going to change the landscape of restaurants forever,” Riske says. “He thinks there’s going to be just a huge delivery uptick for the people who have done it successfully. We’re going to have this period where restaurants can only be half full, maybe, and the government holds them to that. So Chapter 11 provides a good way to not only reorganize, but kind of reformulate your business. Let’s say before COVID-19 you had a huge restaurant with 350 seats, and then post-COVID-19, your takeout and delivery business is doing great, so that huge building now doesn’t make sense for you. You go into bankruptcy and you reject that lease, you pay only a portion of what you owe on the lease over time and you move to a smaller, more cost-effective location for your new business model.”
The new act is less expensive for business owners, but because it’s new, Riske and Eggmann say it’s hard to estimate the actual cost to owners.
“I would say a small business case would cost half as much as a Chapter 11 case,” Eggmann says.
He adds that owners interested in seeking this solution should wait to do so until closer to when they can safely reopen for business, either in full or in part.
“So you've been closed during this terrible time for three months and you've fallen behind on your bills because it's just inevitable,” Eggmann says. “But now you finally see an end in sight, and you think you can get your previously profitable restaurant back open again, but what do [you] do about these bills that have been accumulated for three months? I can't open on day one and write a check for all this. Well, the steps would be to file this type of bankruptcy and be able to spread out those bills over time – especially those of us or those restaurants who would fall behind in their rent, and they can spread the old bills over and pay it out over time.”
Both attorneys stress the importance of owners staying in regular communication with their landlords throughout temporary closures, as rent on restaurant spaces is often the biggest expense for a single-location restaurant after payroll. And whether or not payroll stays online for a portion or all of the temporary closure, as it has so far for a small number of restaurant owners, rent will continue to accrue.
“I think it’s important to have a dialogue with your landlord and maybe restructure your lease during this time,” Eggmann says. “Maybe you can put the past due rent payments on the end of the lease, or something like that, and the same holds true for your suppliers as well. A lot of these restaurants, especially a farm-to-table restaurant, you’re talking about suppliers that they know, love and rely upon, and the suppliers rely upon them, but the bottom line is, if there’s not money there to pay them, they’re not going to get paid during this time. But it’s important to have a dialogue there.”
Riske adds that he and Eggmann often negotiate with creditors on behalf of their clients and serve as resources for small business owners who want counsel on how to navigate those conversations directly.
“We’re able to help with how to propose and structure things so that it makes it a little more palatable for some of these creditors when they’re wondering when and how they’re going to get paid,” Riske says. “It’s a push and pull at all times in these types of distress situations, where it’s, ‘Landlord, do you want to have a tenant, or do you want us to close? And if you’re not willing to work with us, you will not have a tenant.’”
Riske and Eggmann have worked with many small restaurants and businesses over the years at Carmody MacDonald. As proud St. Louisans, they take great pride in representing owners who have invested in maintaining and growing the food and beverage scene in town.
“I've been practicing for 30 years and lived in St. Louis most of my life, and never have I seen St. Louis have such a vibrant, eclectic restaurant scene,” Eggmann says. “Whether it be a place like Stone Soup Cottage out in St. Charles County to some of the cool places out in west county and obviously the city, for a city of our size, it’s unbelievable the type of restaurants we have.”
In the days and weeks since COVID-19 descended upon the metro area, the attorneys say it’s been a trying time – but they’re determined to find solutions that help their restaurant clients not only survive the crisis, but thrive in its aftermath.
Editor's Note: Thomas H. Riske is a relative of Feast editor-in-chief Heather Riske.