In May 2024, Red Lobster Management LLC (RL Management) and fourteen of its affiliates (collectively, Red Lobster), including Red Lobster Canada Inc. (Red Lobster Canada), commenced proceedings in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division (U.S. Bankruptcy Court) by filing voluntary petitions for relief under chapter 11 of title 11 of the United States Code (Chapter 11).
Thereafter, RL Management sought and obtained orders from the Ontario Superior Court of Justice (Commercial List) (the Canadian Court) under Part IV of the Companies’ Creditors Arrangement Act (CCAA) recognizing the Chapter 11 proceeding with respect to itself, Red Lobster Canada and an entity that owned intellectual property registered in Canada. The Canadian Court recognized the Chapter 11 proceedings as a “foreign main proceeding” and granted related relief.
A successful restructuring was completed in October 2024, with Red Lobster continuing as a going-concern enterprise following the sale to its secured creditor via a reorganization plan. All 27 Canadian restaurants remained open.
The restructuring of Red Lobster was one of the most high-profile restructurings of 2024, generating significant interest from both the restructuring community and the general public. In the current economic climate, it is expected that the number of cross-border restructurings will increase. Red Lobster’s restructuring highlights some of the key distinctions between U.S. and Canadian insolvency law and how these differences are reconciled under Part IV of the CCAA. Set out below are five key takeaways from the Red Lobster cross-border proceeding:
1. Roll-Up DIP Financing
At the outset of the Chapter 11 proceeding, the U.S. Bankruptcy Court approved debtor-in-possession (DIP) financing for Red Lobster. The DIP financing was provided by Red Lobster’s prepetition term loan lenders and consisted of both new money advances and a deemed funding of prepetition loan obligations. Red Lobster’s prepetition loan obligations were thereby “rolled up” into the DIP facility.
This type of roll-up DIP financing is not permitted in Canadian plenary CCAA proceedings by operation of section 11.2 of the CCAA, which prohibits using post-filing court-ordered charges to secure pre-filing obligations. In recognition proceedings, however, Canadian courts have recognized orders approving roll-up DIP facilities granted by U.S. courts where it can be demonstrated that the roll-up component of the DIP facility will not prejudice the collateral position of Canadian creditors. The Red Lobster cross-border proceeding followed those precedents.
The applicable test is not whether the requested relief could be obtained in a plenary CCAA case but, rather, whether recognition of the foreign order would be contrary to Canadian public policy. As long as the foreign order is not inconsistent with Canadian public policy, the Canadian court in a recognition proceeding will not, ordinarily, interfere with or second guess the decision of the U.S. Bankruptcy Court.
2. Plan Optionality
Red Lobster’s Chapter 11 proceeding was commenced with the intention of pursuing a comprehensive operational restructuring and value-maximizing sale inside of a Chapter 11 process. Red Lobster’s existing prepetition term loan lender acted as the stalking horse bidder and was ultimately selected as the successful bidder for the business. Red Lobster elected to pursue the transaction through a joint plan of reorganization (the Plan), which provided a potential path for recovery for its unsecured creditors.
To maintain optionality and flexibility, the Plan provided the purchaser with the ability to elect to purchase reorganized equity of certain operating entities of Red Lobster while purchasing the assets of the remaining debtors, including the parent company, RL Management. Red Lobster Canada had its reorganized equity indirectly acquired (through the cancellation of existing equity held by its existing parent company and the issuance of new equity to the purchaser), allowing for the seamless continuation of employment for employees, the continuation of real property leases (as consensually amended) and the transition of liquor licences following a change of ownership.
3. Third-Party Releases
Red Lobster was one of the first cases to address the availability of third-party releases under Chapter 11 plans following the decision of the Supreme Court of the United States (SCOTUS) in William K. Harrington, United States Trustee, Region 2, Petitioner v. Purdue Pharma L.P. et al. (Purdue). In that case, SCOTUS held that non-consensual third-party releases were not permitted pursuant to a Chapter 11 plan.
In the Red Lobster case, under the Plan, the parties granting third-party releases were restricted to (i) those that voted to accept the Plan, (ii) those parties that expressly consented to the third-party releases in writing, or (iii) those that otherwise supported the Plan. The U.S. Bankruptcy Court was satisfied with this approach. In recognizing the Confirmation Order, the Canadian Court held that “the third-party releases contained in the Plan are consistent with the approach to granting third-party releases in the context of a plenary CCAA Plan”.
4. Cram-Down
Following the creditor vote, the Plan was accepted by the majority of creditors by number in both voting classes, including a majority of voting unsecured creditors. The unsecured creditors voting in favour of the Plan did not, however, represent at least two-thirds in value of voting claims. Unlike a CCAA plan of compromise or arrangement, a plan may be confirmed under Chapter 11 even if it was not approved by the requisite majorities of each class of affected creditors so long as the “cram-down” requirements of Chapter 11 are met.
Pursuant to the cram-down provisions, a U.S. court may confirm a plan notwithstanding its rejection by a dissenting class if the plan has been accepted by at least one impaired class of creditors and does not discriminate unfairly against and is fair and equitable with respect to each dissenting class of claims or interests.
The Plan was accepted by the prepetition term loan lenders’ class, satisfying the first requirement of the cram-down provisions. The U.S. Bankruptcy Court determined that the Plan was fair and equitable with respect to the dissenting class of unsecured creditors and elected to apply the cram-down provisions of Chapter 11 to allow confirmation of the Plan. Although cram-down is not available in plenary CCAA proceedings, the Canadian Court reaffirmed that it was not necessary for the relief granted by the foreign court to be identical to what can be granted by the Canadian Court. Recognition of the Chapter 11 Confirmation Order supported the overarching goals of Part IV of the CCAA.
5. Virtual Appearances
Since the onset of the COVID pandemic, insolvency courts have embraced virtual appearances. All court hearings conducted in Canada in the Red Lobster recognition proceeding were conducted virtually. Similarly, all court hearings before the U.S. Bankruptcy Court were conducted in a hybrid virtual and in-person fashion. Virtual appearances have become an increasingly vital tool in cross-border proceedings to allow stakeholders on both sides of the border to stay informed of all aspects of a cross-border case and, where appropriate, participate without the need to incur substantial travel costs.
For more information, please contact the authors or any other member of our Restructuring & Insolvency group.
