Hotels in Chapter 11: Prioritizing Vendors, Employees and Guests
By Julian Gurule Associate Attorney, Milbank, Tweed, Hadley & McCloy LLP | August 18, 2013
The success of a hotel's reorganization will depend on securing the support of vendors, employees and guests in the early stages of the chapter 11 case. Building and maintaining strong relationships with these groups will enable the hotel debtor to seamlessly transition into bankruptcy without negatively affecting the guest experience (always a critical consideration) or jeopardizing the value of the business. This article outlines the principal ways that a hotel debtor can encourage vendors, employees and guests to stand by the company for the duration of the chapter 11 case, thereby increasing the likelihood of a successful restructuring.
It is important to note at the outset that, as a general rule and unless the Bankruptcy Court orders otherwise, a company in bankruptcy cannot make payments for amounts owed for goods and services provided to the company before the filing of the bankruptcy case. This broad category of obligations, referred to as "prepetition claims," includes vendor invoices, employee wages and salaries, and hotel guest obligations that arose prior to the bankruptcy case.
Trade vendors play a critical role in chapter 11 hospitality cases for a number of reasons. Relative to other businesses, hotels are particularly dependent upon the timely and uninterrupted delivery of goods and services, including food, beverage and liquor deliveries, property maintenance services, and cable and internet services, among countless others. It won't take long, for example, for guests to notice that the restaurant has run out of Coca-Cola.
Trade vendors supply not only crucial goods and services, but also trade credit, the lifeblood of any hotel enterprise. Frequently, the company will be dealing with severe liquidity constraints immediately before and after a chapter 11 filing, and much of management's focus will be on dissuading vendors from imposing onerous trade terms that could seriously impact the company's cash position and scuttle any prospects for reorganization.
Vendors may also prove to be strategic allies in the chapter 11 case. Vendors' interests are often more aligned with the company than any other stakeholders, aside from employees. They will often be willing to work with the company to achieve a restructuring that ensures that business emerges from bankruptcy as a continuing customer with improved finances.