The Important Role of Blanket UCC Filings in the Foodservice, Beverage & Hospitality Industries
The restaurant, beverage and hospitality industries are massive. The National Restaurant Association projected the commercial restaurant services sales would reach $783 billion by the end of 2016, which is about 4% of the U.S. gross domestic product.
With a flooded market, there is variety, but there is also significant risk.
If you are supplying goods, equipment or services to the foodservice, beverage or hospitality industries, you are faced with a unique set of challenges when extending credit. The most common challenge? The high rate of company failure.
“Most restaurants fail quickly, and the seeds of their failure are planted before the restaurant even opens.” — Christine Letchinger, professor at Chicago’s Kendall College.
In The Anatomy of Restaurant Failure: Dead Man Walking, author Christine Letchinger cited studies that estimate 60% of restaurants fail within their first three years.
“Various studies estimate that among the 60% of operations that fail within the first three years, 44% failed the first year, 33% within the second year, and 23% in the third year.”
So how can you, the creditor, reduce your risk in extending credit? UCC filings. We’ve previously discussed how consignment filings can reduce risk to scan-based trading and today we are going to discuss blanket filings.
A Blanket Filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. (Think of it as a blanket that lays down over all customer assets.)
The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). For example, if ABC Co. files the first UCC and XYZ Co. files the second UCC, ABC Co. will be paid first and XYZ Co. will be paid second.
Blanket filings are popular among those supplying to restaurants, as they are most commonly used in situations when your customer “consumes” or otherwise does not stock your goods.
Here’s an example of a new restaurateur, whose creditors secured via Blanket Filings, and the fate of his secured & unsecured creditors in a Chapter 7 bankruptcy.
Chef Charles is going to start a restaurant. He’s worked in the restaurant industry his entire working life and thinks “OK, I’m pretty good at this. I know how to run a restaurant, and how to make foods that are delicious and attractive, plus I can create an environment where people will want to dine.”
Chef Charles creates his business plan and determines he needs start-up capital, so he goes to the bank with his business plan and a request for $20,000. The bank reviews his plan and decides to lend the $20,000 to Chef Charles, and the bank perfects their security interest.
Chef Charles is ready to start. Various vendors will solicit Chef Charles regarding different materials and services he may need, and each vendor that successfully sells their goods to Chef Charles will need to decide whether they are going to sell on open credit terms, via credit card or cash in advance. If the vendor decides to sell on open terms, the vendor will need to further decide whether they will sell on a secured or unsecured basis.
Chef Charles has selected his vendors. Of his numerous vendors, four of them have taken a security interest and filed a UCC.
Secured Creditor 1: $10,000
Secured Creditor 2: $10,000
Secured Creditor 3: $5,000
Secured Creditor 4: $10,000
We’ll assume the remaining vendors have opted to sell on unsecured open terms.
Business is underway! At any given time, Chef Charles has $61,000 in assets.
Unfortunately, 3 years later Chef Charles becomes a statistic, when his business fails and he files for Chapter 7 bankruptcy protection.
What happens to his creditors? It’s simple, Chef Charles’s assets will be liquidated and creditors will be paid by priority. Creditor priority is based on first in time, first in right.
Here are the Basics
The bankruptcy trustee is going to liquidate Chef Charles’ $61,000 in assets and begin paying his creditors.
The bank was the first party to lend and take a secured interest, so they will be the first paid, then the other vendors who filed UCCs will be paid in the order in which they secured their interest.
Bank is paid
Secured Creditor 1 is paid
Secured Creditor 2 is paid
Secured Creditor 3 is paid
Secured Creditor 4 is paid
Total Available for Unsecured Creditors
Once the secured creditors have been paid, there is $6,000 remaining, and that $6,000 will be disbursed on a pro-rata basis to all general unsecured creditors.
In this case, Chef Charles has 100 unsecured creditors that were each owed $1,000. Each of these creditors will receive $60 (based on the pro-rata disbursement) or 6 cents on the dollar
Customer Default & Your UCC Filing
If your customer has defaulted on payment(s) and you have filed a Blanket UCC, you could place the outstanding debt with a collection agency or file suit against your debtor.
If your customer filed Chapter 7, File your secured proof of claim.
If your customer filed Chapter 11, File a secured proof of claim and monitor for distribution.
With 60% of restaurants failing in the first three years, and little surviving beyond five years, are you willing to take the risk of losing money? If you are not securing your rights through UCC filings, you are taking an unnecessary risk and allowing your company to be competitively disadvantaged.