In re Lunan Family Restaurants Limited Partnership

Lunan Family Restaurants Limited Partnership (Lunan) (debtor) borrowed $13.5 million from Bank of America Illinois (the bank) to purchase 31 restaurants that Lunan planned to convert into Shoney’s franchise restaurants. Lunan purchased some restaurants in fee simple and leased other restaurants from Marriott. Lunan’s loan from the bank was secured by mortgages on the fee-simple properties, leasehold mortgages on the leased properties, and a security interest in Lunan’s equipment and accounts receivable. The Shoney’s restaurants were not successful, and Lunan defaulted on the loan and many of its leases. The bank did not foreclose on any of the properties and instead wanted Lunan to sell the restaurants as going concerns (i.e., as operational businesses) so the proceeds could be used to satisfy Lunan’s debt. The bank met with Lunan about filing for Chapter 11 bankruptcy, and Lunan filed a Chapter 11 petition. Lunan presented reorganization plans to the bank, but the bank rejected any plan that would involve a long-term payback of the debt. Lunan meanwhile continued to operate its businesses and manage its properties as a debtor-in-possession. Lunan eventually sold 19 restaurants as going concerns, stopped operating three restaurants, and continued to actively market all but one of the remaining restaurants for sale. The bank supported Lunan’s operations and liquidation efforts and repeatedly allowed Lunan to use the bank’s cash collateral. However, the bank never explicitly consented to specific services or payment for those services out of the bank’s collateral. In total, the restaurant sales generated $11 million, of which the bank received over $8.2 million. In continuing to operate the restaurants, Lunan had incurred costs and expenses including (1) utilities bills; (2) wage-related expenses including payroll, payroll taxes, and health-insurance benefits; (3) fees for accounting services; and (4) debtor-in-possession expenses including maintenance of Lunan’s office and expenses related to keeping open the one restaurant that Lunan was not trying to sell. Lunan sought reimbursement of those expenses through a surcharge on the bank’s distribution from the bankruptcy estate pursuant to 11 U.S.C. § 506(c).