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Companies that manage to make it through Chapter 11 of the U.S. Bankruptcy Code to stand on their feet again are few and far between.


The decision to step off the edge into the abyss of the unknown world of the bankruptcy process is never an easy one for a business person to make.

And for Gary Vickers and Larry Stanley, it was no different. The duo talked about it and thought about it and then they were ultimately pushed, so to speak, into seeking protection under Chapter 11 of the U.S. Bankruptcy Code by antsy creditors. Vickers and Stanley are the co-owners of Loggerhead Restaurant and Brew Pub on Vandalia Road in Greensboro.It's no wonder the experience is so terrifying - on average a mere 10 to 12 percent of the companies that file Chapter 11 survive.

Loggerhead is one of the few toughing it out and surviving. Just call it and its owners the ``comeback kids.'

The company filed Chapter 11 in November 1991 and emerged in the first part of December 1992. The coming out, as Vickers calls it, refers to the time when the restaurant's creditors approved of its plan to continue operating and extended Loggerhead's loans.

Loggerhead's plan, which was approved by its creditors, requires that the creditors recoup 100 percent of what they are owed. The debts have been refinanced in a manner of speaking, and some creditors will not be paid until five years down the road.

``We didn't go into the plan to be greedy,' Vickers said. ``We went in to keep Loggerhead open. Business had picked up, and we didn't want to close the doors on the restaurant.'

The restaurant must follow its payment plan to the letter. Vickers said it was strict. If the company does not make a scheduled payment, a creditor can go back to the court.

For Loggerhead, the trip through the legal maze started when construction bills began to pile up.

Vickers explains it like this: The restaurant changed locations, and they spent more on construction than budgeted. The new location opened with less than six months of operating funds on hand. From there, things got worse.

Loggerhead was short on cash and tried to pay subcontractors' bills little by little. Then, the construction industry took a nose dive, and the subcontractors wanted - and needed - payment more quickly than the restaurant was able to muster at the time.

The subcontractors were threatening lawsuits, and Vickers and Stanley turned to their attorney for advice. The advice, in simple terms, was file Chapter 11 to stave off creditors until they could reorganize and come up with a plan to repay debts.

Chapter 11 was a tame choice compared to the other option Vickers and Stanley had considered. The other route would have been a Chapter 7 filing.

Under Chapter 11, a company may obtain a federal court order freeing it from the threat of creditors' lawsuits until it can develop a plan to put its finances in order. While the reorganization proceeds, the activities of management must be approved by the court.

The ultimate reorganization plan must be accepted by a majority of the creditors, and it may involve a number of options, including a full or partial payments of debts. While rare, it is possible for stockholders to retain some of their investment under Chapter 11 even if creditors are not paid in full.

Chapter 7 is not so generous. In short, it consists of liquidating the company's assets. The cash is then used to pay the company's creditors, which may or may not receive payment in full.

Loggerhead is definitely the exception to the rules concerning proceedings in bankruptcy court. As a general rule, far more Chapter 11 filings fail and end up in liquidation than those that successfully consummate a reorganization plan.

The numbers of companies seeking court protection dropped last year. According to the American Bankruptcy Institute, there were 58 Chapter 11 filings in Greensboro, which is where the court is located for the Middle District of North Carolina, during 1992. That's compared to 86 filings during 1991.

North Carolina ranks 17th in the country for the number of Chapter 11 filings. Statewide, Chapter 11 filings dropped from 351 in 1991 - North Carolina's peak year in Chapter 11 filings - to 267 cases in 1992.

According to Mike West, U.S. bankruptcy administrator for the Middle District, North Carolina's economy has helped the number of filings decline.

``The economy in North Carolina has ebbs and flows, but it doesn't seem to take the hits like other parts of the country,' West said, adding that the state has diversified and is not solely dependent on the textile and furniture industries. ``Our economy is more insulated from the ups and downs than say Texas, which is highly dependent on the oil industry.'

Nationwide, Chapter 11 filings dropped 5.6 percent during 1992.

On the homefront, two companies currently facing the Chapter 11 sought protection under the code during the past year. The most recent being Winston-Salem-based Piece Goods Shops, which filed in April. The other one is Elkin-based retailer Brendle's.

Piece Goods has not yet filed a reorganization plan, and the law allows a 120-day exclusivity period during which the company - and only the company - may file such a plan. After that time frame, a creditors' committee may establish a plan unless the company has sought and received an extension.

In its initial filing, the fabrics and crafts retail chain said it is having problems meeting long-term debt payments. The company's has assets of more than $152 million and liabilities in excess of $120 million.

Brendle's sought protection under Chapter 11 in November after creditors threatened to cut off the company's influx of inventory during its peak holiday season. The creditors said the company was behind on its payment schedules.

The retailer sought and received an extension May 25 to file its plan to deal with $118 million in debts. Brendle's had asked for a Nov. 30 deadline, but Judge James B. Wolfe Jr. allowed until Sept. 21.

Brendle's banks and creditors have been pressing the company to put together a plan that would include an immediate partial payment of the debt.

At the court hearing, Brad Leggett, a Winston-Salem attorney representing Brendle's, submitted exhibits showing that the company is pursuing a strategy to bring a pared-down company back to profitability. He also said the company also needs time for the strategy to take hold before the reorganization plan.

The jury is still out as to whether Piece Goods and Brendle's can be among the 10 to 12 percent of the companies that survive the stormy waters.

On the average, a Chapter 11 case will span one to three years depending on the complexity of the case, and the road is an expensive route. Companies must pay filing fees, legal fees, accounting fees and court costs - none of which are inexpensive.

Professional fees in bankruptcy cases vary by the complexity and length of each case, but multimillion-dollar bills are not uncommon in bankruptcy cases. According to West, those fees are administration costs and come off the top of the pot before the creditors get paid.

Vickers wouldn't divulge the exact cost for Loggerhead to crawl through Chapter 11, but he did say it was the equivalent of one month's gross revenue at the restaurant.

West is charged with making sure all parties in a bankruptcy case are doing what they are supposed to be doing, when they are supposed to be doing it. West and his staff review the required monthly reports of companies going through Chapter 11. The reports outline cash flow and profitability, among other things. West and his crew look at the reports to make sure taxes are being paid, payroll is being met and insurance is being paid.

And he says red flags do go up in cases, sending out caution signs that a reorganization is not going to work.

``If we see a company taking its withholding taxes and spending it elsewhere or a failure to file reports, we may have a problem,' West said. ``We also start looking at them with a jaundiced eye if they have been in here (bankruptcy court) for a year.'

If Loggerhead is the exception to the rule that Chapter 11 results in failed companies, it also breaks the rule about how much creditors stand to recoup from such proceedings. Loggerhead's creditors will fare well. Vickers says the creditors will get all the money they are owed.

Gerald Schafer, an attorney who typically represents creditors in bankruptcy cases, said there is no average payback for creditors in Chapter 11 cases and each case has to be looked at on an individual basis.

The payments to creditors can run the gamut from nothing to 100 percent of the debt, Schafer said. Under the law, the creditors must receive at least the amount they would receive if the company were to liquidate.

Looking back, Vickers said they made the right choice. The 3-year-old restaurant is still open, and business is rolling along.

Vickers, Stanley and their 20 employees are determined to survive. That desire to win, Vickers said, was one of Loggerhead's selling points to its creditors and the judge during court proceedings.

``We were, and still are, determined to make it a success,' he said.


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