An Arizona REIT is fighting to keep some its Richmond real estate from getting tangled in the bankruptcy of a local restaurateur.
If Spirit Realty Capital gets its way, it would be free to evict Richmond-based Cornett Hospitality from five of its restaurant properties, including two local Hooters locations and a Topeka’s Steakhouse in the West End.
Spirit Master Funding III, a fund belonging to Spirit Realty, on Monday asked a federal bankruptcy judge to prevent the restaurants from being considered an asset of Cornett’s Chapter 11 bankruptcy estate because the company previously defaulted on lease and loan agreements.
Cornett, which operates nine Hooters restaurants and three Topeka’s locations in Virginia, West Virginia and Pennsylvania, filed last week for Chapter 11 bankruptcy protection in an attempt to reorganize its debt.
Cornett also previously owned two Max & Erma’s locations in Richmond but closed them after falling behind on rent and after the chain filed bankruptcy in 2010.
Cornett is headquartered on Staples Mill Road and listed in its filing 287 creditors and liabilities of between $1 million and $10 million. That debt includes $100,000 owed to Spirit in rent and $3 million Cornett borrowed from the company.
According to Monday’s filing in federal court, Cornett violated its lease with Spirit on five restaurant properties in early 2010 when it missed rent and loan payments.
The two sides eventually worked out an agreement that allowed Cornett time to resume making payments. But last August, Cornett fell back into default, according to Spirit’s claim.
After Cornett defaulted, Spirit terminated the leases on the five properties. Cornett made its Chapter 11 filing a few weeks later.
Chapter 11 reorganizations are often lengthy processes that allow a debtor to work through its debts in an orderly fashion while keeping creditors at bay. When real estate is involved, that process can prevent creditors who are landlords from evicting bankrupt tenants.
Spirit is arguing that because it terminated its leases with Cornett on five restaurant properties prior to the bankruptcy filing, it should be granted the ability to evict Cornett from the spaces, should it so choose, without having to wait for the company’s reorganization.
The properties in question include Hooters restaurants at 7912 W. Broad St. and 1211 Huguenot Road in Midlothian, a Topeka’s Steakhouse restaurant at 1776 Parham Road, and two Hooters locations in Roanoke and Pennsylvania.
Cornett “remains in unlawful possession” of the properties, Spirit claims.
Kirk Vogel, an attorney with LeClairRyan representing Spirit, declined to comment on the case.
Bruce Arkema, an attorney with Durrette Crump who is representing Cornett, did not return a call by press time.
Phil Cornett, a director at Cornett Hospitality, told BizSense last week that the company’s restaurants remain open for business as usual during the bankruptcy process.
In early 2010, the company was locked out of its Max & Erma’s location at Reynolds Crossing after falling behind on the rent. Cornett at the time cited the chain’s bankruptcy as part of the problem. Cornett eventually closed the restaurant, which is now a Plaza Azteca.