Sbarro pizza chain files for second bankruptcy. It can do that?

The bankruptcy filing for the Sbarro pizza chain, announced Monday, wasn’t especially surprising for a few reasons. The company is facing hundreds of millions in debt. Last month it announced plans to close 155 of its 400 North American stores. Also, Sbarro just did this, making its second bankruptcy filling in the last three years.

Despite changes, including a menu overhaul, Sbarro’s future looks bleak: Foot traffic in malls is dwindling, and the chain is being squeezed at both ends by competitors, as larger pizza chains like Dominos and Papa John’s fight to gain fast food pizza dominance and smaller purveyors continue to make headway. A recent report from Standard & Poor's, the credit ratings agency, recently described the company’s financial structure as “unsustainable.” It’s even been deemed America’s “least essential restaurant.” 

The world’s fifth-largest pizza chain (at the time) first filed for Chapter 11 reorganization in April 2011. It exited bankruptcy in November of that year after winning court approval of its plan to restructure and hand ownership over to its lenders.

Under the new plan, once again, Sbarro would cede control to its lenders, who the Melville, N.Y.-based company says largely approve of the plan. The chain intends to shed about 80 percent of its $165.2 million debt load (about $140 million) by closing more locations and looking for potential buyers, pending court approval.

Some of you may be wondering: if the bankruptcy filing didn’t take the first time around, why is Sbarro allowed to do it again so soon? And can it actually save the company?

Chapter 11 is a type of bankruptcy that allows US businesses to retain ownership and continue operating while they reorganize and work to eliminate their debts. As long as companies have emerged from previous Chapter 11 filing, there’s no rule preventing them from doing it again and again (other types of bankruptcy have time frames during which a person cannot re-file. For Chapter 7, for instance, bankruptcy filings have to be at least eight years apart).

“If they emerged and refiled, there’s nothing that says they can’t,” says Justin Luna, a bankruptcy lawyer at Latham, Shuker, Eden and Beaudine LLC, an Orlando, Fla.-based law firm. “But when someone says they’ve emerged, that means there’s a plan of reorganization."

There are obstacles beyond the filing, however. Hypothetically, Sbarro’s creditors could vote against the new plan, as could the arm of the US government that oversees bankruptcy cases. Sbarro and its affiliates say their plan already has approval from lenders, and hope to re-emerge from bankruptcy before May 7. 

But even if this bankruptcy filing clears all hurdles, that doesn’t make Sbarro’s future any less bleak. Filing for Chapter 11 is like “fixing an old shoe,” says David Madoff, an attorney with Madoff and Khoury LLP based in Foxboro, Mass. “You can keep on repairing it, but every time it gets weaker and weaker.”

He says in his experience it’s unusual, though not unheard of, for a company to declare Chapter 11 twice. "Chapter 11 doesn’t have a huge success rate, so if they’re doing it a second time it stands to reason it would work even less,” he says.