Bankruptcies Keeping Restaurants Afloat : Economy: Chains reorganize to fight heavy debt loads, bad locations and too-expensive leases.

For many hard-pressed restaurateurs, bankruptcy court is as necessary an ingredient as basil and thyme.

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Struggling Southern California restaurant companies are using bankruptcy proceedings to jettison unprofitable locations, reject onerous leases and erase unwanted debt. In short, the court-approved cost cutting is a tool to rein in expenses that, in hindsight, are out of sync with the current economic slowdown.

The list of restaurant operators in U.S. Bankruptcy Court includes many of Orange County’s best-known eateries:

* Restaurant Enterprises Group, which operates the El Torito, Carrows and Coco’s chains, voluntarily entered bankruptcy proceedings in late November. REG’s creditors approved a “prepackaged bankruptcy� petition that was submitted in November to a U.S. Bankruptcy Court judge in Wilmington, Del. REG’s bankruptcy filing listed $374.5 million in assets and $564.7 million in liabilities, including $379.9 million owed to secured creditors, including the restaurants’ former owner--W.R. Grace & Co.

* Anaheim-based Speciality Restaurant Corp., which operates Orange Hill in Orange, Ports O’ Call in San Pedro and the landmark Castaway restaurant in Burbank, sought Chapter 11 protection from creditors in late August. The company said its Southern California restaurants remain profitable but that it is being dragged down by out-of-state locations.

* Del Taco Inc., which operates the Del Taco and Naugles Mexican-style fast food chains, is using bankruptcy to rid itself of debt left over from a leveraged buyout completed in the late 1980s by a previous management team. The company, which remains profitable from operations, has also modified or rejected about 70 leases.

* LJC Restaurants, which operates three locations owned by longtime restaurateur Larry J. Cano, sought bankruptcy protection in August. The filing showed $3 million in assets and $1.3 million in liabilities. Cano owns restaurants in Newport Beach, Fountain Valley and Pasadena.

The reasons behind the wave of bankruptcies can be as varied as the restaurants’ menus.

Los Angeles-based West Coast Restaurant Ventures, for example, took refuge in bankruptcy in August during a rent dispute with a Tokyo-based landlord. West Coast Restaurants, which owns and operates some of Orange County’s better-known eateries--including Bistro 201 and Diva--quickly exited bankruptcy after the dispute was settled.

But most of the filings are driven in large part by the stalled economy that is forcing many restaurants--including Matteo’s Italian Restaurant, a Corona del Mar landmark for 23 years--to close their doors. Matteo’s owner, Wanda Jordan, said business had slowly deteriorated at the restaurant that once counted John Wayne and Henry A. Kissinger among its customers.

A court filing made this summer by San Juan Capistrano-based Rusty Pelican provides a recipe for bankruptcy:

Mix in increased competition, the dulling impact of an ongoing economic slowdown and ever-increasing costs associated with workers’ compensation claims, insurance premiums and taxes. Then toss in changing dining patterns--including a trend away from high-profit alcoholic beverages--and consumer demand for better values.

Rusty Pelican’s case was complicated by a handful of expensive leases signed during the 1980s that proved to be overwhelming in the current economic climate. While the restaurant chain remained profitable from operations, it was unable to deal with the expensive leases.

Rusty Pelican used bankruptcy court to jettison the troublesome leases, a move that cut monthly lease and maintenance costs by $104,614.22, according to bankruptcy records. The chain went from 26 locations and 1,800 employees to 19 locations with 1,200 employees.

Rusty Pelican isn’t alone in blaming real estate costs for forcing bankruptcy proceedings.

“When it comes to restaurant failures, there’s one cause that’s most common--burdensome leases that were entered into at times when optimism reigned,� said Ali Mojdehi a San Diego-based bankruptcy attorney with the firm of Baker & McKenzie.

“Congress anticipated that long-term leases could cause business failures, and the bankruptcy code contains provisions that allow tenants to limit exposure to landlord claims,� Mojdehi said, adding that the code recognizes that lengthy, onerous leases would “dwarf� all other claims by unsecured creditors.

Leveraged buyouts also have had an impact on profitability: “It used to be that ‘LBO’ meant ‘leveraged buyout,�’ Mojdehi said. “Now it means ‘large bankruptcy opportunity.’ �

“Debt at some of these (highly leveraged) restaurants is very heavy,� said Janet Lowder, an industry consultant in Rancho Palos Verdes. “They were banking on projections of 5% to 10% revenue increases, but when it didn’t occur, it was hard to meet debt requirements.�

In the case of Del Taco, debt accumulated by a previous management pushed the company into bankruptcy. Del Taco remains profitable from operations but, according to court filings, could never repay its indebtedness “without a substantial reorganization.�

Del Taco and its creditors are close to agreement on a reorganization plan that will push the company out of bankruptcy court. Once free, Del Taco plans to embark on a major franchising push, spokesman Paul Hitzelberger said.

Debt also is the key to a planned filing by Irvine-based REG. The company’s bankruptcy petition is part of a complex reorganization that will turn ownership of the company over to a group that includes San Diego-based Foodmaker, the parent company of the Jack-in-the-Box chain.

As part of that deal, REG will acquire the Louisville, Ky.-based Chi-Chi’s chain, making REG the nation’s largest operator of full-service Mexican-style restaurants, with 315 locations. REG plans to initiate a substantial restaurant renovation program after exiting bankruptcy court.

Anaheim-based Speciality Restaurants blamed out-of-state expansions for its financial woes. It doesn’t plan to close any of its Southern California locations, but hopes to use bankruptcy court to eliminate unprofitable locations in Texas, New York and Florida.

The relatively large number of restaurant operators filing for bankruptcy in Southern California is in keeping with the state’s overall economic malaise, according to Samuel J. Gerdano, executive director of the Washington-based American Bankruptcy Institute.

While personal and business bankruptcy filings during the first half of 1993 were down by 5.5% nationally, Gerdano said, “the West Coast is one of the dark clouds on an otherwise brighter horizon.�