On August 10, 2026, Senior United States District Judge Jane J. Boyle dismissed as moot an appeal from the final debtor-in-possession financing order entered in the Genesis Healthcare chapter 11 cases. The dismissal rests on 11 U.S.C. section 364(e), the statutory mootness provision protecting good-faith postpetition lenders. The opinion issued in Almeda v. Genesis Healthcare, Inc., Civil Action No. 3:25-CV-2563-B, in the Northern District of Texas, Dallas Division, with a final judgment to follow.

The holding itself is a dismissal, which is the least interesting thing about it. What makes the opinion worth reading is the route. Judge Boyle confronted an open question in the Fifth Circuit about how far section 364(e) reaches, surveyed a genuine circuit split, predicted which side the Fifth Circuit would take, and then applied a limiting principle that keeps the rule from swallowing everything a party might attach to a financing order.

Genesis Healthcare, Inc. operates healthcare facilities across the country. Genesis and several affiliates filed chapter 11 petitions in July 2025 in the Northern District of Texas, before Judge Stacey Jernigan. Research Suite case data reflects approximately $4.06 billion in assets at filing, roughly $3.3 billion in annual revenues, and about 27,000 employees, with McDermott Will & Emery as debtors' counsel and Proskauer Rose as committee counsel.

To fund operations during the case, the debtors sought approval of postpetition financing. The bankruptcy court entered the Final DIP Order on August 28, 2025, authorizing borrowing of up to $30 million from various lenders in exchange for security interests and liens. The bankruptcy court found that the debtors needed the funding to avoid serious and irreparable harm, that more favorable terms were unavailable, and that the terms had been negotiated in good faith and at arm's length. The order granted the DIP secured parties the full protection of section 364(e) in the event the order was reversed or modified on appeal.

The appellants are a group of sixty tort claimants holding personal injury or wrongful death claims against Genesis and its affiliates. Welltower OP LLC, one of the lenders, intervened as an appellee. Under Federal Rule of Bankruptcy Procedure 8019(b)(3), the court determined that oral argument was unnecessary and decided the appeal on the briefs and the record.

The appellants did not attack the loan. They did not contest the validity of the credit extended, the priority of the liens, or the amount borrowed. Their challenge was confined to a single feature of the Final DIP Order: the releases of claims held by Genesis against its prepetition lenders who also agreed to lend postpetition.

Their objection had two parts. The released claims possibly include claims the appellants themselves could have brought outside bankruptcy. And the definition of released parties is drawn too broadly, sweeping in insiders of Genesis.

In their reply brief the appellants made the narrowing explicit, stating that they were not asking the court to invalidate any terms of the Final DIP Order pertaining to the validity of the credit or debt incurred or to any priority or lien granted under section 364, and that they had filed the appeal to invalidate the releases. The opinion quotes that passage and treats it as dispelling any doubt about the basis of the challenge.

Section 364 permits a debtor in possession, with court permission, to obtain new credit during the case. Subsection (e) then provides that reversal or modification on appeal of an authorization to obtain credit or incur debt, or of a grant of a priority or a lien, does not affect the validity of any debt so incurred or any priority or lien so granted to an entity that extended credit in good faith, whether or not that entity knew of the pendency of the appeal, unless the authorization and the incurring of the debt or the granting of the priority or lien were stayed pending appeal.

The purpose is commercial rather than doctrinal. Lenders would be reluctant to extend credit to a bankrupt borrower if the terms could be unwound on appeal, so the statute permits reliance on the bankruptcy judge's authorization. The opinion cites TMT Procurement Corp. v. Vantage Drilling Co. (In re TMT Procurement Corp.), 764 F.3d 512 (5th Cir. 2014), for that framing.

The first three elements come from the statute and existing Fifth Circuit law. The fourth comes from the rule the court adopted, and it is the part of the opinion that will matter most in future DIP negotiations.

The parties disputed whether section 364(e) applies to the release of claims at all. If it does, everyone agreed the Final DIP Order was not stayed. So the entire appeal turned on scope.

Several Fifth Circuit decisions point toward breadth. In Bank of New York Trust Co. v. Official Unsecured Creditors Committee (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009), the court described section 364(e) as forbidding appellate review and preventing the reversal of an order, not merely parts of an order, issued under section 364 to obtain postpetition financing. TMT Procurement stated that failure to obtain a stay of an authorization moots an appeal of that authorization where the lender acted in good faith.

Judge Boyle treats those statements as suggestive rather than controlling, and identifies the ambiguity precisely. It is unclear whether an authorization under section 364 refers to everything in an order purportedly made under section 364, or instead to only certain things, perhaps not including releases of claims. That is the gap the opinion has to fill.

Two Fifth Circuit decisions push toward the broader reading. In AKD Investments, LLC v. Magnolia Investments I, LLC (In re AKD Investments), 79 F.4th 487 (5th Cir. 2023), the court rejected an argument that section 364(e) confines an order to lien-securing terms, saying it has never read the provision to focus myopically on liens, and instead reading it as a stay requirement that moots an appeal of any unstayed authorization under section 364. And in TMT Procurement itself, the Fifth Circuit reasoned that statutory mootness must be assessed before reaching a property-of-the-estate question, regardless of whether that question sounded in statutory authority or subject-matter jurisdiction. Judge Boyle draws the inference from that treatment: if a lack-of-authority argument does not survive section 364(e) there, an argument that the bankruptcy court lacked authority to approve releases does not survive it here.

The opinion then borrows from the sale context. Section 363(m) is the parallel statutory mootness provision for asset sales, and section 364(e) was modeled after it. That lineage lets the court reason from settled circuit law on sales to an unsettled question on financing.

For section 363(m), the Fifth Circuit has expressly adopted as the rule of the circuit that a failure to obtain a stay is fatal, even where the basis for challenging the section 363 order is jurisdictional. The citation is Gilchrist v. Westcott (In re Gilchrist), 891 F.2d 559 (5th Cir. 1990). If that is the rule for sales, the opinion reasons, failing to obtain a stay of a section 364 order is likewise fatal regardless of the basis for the challenge.

This is the structural point restructuring practitioners should take from the opinion. Section 363(m) jurisprudence is far more developed than section 364(e) jurisprudence, and courts facing gaps in the latter will keep reaching for the former. The Genesis opinion is a clean example of how that transfer works in practice.

Outside the Fifth Circuit, the opinion identifies two competing theories of section 364(e)'s scope, and they produce opposite results on these facts.

Under Cooper Commons, any provision of the financing agreement that a lender bargained for, or that helped motivate its extension of credit, is protected. Excising such a provision from the order would affect the validity of the loan, because the provision was part of the exchange that produced the loan. Applied to Genesis, if the releases possibly motivated the lenders to advance funds, section 364(e) bars the court from touching them.

Under Saybrook, a reviewing court asks first whether the bankruptcy court's action was authorized by statute. If it was not, an attempt to reverse or modify that action is not mooted. Applied to Genesis, if approving the releases was not something the bankruptcy court had authority to do, section 364(e) would not bar review.

Judge Boyle concluded that Cooper Commons is likely the rule the Fifth Circuit would adopt, and applied it. Fifth Circuit case law describes section 364(e) as protecting an entire order regardless of the basis for the challenge, and the circuit's treatment of section 363(m) buttresses that reading. Saybrook runs the other way, and the Fifth Circuit has rejected the idea that a party can challenge the bankruptcy court's authority or jurisdiction to act when either mootness provision applies.

The more consequential part of the holding is the limit the court builds into it. Cooper Commons supplies what the opinion calls a commonsense requirement: the challenged aspect of the order must at least have been part of the bargain for the postpetition loan. Without that requirement, merely labeling an order as made under section 364 would control the inquiry, exalting form over substance.

Applying that rule, the court found the releases were part of the bargain that led the lenders to extend postpetition financing. Welltower's brief made the commercial logic plain, arguing that no lender would agree to lend money only to see that money used to pursue claims against it. The appellants did not contest that the releases were important to the lenders' agreement to provide financing.

From there the analysis is mechanical. Modifying or reversing the challenged aspect of the Final DIP Order would affect the validity of the approved loan. The order was not stayed. There is no argument that the lenders failed to act in good faith. Section 364(e) therefore bars the court from granting the requested relief, and the appeal is dismissed as moot.

Note what the court did not decide. It did not hold that the releases were properly granted, that the released parties were appropriately defined, or that the bankruptcy court had authority to approve releases of claims the appellants might have held. The opinion assumes those questions away by holding that section 364(e) forecloses reaching them at all. That distinction matters if the issue reaches the Fifth Circuit.

The Genesis docket reflects a pattern worth noting. The same claimant group whose DIP appeal was dismissed here has prevailed on appeal in these cases on stay-related issues. The notice of appeal from the order extending the automatic stay to non-debtor defendants was filed at Docket No. 1415 by the creditor claimants represented by Rochelle McCullough, LLP and Reddick Law Firm, P.A., the same designation appearing on the amended notice of appeal underlying this proceeding. That appeal produced a vacatur. This one produced a dismissal on statutory mootness rather than a ruling on the merits.

The contrast is instructive. Orders extending or refusing to lift the automatic stay were reviewed, vacated, and remanded. The financing order was not reviewed at all. Nothing in the record suggests the difference lies in the strength of the underlying arguments. The difference is that Congress attached a statutory mootness provision to one category of order and not the other, and no stay of the financing order was obtained.

For parties objecting to financing terms, the operative lesson is about timing rather than argument quality. If you intend to challenge a provision of a DIP order and you do not obtain a stay, this opinion says the merits of your challenge may never be reached. The appellants here framed a narrow, targeted objection to release language and never got a ruling on it. Section 364(e) does not care how good the argument is.

The practical response is to move the fight forward. Contest the scope of releases at the interim and final hearings, build a record on what the lenders actually required as a condition of funding, and seek a stay contemporaneously with any notice of appeal. Under the bargained-for limit this opinion adopts, the record on what motivated the extension of credit is the record that determines whether appellate review remains available.

For debtors and lenders negotiating financing, the opinion cuts the other way and reinforces existing practice. Provisions genuinely bargained for as a condition of funding, and reflected as such in the record and in the court's findings, receive the full protection of section 364(e) in this district under this reasoning. Provisions attached to a financing order for convenience are more exposed, because the bargained-for requirement is doing real work.

For everyone else, the value of the opinion is that it names the split. A district court has now surveyed Cooper Commons and Saybrook, predicted the Fifth Circuit's answer, and explained why. That prediction is not binding on the Fifth Circuit, and the question remains genuinely open there. Anyone litigating section 364(e) scope in the Fifth Circuit now has a reasoned starting point and a clear statement of what has not yet been decided.

On August 11, 2026, PJM Interconnection, L.L.C. and PJM Settlement, Inc. moved for entry of an order appointing a chapter 11 trustee in the jointly administered cases of American Efficient LLC under section 1104(a) of the Bankruptcy Code, or in the alternative an examiner under section 1104(c). The motion is set for hearing on August 26, 2026 before Judge Laura T. Beyer in Charlotte. PJM invokes sections 105(a) and 1104(a) through (c), together with Bankruptcy Rules 2007.1 and 9014, and is represented by Hunton Andrews Kurth LLP.

The timing matters. The debtors filed on July 18, 2026 and moved for debtor-in-possession financing four days later. That financing motion has now been continued twice and is set for special setting on August 21. PJM objected to it on August 5. Six days after that objection, and one day after the Bankruptcy Administrator filed its Notice to 20 Largest Unsecured Creditors, PJM escalated from opposing the financing to asking the court to replace the fiduciary proposing it.

The motion is short by the standards of contested trustee practice, running fifteen pages including the certificate of service. It is short because PJM does not need to build a factual record from scratch. It is asking the court to give weight to findings another federal tribunal has already made.

PJM Interconnection is the regional transmission organization that operates wholesale electricity markets across all or parts of thirteen states and the District of Columbia under FERC-approved tariffs. PJM Settlement is its wholly owned subsidiary and serves as the counterparty for transactions, performing credit, billing, and settlement functions under the tariff. When PJM appears as a creditor in these cases, it appears as the entity that paid the money at issue.

Beginning in 2009, PJM capacity auctions were open to energy efficiency resources on the premise that qualifying efficiency measures would offset future capacity needs. One of the debtors, Affirmed Energy LLC, participated as a provider of those resources starting in 2014, aggregating efficiency attributes associated with energy-efficient consumer products and offering the aggregated resources into the capacity markets.

On April 15, 2026, FERC issued the order the motion refers to as the Penalties Order. According to PJM's description of that order, FERC determined that Affirmed Energy sold PJM "fake capacity" of nearly two gigawatts per year, described in the motion as approximately the annual capacity of two nuclear reactors, in exchange for roughly $500 million in capacity payments it received. FERC found that Affirmed Energy purchased sales data concerning energy-efficient products sold by others and then collected capacity payments as though it had itself caused the qualifying reductions in demand. FERC further determined that Affirmed Energy made multiple false statements and misrepresentations about its operations over a period of years.

FERC ordered disgorgement of more than $407 million in capacity payments to PJM plus interest, and imposed approximately $772 million in civil penalties. The determination applies to each of the debtors. The debtors are contesting the FERC proceedings in the United States District Court for the Middle District of North Carolina, and nothing in the bankruptcy court's disposition of the trustee motion resolves that challenge.

The motion cites United States v. Utah Construction & Mining Co., 384 U.S. 394 (1966), for the proposition that courts may give preclusive effect to administrative findings when the agency acts in a judicial capacity and the parties had an adequate opportunity to litigate. That citation does the heavy lifting. If the court accepts it, the evidentiary contest over prepetition conduct largely collapses into a question of what follows from findings already entered.

The second pillar of the motion has nothing to do with misconduct. It concerns what these estates actually are.

In 2024, FERC approved a tariff amendment eliminating energy efficiency resource participation in PJM's capacity auctions, and the D.C. Circuit affirmed that determination in Affirmed Energy, LLC v. FERC, 166 F.4th 1070 (D.C. Cir. 2026). The debtors' former line of business cannot continue in PJM's capacity market in its prior form. That is not a projection or a contested forecast. It is the settled state of the regulatory regime.

The debtors' own thirteen-week budget, filed July 28, projects no income during the budget period other than proceeds of the proposed debtor-in-possession financing. The budget reflects expenditures for professional fees, insurance, payroll, and other administrative items. On that record, PJM argues, the debtors are operating chiefly to pursue litigation and to respond to the consequences of the Penalties Order.

That framing sets up the deference argument. Courts extend substantial latitude to a debtor in possession pursuing a traditional operating reorganization because management is presumed to be running a business that will support creditor recoveries. Where the projected revenue during the budget period is zero and the former business line has been eliminated by regulation, PJM contends the ordinary rationale for that deference thins considerably.

FERC exposure combines the disgorgement and civil penalty figures described in the motion, exclusive of interest. Assets at filing reflect Research Suite case data. The comparison is directional rather than precise, but it frames the practical question: whether this is a reorganization or a contest over how a shortfall gets allocated.

The third pillar is the proposed financing. The debtors seek approval of a facility from MIH LLC, an insider. As described in the DIP-related pleadings, the facility consists of an initial draw of up to $6,731,359, a delayed draw of up to $3,168,641, and a $1,600,000 bridge financing roll-up. The debtors propose to secure that financing with liens on currently unencumbered assets and on the proceeds of avoidance claims.

The conflict PJM identifies is structural rather than hypothetical. The debtors' schedules reflect more than $1.2 million in insider payments to MIH in the year before the petition date. The same schedules and statements of financial affairs reflect over $600,000 in salary allocated to the debtors' Managing Director and over $2.2 million paid to an affiliate, MEG Staffing, LLC, for management services during that year. Management is therefore asking the court to grant liens on avoidance proceeds to a party that received payments those avoidance actions might target.

The motion also points to the financing's dependence on arrangements outside these cases. The DIP-related pleadings reflect that the facility is tied to MIH's own financing, including a note purchase agreement, an April consent, and a transaction support agreement with MIH's secured parties, and that third-party lenders to MIH exercised substantial control over the structure of the financing, the use of proceeds, and the chapter 11 milestones the debtors must satisfy. The pleadings further reflect that the operative DIP documents were not filed with the court when objections were made, and that debtors' counsel advised the documents were not yet complete when requested.

Section 1104(a) supplies two independent bases for appointment. The court shall appoint a trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management either before or after the commencement of the case, or similar cause, or if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate.

PJM argues cause under the first prong on the theory that the question is not whether misconduct occurred in the past but whether current management can be trusted to serve as a fiduciary now. The Fourth Circuit's decision in Committee of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239 (4th Cir. 1987), supplies the discretion framework. The motion then assembles a line of cases holding that appointment is warranted where management cannot be relied upon to fulfill duties of candor, loyalty, and preservation of estate property, where creditors have reasonably lost confidence, or where conflicts prevent impartial decisions on behalf of the estate.

The authorities PJM leans on are notable for how close to home they sit. In re Drew Transportation Services, Inc., 2016 WL 6892459 (Bankr. E.D.N.C. July 7, 2016), and In re Piedmont Center Investments, LLC, 2011 WL 5903398 (Bankr. E.D.N.C. Sept. 8, 2011), are Eastern District of North Carolina decisions. Gomez v. United States Trustee, 2010 WL 582706 (W.D. Va. Feb. 18, 2010), and In re El Rafaei, 2022 WL 2911429 (Bankr. E.D. Va. July 22, 2022), are Fourth Circuit district and bankruptcy decisions. In re Marvel Entertainment Group, Inc., 140 F.3d 463 (3d Cir. 1998), supplies the out-of-circuit anchor on both prongs.

PJM concedes the burden. The moving party must establish the need for a trustee by clear and convincing evidence, citing Marvel and In re Euro-American Lodging Corp., 365 B.R. 421 (Bankr. S.D.N.Y. 2007). That concession is why the Penalties Order does so much work in the motion. Clear and convincing evidence of prepetition dishonesty is a heavy lift on a record this young if it has to be built through discovery. It is a considerably lighter lift when a federal agency has already entered findings after an adjudicative proceeding.

PJM presents the second prong as genuinely independent rather than as a rhetorical fallback, and the distinction is the analytically interesting part of the motion. Section 1104(a)(2) does not require a finding of fault. It turns on the practical realities and necessities of the case and permits appointment whenever an independent fiduciary is needed in the interests of creditors and the estate.

Under the second prong the motion advances four points in sequence. Creditor confidence in management is impaired where management remains in possession after adverse regulatory findings and now seeks insider financing that would encumber unencumbered assets and avoidance proceeds. The absence of operating revenue narrows the deference ordinarily afforded a debtor pursuing a traditional reorganization. The insider proposal creates a conflict that management cannot resolve in its own favor. And the benefits of appointment would be substantial, because a trustee could independently evaluate the financing, investigate insider transactions, assess estate claims, and make a neutral recommendation on whether these cases should proceed toward reorganization, liquidation, settlement, or some combination.

PJM frames the cost-benefit conclusion carefully. A trustee would not be appointed to displace a functioning reorganization led by trusted management. A trustee would be appointed because these estates presently require credibility, neutrality, and independent judgment before further significant decisions are made. That framing is designed to answer the standard objection that a trustee is expensive and disruptive. The response is that there is little functioning reorganization to disrupt.

If the court declines to appoint a trustee, PJM asks for an examiner under section 1104(c). The statutory hook is straightforward. Where the court does not appoint a trustee, it shall order the appointment of an examiner if appointment is in the interests of creditors and the estate or if the debtor's fixed, liquidated, unsecured debts exceed $5 million. Given the disgorgement and penalty figures, the debt threshold is not a serious question in these cases.

The proposed mandate is specific, which distinguishes it from examiner requests that ask for an investigation without defining one. PJM proposes that the examiner investigate current management's role in the conduct described in the Penalties Order and whether that conduct bears on management's ability to continue serving as a fiduciary, the negotiation and structure and fairness of the proposed insider facility, prepetition insider payments and other affiliate transactions reflected in the schedules and statements, the nature and value of any estate claims against insiders or affiliates or third parties, and the debtors' actual restructuring prospects in light of the elimination of energy efficiency resource participation and the projected absence of operating revenue.

The examiner request also functions as a settlement of expectations for the court. A judge reluctant to displace management three weeks into a case on a paper record has an intermediate option that produces an independent report without transferring control of the estates. PJM's supporting citations, including In re First American Health Care of Georgia, Inc., 208 B.R. 992 (Bankr. S.D. Ga. 1996), and In re Residential Capital, LLC, 474 B.R. 112 (Bankr. S.D.N.Y. 2012), are aimed at that middle path.

The first footnote of the motion does more work than its placement suggests. Based on the Bankruptcy Administrator's Notice to 20 Largest Unsecured Creditors, filed August 10 at Docket No. 61, PJM states that it appears there will not be a committee in these cases who could undertake the review PJM is describing. That is PJM's reading of the notice rather than a determination by the Bankruptcy Administrator, though Research Suite case data likewise reflects no creditors' committee appointed to date.

That footnote closes the obvious response to a trustee motion. The usual answer to a creditor demanding an investigation of insider transactions and financing conflicts is that the official committee, funded by the estate and armed with standing and discovery, exists precisely to perform that function. In these cases that answer is unavailable. The Western District of North Carolina uses a Bankruptcy Administrator rather than a United States Trustee, and while the Bankruptcy Administrator filed a limited objection to the financing on July 27, that office does not perform the investigative role of an appointed committee.

The second footnote raises a separate issue and then declines to press it. PJM notes that the debtors' petitions identify Durham, North Carolina as their principal place of business, and that the resolutions filed with the petitions authorized bankruptcy filings in the Middle District of North Carolina rather than in the Western District where the cases were commenced. Durham sits in the Middle District. The motion suggests the court should consider whether transfer of venue is appropriate when any basis for the filings in this district is revealed.

PJM expressly does not ask the court to resolve venue through this motion. It uses the discrepancy for a narrower purpose, arguing that unresolved questions about authorization and venue underscore the need for an independent fiduciary to evaluate how these cases were commenced, for whose benefit, and under whose control.

Preserving the venue point rather than pressing it is a deliberate choice. A venue motion decided against PJM would resolve nothing about governance. A venue question left open contributes to the atmosphere of unresolved authorization that supports the section 1104(a)(2) argument, and it remains available later.

The sequencing of the two hearings is the first thing to watch. The financing motion is set for August 21 and the trustee motion for August 26. If the court approves the insider facility on final terms before reaching the governance question, the liens on unencumbered assets and avoidance proceeds are in place and a later-appointed trustee inherits a smaller field of action. If the court defers the financing again, the governance question gets decided first and on a fuller record. Continuances in this case have not been neutral scheduling events.

The preclusion question is the second. PJM is asking the bankruptcy court to accept FERC's findings as findings rather than as allegations, while the debtors are contesting those same proceedings in the Middle District of North Carolina. How Judge Beyer treats the Penalties Order will shape more than this motion. It will shape what the debtors have to prove, and where, for the remainder of the case.

The third is whether the examiner alternative becomes the actual outcome. Trustee motions filed within a month of the petition date, on a record built from another tribunal's findings rather than from discovery, are difficult to win outright. The clear and convincing standard is real. But PJM has structured the request so that the court can decline the trustee and still order the investigation, and the absence of a committee removes the most common reason to say no to both.

Watch also for the debtors' response. The motion recites that operative DIP documents were not filed when objections were made and that counsel advised the documents were not yet complete. Whether those documents are on file before August 21 will tell you a good deal about how the financing hearing goes, and by extension how the trustee hearing goes five days later.

Vi-Jon, LLC filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware on August 2, 2026, and it filed with the deal already in hand. Three days earlier, the debtor executed a restructuring support agreement with its non-debtor parent and affiliates, a prepetition future claimants’ representative, and the plaintiffs’ firms whose clients hold the overwhelming majority of the talc personal injury claims asserted against it.

The agreement contemplates a plan that channels every current and future talc claim into a trust established under section 524(g) of the Bankruptcy Code. The trust would be funded by a guaranteed $25 million cash contribution from non-debtor affiliates, together with assigned insurance rights, a $1 million promissory note from the reorganized debtor, net proceeds of a real estate sale, assigned causes of action, and a contingent settlement fee tied to a future sale of the corporate parent. In exchange, the channeling injunction and related releases would extend beyond the debtor to the non-debtor affiliates and their related parties.

There is no debtor in possession financing. The debtor entered the case with approximately $1,650,000 in cash on hand and intends to fund administration through an amended prepetition keepwell arrangement with its affiliate, under which roughly $8.1 million in undrawn capital commitments would be advanced once the interim cash management order is entered.

The schedule the parties agreed to is aggressive. A plan and disclosure statement are due 30 days after the petition date, disclosure statement approval at 70 days, solicitation at 75 days, confirmation at 110 days, and consummation at 120 days. The restructuring support agreement terminates automatically nine months after execution if the effective date has not occurred.

Case at a Glance

The most useful thing to understand about Vi-Jon is the mismatch between the size of the business and the size of the liability it carries. This is a private-label dry bath products company selling Epsom salts and body powder to retailers including Amazon, Dollar General, Kroger, TopCo, and Walgreens. Total net sales were approximately $26 million in 2025, with approximately $21 million expected in 2026. Adjusted EBITDA was approximately $700,000 in 2025, expected to fall to approximately $300,000 in 2026.

As of the petition date, the debtor had one full-time salaried employee, a vice president and general manager, and one independent contractor providing litigation support.

Everything else is outsourced to affiliates. Manufacturing runs through a co-manufacturing agreement, and management, human resources, finance, information technology, legal compliance, risk management, insurance, employee benefits, and tax services run through two administrative services agreements. The debtor owns a single non-operational manufacturing plant in St. Louis, referred to in the filings as the Etzel Property, which is slated for sale with the net proceeds contributed to the trust.

Customer concentration is high. The two largest customers accounted for nearly 50% of net sales in both 2024 and 2025. Epsom salt products represent roughly 65% of total annual net sales.

Corporate History

The company traces to 1908 as the Peroxide Specialty Company, rebranding as Vi-Jon Laboratories Inc. in 1933 and expanding into private-label cosmetic and personal care products in the 1960s. In 2006, Berkshire Partners LLC acquired a controlling interest and Vi-Jon Laboratories merged with Cumberland Swan Holdings, Inc. That merger matters for insurance purposes, because it brought with it rights under policies Cumberland Swan purchased from July 31, 1999 through July 31, 2006. In 2020, Berkshire consummated the ESOP Transactions, making the enterprise 100% employee-owned, and Vi-Jon, Inc. became Vi-Jon, LLC.

The declaration identifies a single primary driver of the filing, and it is not operational. Claims filed against the debtor increased by approximately 400% since 2023, driven largely by plaintiffs’ counsel adding the debtor to pre-existing cases in which it had not initially been named. Twenty-eight law firms filed talc-related claims against the debtor for the first time following the 2023 liability forecast. At the same time, average settlement costs increased substantially and dismissal rates decreased substantially.

Then two verdicts landed within eight weeks of each other. On May 15, 2026, a jury returned a $10.2 million verdict in Heyer v. A.H. Bennett Co., with 20% apportioned to the debtor and subject to certain setoffs. On July 7, 2026, judgment was entered against the debtor in Ludwig v. Sumitomo Corp. of Americas in the amount of $16,750,487. The $10.2 million figure is the full Heyer verdict rather than the debtor’s share, but the declaration nonetheless lists approximately $20 million of litigation judgments from these two matters among the debtor’s unsecured obligations. That is the exposure carried by a company projecting approximately $300,000 of adjusted EBITDA.

The commercial picture deteriorated alongside the litigation. The debtor lost a significant portion of its body powder business in October 2025. Quarterly body powder net sales had run at approximately $2.4 million during 2024 and 2025 and fell to approximately $662,000 in the first quarter of 2026.

What makes the claim volume notable is that the underlying conduct stopped a decade ago. The debtor permanently discontinued production and sale of talc products in 2016, having temporarily discontinued sales between 1995 and August 1999. Its average market share for talc products between 1975 and 2015 was 13.2%, with peak sales of approximately 20 million units in 2003. The debtor disputes all talc-related liabilities and maintains that its talc products were safe.

You cannot read this case without understanding the transaction that shaped it. In late 2023, the enterprise separated the dry goods business from everything else it owned, and the exhibits filed with the declaration lay out the mechanics in four phases.

In the refinancing phase, Vi-Jon formed VH Finance, LLC and Vivos Holdings, LLC. Vivos entered a new financing arrangement, distributed the proceeds up the chain to Vi-Jon, and Vi-Jon repaid its existing lenders. In the post-refinancing distribution phase, Vi-Jon contributed the equity of VH Finance to an intermediary holding company and then contributed substantially all of its assets to Vivos, retaining only the dry goods business. In the asset transfer phase, Vi-Jon distributed the equity of Vivos to VH Finance, and Vivos formed UpLift Brands, LLC, Consumer Product Partners, LLC, and INSPR Labs, LLC, moving branded inventory and intellectual property to the first and the remaining assets to the second. In the pre-reorganization phase, Vi-Jon Holding, Inc. became Emprise Group, Inc. and the intermediary holding company became Emprise HPC, LLC.

What remained at Vi-Jon was the Epsom salts and body powder business, the Etzel Property, and the talc liability. What backstopped it was the Keepwell Agreement, executed December 28, 2023, under which Emprise HPC committed to provide up to $25 million in equity contributions.

The 2023 transaction is also why the funded debt in this enterprise sits outside the debtor. The current organizational chart identifies Emprise Group as borrower or issuer under a prepetition asset-based lending facility and a first lien facility, with Emprise HPC as guarantor, and Emprise HPC as borrower under a second lien facility with Emprise Group as guarantor. Vi-Jon itself has no secured debt.

The analytical center of this case is a pair of numbers produced by the same expert three years apart. NERA prepared a series of liability forecasts for the enterprise between June 2020 and May 2026. The 2023 forecast, which was used to size the keepwell obligations, ran two scenarios. The 2026 forecast, prepared in May of this year, ran one.

The declaration attributes the revision to three factors: a substantial increase in the number of claims, lower dismissal rates, and increased average settlement amounts. Each of those inputs moved in the same direction at the same time, which is how a forecast changes by an order of magnitude rather than a margin.

The balance sheet is unusually clean for a Chapter 11 debtor, which is a direct consequence of the 2023 transaction. Vi-Jon has no secured debt and no accrued outstanding third-party trade accounts payable as of the petition date. Its obligations are litigation, indemnification, professional fees, and intercompany.

The unperfected security interest on the Emprise advance is worth flagging. The declaration states plainly that the interest was never perfected. The plan term sheet assigns chapter 5 preference causes of action to the trust among the assigned causes of action, so the disposition of that advance is a question the trust would inherit rather than one the plan resolves on its face.

The retailer indemnification claims deserve equal attention. Approximately $15 million of contingent indemnification exposure runs to customers under agreements requiring the debtor to defend, indemnify, and hold harmless those customers from claims arising out of products it sold. Those customers are not affiliates and, as Section X describes, the term sheet expressly declines to extend the automatic stay to them absent consent.

By stated limits, insurance dwarfs every other component of the trust. From 1965 through October 31, 2016, the debtor and its predecessors purchased over $900 million of general liability, products liability, and umbrella coverage. The aggregate limit attributable to insurers who are currently solvent is approximately $900 million, with fewer than $20 million in limits issued by insurers now insolvent.

Under the plan term sheet, the debtor assigns its rights under the talc insurance policies to the trust, and the non-debtor affiliates contribute their own rights under those policies as well. The channeling injunction is to be structured to preserve and maximize the value of those rights, and the non-debtor affiliates waive any liens on the real property and sale proceeds. A coverage adversary proceeding cannot be commenced without the reasonable consent of Emprise before the effective date, and of the claimants’ representatives or committee and the future claimants’ representative.

Emprise commits $32 million of cash on the effective date, of which $25 million funds the trust and $7 million funds case administration in accordance with an agreed budget. The declaration describes that $7 million as exit financing; the term sheet describes it as part of the effective date contribution to be used per the budget. Layered on top is approximately $8.1 million of remaining undrawn capital commitments under the amended keepwell agreement, to be advanced following entry of the interim cash management order and not subject to repayment. Total committed cash across the case is approximately $40.1 million.

Trust Assets

The Contingent Settlement Fee

The settlement fee is the most structurally interesting piece of the package. It equals 50% of the first $40 million of gross consideration above $1 billion in a sale or merger of Emprise, capped at $20 million, and it is payable only if that transaction occurs at an enterprise value at or above $1 billion. The trust receives consultation rights on the computation, including enough information to assess the enterprise value calculation.

The effect is to give claimants a participation in future enterprise upside without giving them equity in Emprise and without imposing a fixed obligation on a business that may never transact. It also creates a monitoring problem the parties addressed directly, since the fee turns entirely on a valuation the payor controls.

Transfers Under the Plan

Two asset transfers sit inside the structure. A material set of the debtor’s assets, to be scheduled in a plan supplement, transfers to Emprise HPC, LLC or another non-debtor affiliate or designee under section 1123(a)(5)(D), in exchange for the monetary and non-monetary contributions described above. Separately, the real property is to be sold during the case under section 363 or under the plan under section 1123(a)(5)(D), with the parties intending to qualify for the section 1146(a) exemption from stamp and transfer taxes. If that sale is not consummated or requisite consent is withheld, the claimants’ representatives or the official committee may elect to have the real property itself contributed to the trust.

Whenever a debtor releases the affiliates that received its assets three years before it filed, the record supporting that release becomes the most examined part of the case. The declaration devotes several pages to building that record.

On April 1, 2026, the board adopted unanimous consents establishing a special committee and adopting a charter designating two independent directors as its members. The charter delegated to the committee exclusive authority over the relevant matters. On April 16, 2026, the committee directed a Sidley litigation partner to investigate potential claims against the debtor’s equity holders, affiliates, directors, managers, and officers, expressly including alter ego, veil piercing, successor liability, actual fraudulent transfer, and constructive fraudulent transfer. The investigation included diligence requests covering the books and records underlying the 2023 restructuring transaction and the emails of key employees, along with interviews of management at the debtor, Emprise, and Vivos.

The declaration does not disclose the committee’s conclusions. It discloses the outcome. As part of the restructuring support agreement, and in exchange for the affiliates’ contributions to the trust and to the case, the debtor agreed to release, under a confirmed plan, all claims and causes of action arising out of the 2023 restructuring transaction and all other estate claims and causes of action against the non-debtor affiliates.

What Survives

Claims relating to the 2020 ESOP Transaction are preserved, but only against a defined set of Excluded Parties: Berkshire Partners LLC, Berkshire Fund VI Limited Partnership, Berkshire Investors LLC, Berkshire Investors III LLC, and Brunner-family related entities and individuals. Those claims are assigned to the trust alongside insurance-related claims, talc-related claims, and chapter 5 preference actions.

Procedurally, the plan is deemed a motion to approve the estate claims settlement, and entry of the confirmation order constitutes court approval under section 1123 of the Bankruptcy Code and the applicable rules. That means the settlement of the estate’s claims against the affiliates would be adjudicated through confirmation rather than through a standalone contested motion earlier in the case.

Section 524(g) requires acceptance by at least 75% in number of the claimants whose claims are to be channeled. That requirement is the reason this case was negotiated before it was filed, and it explains the composition of the supporting party group.

The two source documents describe that support slightly differently, and the difference is worth noting precisely. The restructuring support agreement recites that the eight signatory Talc Claimants’ Representatives collectively represent at least 75% of holders by number, with a joinder mechanism allowing additional firms to become parties. The declaration describes the Ad Hoc Plaintiffs’ Group as nine plaintiffs’ counsel representing more than 80% of holders of talc-related claims. Either way, prepetition support sits at or above the statutory floor, and the margin above that floor is thin enough to matter.

The signatory firms agreed to support the plan, to recommend that their clients vote in favor and not opt out of the third-party releases, and, where they hold a specific power of attorney authorizing them to vote on a bankruptcy plan, to exercise it accordingly. Ballots will contain an opt out with respect to releases of talc claims against the non-debtor affiliates, or an opt in if the court does not permit an opt out.

Scope of the Injunction

The channeling injunction would permanently enjoin talc claims against the debtor, the reorganized debtor, the non-debtor affiliates, and each of their related parties, channeling them exclusively to the trust. Related parties is defined broadly to include current and former officers, directors, shareholders, lenders, employees, professionals, agents, consultants, and their assignees, predecessors, and successors. The trust indemnifies the non-debtor affiliates and their related parties against talc claims, and no claimant may receive a distribution without first delivering a written general release in a form acceptable to those parties.

Before the effective date, the debtor may file an adversary proceeding seeking a preliminary injunction and temporary restraining order extending the automatic stay to the non-debtor affiliates and their related parties. The claimants’ representatives and the prepetition future claimants’ representative agreed not to oppose it.

The Customer and Retailer Carve-Out

Customers and retailers were treated differently, and deliberately so. Absent consent of the claimants’ representatives or the official committee and the future claimants’ representative, neither the debtor nor Emprise will settle with or support relief for any customer or retailer, including any attempt to extend the automatic stay or enjoin talc claims against them, and neither will seek or support removal of talc claims against those entities to federal court. Commercial accommodations remain permitted, provided they do not settle, release, channel, or enjoin any talc claim against the customer or retailer.

Read against the approximately $15 million of retailer indemnification exposure disclosed in the declaration, that carve-out leaves the debtor’s customers exposed to continued litigation and leaves their indemnification claims against the estate outside the resolution the trust provides.

The parties built a 120-day case and then built the cost controls to match it. That pairing is intentional. When the trust corpus is fixed at $25 million of guaranteed cash, every dollar of administrative expense is a dollar that does not reach claimants, and the term sheet says so directly: the transactions will not be feasible or in the best interests of claimants unless the process is undertaken on a cost-efficient basis.

The controls themselves are unusually specific for a first day record. Professionals of the company, the official committee of unsecured creditors, and the future claimants’ representative are each subject to a budget and an agreed aggregate cap on fees to be incurred and allowed during the case, reflected in a budget that may be amended only with Emprise’s consent. A weekly budget variance report goes to Emprise, the committee, and the future claimants’ representative, setting out actual non-operating expenditures against budget with an explanation of material variances, certified by the chief restructuring officer. The parties also agreed that a solicitation process similar to the protections in Miyoshi America would be considered commercially reasonable.

Fiduciary outs are preserved throughout. The company’s board of managers or special committee may deviate from the agreement if it determines in good faith, on advice of counsel, that its fiduciary duties require it, and the official committee and the official future claimants’ representative reserve the same rights.

If the plan is confirmed as contemplated, the outcomes divide cleanly. The following reflects the framework set out in the restructuring support agreement and plan term sheet, all of which remains subject to negotiation of definitive documents, court approval, and confirmation.

What makes this case worth following is not its size. It is the structure. A liability that outgrew the vehicle built to contain it, a forecast revised by an order of magnitude, a fixed contribution that did not move with it, and a settlement that trades estate claims for the certainty of cash. Those are the questions section 524(g) practice has been working through for a decade, presented here at a scale small enough to see all of the moving parts at once.

Both plans are off the table. On August 4, 2026, the United States Bankruptcy Court for the District of Maryland denied approval of the two competing disclosure statements in the Chapter 11 case of the Roman Catholic Archbishop of Baltimore, holding that neither satisfies section 1125 of the Bankruptcy Code and that each describes a plan of reorganization that is patently unconfirmable. The denial was entered without prejudice. As a scheduling matter it was decisive.

The Court had set a confirmation hearing to begin on September 14, 2026, which required solicitation packages to be mailed on or before August 10, 2026. The order states plainly that the Court does not find adequate time to consider amended competing disclosure statements before that date, and that the deficiencies in the pending documents are too significant to justify having the parties spend more time or money on them in their current form. Six days is not a revision cycle. The confirmation schedule the Court described as tight by design has now been overtaken by the substance of what was filed against it.

The immediate consequence extends beyond the calendar. In March 2026, seven survivors of child sexual abuse moved for relief from the automatic stay to pursue their claims in the Maryland state courts. The Court did not decide those motions. It continued them, along with the automatic stay itself, to September 30, 2026, on the theory that a firm confirmation schedule gave the parties a short runway to reach a global, consensual resolution before the status quo changed. That runway is now shorter than the parties assumed, and the September 30 date arrives with no approved disclosure statement, no solicitation, and no confirmation hearing in front of it.

The Roman Catholic Archbishop of Baltimore is operating as a debtor in possession under section 1107 of the Bankruptcy Code. It is the only debtor before the Court. That fact does a great deal of work throughout the order, because much of what both plans propose depends on entities that have not filed and are not subject to the Court’s in rem jurisdiction.

The creditor body is unusual in composition and central to how the Court reads the disclosure obligation. All members of the Official Committee of Unsecured Creditors are survivors of child sexual abuse. The Court treats that composition as the reason sections 1125 and 1129 matter here in the first place, noting that those provisions exist in large part to protect the creditors of the estate, which in this case are primarily survivors. The remaining constituencies are the Debtor’s insurance carriers, an Ad Hoc Committee of Parishes, Schools, and Affiliates, and the Covered Parties, meaning the related entities included as additional insureds under the Debtor’s current and legacy insurance programs.

The filing was a direct response to legislation. In April 2023, the Maryland General Assembly passed the Maryland Child Victims Act, which eliminated the statute of limitations on civil lawsuits involving child sexual abuse. The Debtor filed its Chapter 11 petition on September 29, 2023, two days before the statute took effect on October 1, 2023. On the petition date, the Debtor also moved to extend the automatic stay to the Covered Parties under its insurance programs.

The Court granted that relief on an interim basis and then continued it under a Second Interim Order extending the automatic stay to certain related entities. That order has now been in place for nearly three years. The order under review identifies this as the source of the current posture. Three years of stay protection for both the Debtor and a set of nondebtor entities, periodic mediation among the Debtor, the Committee, and the Insurers, litigation in the main case and in two separate adversary proceedings, and still no plan proposing a global resolution. What the Court has instead is two competing plans and, in its own description, relatively little agreement on the best path forward.

Length is not the holding, but it is the entry point. The Court found that each document provides an appropriate level of detail about the key prepetition and postpetition events concerning the Debtor, so the deficiencies it identified are not a failure to cover the history of the case. The Debtor’s amended disclosure statement runs 54 pages without exhibits. The Committee’s third amended disclosure statement runs 158 pages without exhibits. The Court took 16 pages to explain why neither works.

Section 1125(a)(1) requires information of a kind, and in sufficient detail, that would enable a hypothetical investor of the relevant class to make an informed judgment about the plan. The determination is case by case and largely within the discretion of the bankruptcy court. The Court applies that standard here through a formulation borrowed from an older decision: a disclosure statement must be meaningful to be understood, and it must be understood to be effective.

The Court credits counsel for trying to address pending objections and legal hurdles by building optionality into the plans and adding disclosure to the documents. It then explains why those efforts backfired. Both documents grew to the point where information gets lost or confused inside them, both carry defined terms and legalese that complicate an already complicated plan structure, and both are internally inconsistent in certain respects. The United States Trustee had flagged inconsistent and inaccurate information regarding the third-party releases in the Debtor DS, and had described the Committee’s excessive use of defined terms as rendering the plan incomprehensible and the disclosure statement that describes it lacking in adequate information.

The sentence that carries the Court’s point most directly is the one addressed to the audience for these documents. Creditors should not need lawyers or translators to read a disclosure statement or understand a proposed plan of reorganization. In a case where the primary creditors are survivors voting on the treatment of their own claims, that observation is not a stylistic preference. It is the statutory purpose.

The second half of the analysis is separate from disclosure quality and independently fatal. A court may disapprove a disclosure statement where the underlying plan is clearly unconfirmable, and the Court found provisions in both plans that make a confirmation hearing on them futile. Not every section 1129 element belongs at the disclosure statement stage, and the order says so. Certain defects are severe enough that soliciting votes would waste estate resources and further delay any recovery for creditors.

The most consequential ruling in the order concerns three trusts. The Debtor’s plan includes only a small fraction of the value of its Sexual Misconduct Insurance Program Trust in plan distributions, and excludes the value of its General Insurance Program Trust and its Health Benefits Program Trust entirely. Those exclusions flow through to the section 1129(a)(7) liquidation analysis, which is where the Court found the disparity.

The Court had already told the parties where it was headed. In its July 13, 2026 statements, incorporated into the August 4 order as if fully rewritten, the Court found that based on the plain language of the trust documents, Maryland law, and section 541(c)(2), the insurance trusts do not appear to be valid spendthrift trusts protected by that subsection, and that any discretionary aspects of the trustee’s powers do not appear to change the analysis. The trusts appear to be property of the Debtor’s estate.

Two doctrinal points sit underneath that conclusion, and both are stated at a level of generality that makes them portable to other diocesan cases. First, section 1129(a)(7) sets a floor a debtor must clear, not a measure of what an adequate or fair and equitable distribution looks like. Clearing the hypothetical Chapter 7 comparison does not establish that the proposed distribution is enough. Second, and independent of valuation, a debtor must disclose all of its assets and explain how those assets affect valuation. Any interest the debtor holds in property becomes property of the estate on the petition date under section 541(a), and the order states the consequence in one line: the debtor does not get to decide unilaterally what assets it discloses or makes available for distribution to creditors.

That is a disclosure holding as much as a substantive one. Even where the Debtor believes an asset is unavailable to creditors, the asset and its value must appear in the disclosure statement, together with the Debtor’s explanation of why it is excluded. The Court suggested the Debtor take a hard look at its asset base and identify, perhaps in a schedule, any assets in which the estate might have an interest and the basis for excluding them.

The Debtor DS also fails to articulate clearly how creditors may collect against the insurance assets. Objecting parties argued that any disclosure statement must contain adequate information about settlements with insurers and explain the effect of those settlements on the plan and on creditors’ collection rights. The Court agreed, and added a related point about the release architecture. Setting aside the legality of the proposed release, injunction, and gatekeeping provisions, which it reserved for confirmation, the Court found that the Debtor DS does not explain what happens if a creditor declines to grant a release, whether that jeopardizes any insurance settlement or the plan itself, and how a creditor is supposed to assess that risk. If a creditor cannot assess it, the consensual character of the release is itself in question.

The second defect in the Debtor’s plan is structural. The plan places general unsecured creditors into three separate impaired classes, each holding the same priority of distribution under applicable nonbankruptcy law and the Code, and proposes very different treatment across them.

Section 1122(a) permits a claim to be placed in a class only if it is substantially similar to the other claims in that class. Section 1123(a)(4) requires the same treatment for each claim within a class. The Code does not require that all substantially similar claims be placed together, but courts generally require valid business, legal, and factual reasons to justify separate classification, and the Fourth Circuit has held that separate classification may only be undertaken for reasons independent of a debtor’s motivation to secure the vote of an impaired, assenting class. The purpose of the limit is to prevent a debtor from finding a few cooperative impaired creditors and placing them in a class of their own.

The Class 5 mechanics are the part practitioners will read twice. A class the debtor can pay in full is rendered impaired by withholding postpetition interest, and the resulting impairment supplies a voting class. That maneuver is familiar. What is notable is that the Court reached it at the disclosure statement stage rather than reserving it for confirmation, and concluded that under the particular circumstances of this case the classification scheme renders this version of the plan unconfirmable.

The order also folds in a disclosure point that will interest anyone tracking diocesan cases. The Committee raised the Debtor’s commitment to enhanced child protection protocols, framing it as a confirmation issue. The Court took it up as a disclosure issue instead. Given the events that led to the filing and the nature of the majority of claims, a hypothetical reasonable investor would want to understand the Debtor’s position on enhanced child protection protocols and how they would be implemented under the plan. That information, in the context of this case, is reasonably related to the ability of creditors to cast informed votes. Nonmonetary plan commitments become part of the adequate information analysis when the creditor body is voting on them.

The Committee’s plan fails on a different axis. It includes language suggesting that nondebtor entities may be substantively consolidated upon the occurrence of certain events. The Court had already stated that it will not substantively consolidate the Debtor with its nondebtor affiliates on an involuntary basis, and it repeated the holding here: the proposed action violates the express terms of the Bankruptcy Code and renders the plan unconfirmable under section 1129(a)(3).

The Committee’s response was that its plan seeks consolidation only of debtor entities or entities that consent. The Court found that this does not change the analysis at the present stage, and the reasoning is arithmetic before it is doctrinal. There is one debtor before the Court. The Committee has presented no evidence, and articulated no basis for believing, that other entities affiliated with the Debtor will file Chapter 11 cases or voluntarily contribute their assets to the plan. A structure that depends on those events is a structure built on conditions that have not occurred and that no party before the Court can compel.

The Court situated the ruling in a line of authority that restructuring professionals in mass tort and diocesan cases will recognize. The Eighth Circuit’s decision in the Archdiocese of Saint Paul and Minneapolis case declined substantive consolidation of nondebtor nonprofit entities. Courts describe substantive consolidation as an extraordinary remedy grounded in equity, and consolidation reaching a nondebtor requires an even more cautious application of the usual test. The order also cites the Supreme Court’s discussion of section 1123(b)(6) in Harrington v. Purdue Pharma L.P., and notes that sections 1123 and 1129 are focused on the debtor and property of the estate.

The distinction the Court draws is worth isolating, because it is not a blanket rule against creditor plans. A nondebtor plan proponent such as a committee can fund a plan with property of the estate. That is different from a plan that reaches entities, or the assets of entities, not currently before the Court and not subject to its in rem jurisdiction. The line is jurisdictional rather than structural. Who proposes the plan matters less than what the plan proposes to reach.

Feasibility follows from the same facts. A plan must be reasonably likely to succeed on its own terms without a need for further reorganization, and plan funding that is too speculative renders a plan patently unconfirmable. The Court found the Committee’s conditions speculative and lacking a legal basis, and held that a plan relying on nondebtor participation without the consent or commitment of those parties is speculative, uncertain, and potentially misleading to creditors. Each corporation remains a separate legal entity with its own debts and assets, even when affiliated.

The Committee’s treatment of insurance assets drew a separate finding. Regardless of the proponent, any plan must comply with applicable law in the treatment and transfer of insurance rights and policies. The Court found that the transfer and trust provisions of the Committee’s plan create issues that currently render it unconfirmable under section 1129(a)(3).

Objecting parties argued that the Committee DS is incomplete and redacts a large portion of potentially relevant information. The Court agreed with the general principle and then narrowed it in a way that cuts against the Committee twice.

On the first point, a disclosure statement and plan cannot go out for solicitation with redacted information. The purpose of the document is to inform creditors’ votes, and withholding information from the solicitation package undercuts the objective of section 1125.

On the second point, the Court held that where the redacted information concerns the separate assets and liabilities of nondebtor parties, that information is not necessary or appropriate in a disclosure statement concerning the debtor, absent special circumstances. Two exceptions are identified. A disclosure statement may include information about a nondebtor entity that is voluntarily providing plan funding, and it may include such information where relevant to valid claims or causes of action asserted by the estate.

What a disclosure statement cannot do is described directly. It cannot be used to disseminate information about a nondebtor entity for the purpose of prodding a settlement, to impose bankruptcy-like disclosures on that entity, or to confuse creditors voting on the plan. The Court identified the last of these as its particular concern here, because the Committee DS contains financial information regarding entities that are not before the Court and suggests potential contributions from them. Unless and until such an entity agrees to the disclosures, becomes a debtor, or is shown to hold assets of this estate, that information does not belong in the document.

The practical effect is that the Committee cannot solve its redaction problem by unsealing. Unredacting the nondebtor financial information would cure the solicitation defect and deepen the impermissible-content defect at the same time. The path forward requires deciding which entities the plan actually depends on and obtaining their consent, not adjusting what the document reveals about them.

The order is unusually well marked for anyone building a brief on disclosure statement denial or on the treatment of nondebtor assets in a diocesan case. The citations cluster around five questions.

The denial is without prejudice, and the order is explicitly interim in nature so that it does not foreclose future efforts to obtain approval of a disclosure statement. Nothing prevents either proponent from filing again. The question is what a revised filing would have to look like.

For the Debtor, the work is concentrated in the liquidation analysis and the asset schedule. The insurance trusts have to be addressed on the Court’s stated view that they appear to be property of the estate, which means either including more value in distributions or building a record that survives the section 541(c)(2) analysis the Court has already run once. The classification scheme has to be rebuilt or justified on grounds independent of creating an impaired accepting class. The disclosure gaps around insurer settlements, collection rights, release mechanics, and child protection protocols are addressable, but they cut against the instruction to shorten and simplify, which is the tension the Debtor now has to resolve.

For the Committee, the problem is harder because it is not primarily a drafting problem. A plan that reaches nondebtor affiliates cannot be redrafted into confirmability while those entities remain outside the case and outside the Court’s jurisdiction. Either affiliated entities file, or they consent and commit, or the plan has to be rebuilt around property of this estate. The redacted nondebtor financial information has to come out of the document rather than be revealed in it.

The closing paragraph of the order reads as an instruction rather than a criticism. The Court encouraged both proponents to step back and assess what kind of plan will work in this case and how best to describe that plan to all creditors, and observed that the most brilliant, intricate, and innovative plan will mean little if the people affected by it do not understand it or how it works. In a case where the creditors are survivors and the vote is on the treatment of their own claims, comprehensibility is not a drafting courtesy. It is the thing section 1125 was written to require.

On August 7, 2026, Bankruptcy Judge Kyu Y. Paek held that approximately $17.56 million held in Sleep Number’s deferred compensation trust is property of the estate, and directed the trustee to transfer the remaining trust assets to the debtors. The money had been set aside years earlier to pay deferred compensation to a select group of management or highly compensated employees. Under the decision it is general estate property, available to satisfy claims across the unsecured creditor body rather than reserved for Plan participants.

The decision came in a case that has moved quickly. Sleep Number filed in the Southern District of New York on June 12, 2026, pursued a sale of the company as a going concern on an expedited schedule, and obtained approval of a sale to the winning bidder, SNBR, Inc., for $701,800,000 on July 21, 2026. The deferred compensation motion was filed while that sale process was running, and it drew a single objection, from a former employee appearing pro se who is owed roughly $107,000.

For Plan participants, the practical consequence is a deadline rather than a distribution. The decision expressly preserves the right of every participant to file a general unsecured claim, and the bar date is September 10, 2026. The decision directs debtors’ counsel to upload the proposed order previously docketed at ECF Doc. # 479, with revisions noting entry of the Memorandum Decision, so the transfer proceeds under that conforming order.

Sleep Number Corporation was a retail mattress company that assembled and sold adjustable “smart” beds directly to customers. The debtors filed petitions for relief under Chapter 11 on June 12, 2026 in the Bankruptcy Court for the Southern District of New York, and the cases are jointly administered under Case No. 26-11399 (KYP). Davis Polk & Wardwell LLP serves as counsel to the debtors.

The deferred compensation program at issue predates the filing by more than a decade. Sleep Number sponsored the Sleep Number Executive Deferral Plan to provide deferred compensation to a select group of management or highly compensated employees. The Plan was designed as an unfunded arrangement that complies with section 409A of the Internal Revenue Code and qualifies for the exemptions in sections 201, 301, and 401 of ERISA. On September 3, 2013, the company entered into a Non-Qualified Deferred Compensation Trust Agreement for Select Comfort with Charles Schwab Bank as trustee, and the deferred compensation was held in the resulting Executive Investment Plan Trust.

The Memorandum Decision does not catalog the operational or macroeconomic pressures that led Sleep Number to file. What it does describe is the shape of the case, and that shape explains why the trust funds mattered. The debtors filed with the goal of selling the company as a going concern on an expedited schedule, and the docket reflects that pace. Bid procedures were approved on July 2, 2026, twenty days after the petition date, and the court approved the sale on July 21, 2026, less than six weeks after the filing.

A case run at that speed puts the composition of the estates in front of the court early. The board provided written notice of insolvency to the trustee ten days into the case, the debtors moved for turnover of the trust funds on July 5, 2026, and the motion states that the trustee and the Official Committee of Unsecured Creditors support the relief. One objection was filed, by a Plan participant.

The outcome here follows from the structure rather than from anything particular to this case. A top hat plan paired with a rabbi trust exchanges protection from the employer’s creditors for tax deferral, and that exchange is fixed when the employee elects to participate.

A top hat plan is defined in ERISA as a plan that is unfunded and maintained by an employer primarily to provide deferred compensation for a select group of management or highly compensated employees, 29 U.S.C. § 1051(2). Top hat plans remain subject to ERISA’s administrative and enforcement provisions but are exempt from its vesting, participation, fiduciary responsibility, and funding requirements. The rationale, as the decision notes, is that management and highly compensated employees have sufficient bargaining power to negotiate favorable deferred compensation plans and are capable of taking the attendant risks into account. The tax treatment follows the same premise. The participant is not taxed until actual receipt because the participant may never receive the money if the company becomes insolvent.

Unfunded status is the load-bearing element. As the Third Circuit put it in Accardi v. IT Litigation Trust (In re IT Group, Inc.), 448 F.3d 661, 665 (3d Cir. 2006), the assets used to pay the deferred compensation are the general assets of the employer and are subject to the claims of the employer’s creditors. A rabbi trust is the workaround that lets an employer segregate cash without losing that status. The assets go into a trust, they can be used only to pay deferred compensation, and a change of control cannot claw them back. The condition is that the trust funds remain subject to the claims of the employer’s creditors in the event of insolvency or bankruptcy.

That last line is the whole case. The security a rabbi trust provides is security against the employer changing its mind, not security against the employer running out of money.

Two features of the Sleep Number documents pointed in opposite directions, and the court had to decide which controlled. The trust was irrevocable by Sleep Number, and the funds were segregated from other company assets. Those are the features that make a rabbi trust feel like protection. Everything else in the documents pointed the other way.

A bankruptcy filing was an event of insolvency under the Trust Agreement, so the entire insolvency architecture switched on automatically at the petition date. The board’s written notice of insolvency ten days later completed the sequence, and section 3(a) gave the trustee a clean path to comply with a turnover direction without exposure. That drafting is why the trustee supported the motion rather than resisting it.

The sole objection came from a former Sleep Number employee and Plan participant appearing pro se, owed roughly $107,000 in deferred compensation. The objection did not challenge the trust documents on their terms. It raised fairness and disclosure.

He could not reach his own deferred compensation before the filing because he had elected a five year post-employment distribution schedule. He stated that he would not have participated in the Executive Deferral Plan had he fully understood that the compensation would be inaccessible for years and exposed to the claims of Sleep Number’s creditors. He argued that transferring the trust funds to the estates for the benefit of creditors is “fundamentally inequitable,” and he asked the court either to deny the motion or to impose additional protections preserving participants’ contractual and legal rights.

The relative scale is worth noting. The trust funds represent approximately 2.5 percent of the approved sale price, and the objector’s claim represents approximately six tenths of one percent of the trust funds.

The court reached the result in three moves, each resting on settled authority.

Start with the breadth of the estate

The filing of a petition creates an estate comprised of all legal or equitable interests of the debtor in property, wherever located and by whomever held, under 11 U.S.C. § 541(a)(1). The scope of property under that section is broad, as the Supreme Court held in United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 (1983). Custody by a third party trustee does not remove property from the estate if the debtor holds the interest.

Establish that top hat assets belong to the employer

Because top hat plans are unfunded, distributions on account of those plans are paid using the employer’s general assets and are subject to claims of the employer’s creditors, per IT Group, 448 F.3d at 665. The court paired that with Lehman Brothers Inc. Deferred Compensation Defendants Steering Committee v. Giddens (In re Lehman Brothers Inc.), 617 B.R. 231, 240 (Bankr. S.D.N.Y. 2020), aff’d, 2021 WL 4127075 (2d Cir. Sept. 10, 2021), which states that because top hat plans are exempt from the funding requirements of title I of ERISA, the assets of a top hat plan are part of the general assets of the employer.

Confirm that the rabbi trust changed nothing

Creating the Deferred Compensation Trust did not alter the fact that the funds remaining in it belonged to Sleep Number. The court quoted its own prior explanation in In re WorldCom, Inc., 364 B.R. 538, 543 (Bankr. S.D.N.Y. 2007): the Internal Revenue Code requires that all trust assets be property of the employer and therefore subject to the claims of the employer’s creditors, and it is only the act of distribution that conveys assets held in a grantor trust from the grantor to the grantee. Sleep Number’s trust is a grantor trust of which Sleep Number is the grantor, so participants held only a limited interest until distribution, and distribution never occurred.

Notice what the analysis did not require. The decision reaches its result without any avoidance theory and without questioning the validity of the trust. The feature that made the deferral work for tax purposes, employer ownership of the trust assets, is the same feature that placed those assets in the estate.

The court did not dismiss the fairness argument. It agreed with the premise and rejected the remedy, which is the more instructive outcome.

The decision states sympathy for the objector and for other Sleep Number employees who expected to receive deferred compensation payments, then places that expectation alongside every other disappointed expectation in the case. Commercial landlords, vendors, and suppliers all expected full payment of amounts owed to them, and all of them will likely receive a fraction of what they are owed from the estates. Against that backdrop, the court held that it is unable to give preferential treatment to one set of unsecured creditors over another based solely on equitable principles.

The same reasoning answers the alternative request for additional protections for Plan participants. Protections that improve one group of general unsecured creditors relative to the rest operate as priority, and priority is a function of the Bankruptcy Code rather than of the relative sympathy a claim attracts.

The decision is careful to mark its own limits, and the limits are the only actionable part of it for participants.

The ruling has no effect on the objector’s right, or the right of any other Plan participant, to file a general unsecured claim in the cases. The deadline is September 10, 2026 under the order establishing deadlines and procedures for filing proofs of claim, entered at ECF Doc. # 473. The court noted that the case specific website maintained by the claims agent is informative as to the filing of proofs of claim, and directed the clerk’s office to mail a copy of the Memorandum Decision to the objector.

Recovery on those claims will depend on the ultimate distribution in the cases, which the decision does not address. What the decision fixes is the participants’ position in the priority scheme.

Nothing in this decision breaks new doctrinal ground. Its value is in how cleanly it lays out a sequence that recurs in every case where a top hat plan meets an insolvent employer, and in what the sequence tells you about where to spend your attention.

For debtors’ counsel, the turnover motion is a document exercise before it is a litigation exercise. The provisions that carried this motion were drafted in 2013: no ownership interest, parity with general unsecured creditors, availability on insolvency, a payment stop, and an express indemnity for the trustee delivering property at a court’s direction. Read the trust agreement first. If those provisions are present, the motion is largely written, and the trustee is likely to support it rather than oppose it.

For creditors’ committees, a rabbi trust is worth identifying early. The funds sit with a third party institution rather than in the debtors’ operating accounts, and recovering them here required an affirmative motion rather than a claim objection.

For participants and the counsel who advise them, the exposure is fixed at election rather than at insolvency. The objector elected a five year post-employment distribution schedule, which is why the funds were still in the trust at the petition date, and his objection states that he would not have participated had he fully understood that the compensation would be inaccessible for years and subject to creditors’ claims. That is a disclosure and advice question, and the decision indicates it is not one a bankruptcy court can resolve through the priority scheme.

On July 28, 2026, Judge Kyu Young Paek overruled the United States Trustee’s objection to Sleep Number’s Non-Insider Retention Plan and authorized $1.825 million in retention awards to 38 employees. The court overruled the objection on the record following oral argument and issued the written memorandum the same day. The decision is designated for publication.

The ruling came three days before the scheduled closing of a going-concern sale that produced a winning bid of $701,800,000. The prepetition secured lenders are owed approximately $672.5 million. The 38 employees promised awards for staying through that sale process are the ones the United States Trustee argued should not receive them.

Two things remain open. The sale was scheduled to close on or around July 31, 2026, subject to ongoing negotiations with landlords, vendors, and other contract counterparties. And the sale order carved out a separate dispute between the United States Trustee and the debtors over whether the buyer’s satisfaction of severance obligations owed to officers and directors is proper. That matter was set for hearing on August 3, 2026.

Sleep Number Corporation is a retail mattress company that assembles and sells adjustable smart beds directly to customers. It employs just under 3,000 people. The debtors filed Chapter 11 petitions in the Southern District of New York on June 12, 2026, and the cases are jointly administered before Judge Paek. Davis Polk & Wardwell LLP serves as debtors’ counsel.

The corporate hierarchy is central to the dispute. Authority runs through four levels, and the decision maps them precisely.

Every member of the Executive Leadership Team other than the CEO carried a second title of executive vice president or senior vice president. That is the structural fact that gives the case its shape. At Sleep Number, the vice president label sits at the very top of the company and also several rungs below it, which means the word by itself carries no information about where a given employee falls.

This is a sale case, and it was a sale case before it was a bankruptcy case. The memorandum decision does not catalog the operational causes of the filing. What it establishes instead is the posture: the debtors had been running a months-long marketing process to sell the company as a going concern, and they filed Chapter 11 to effectuate that sale.

The prepetition secured lenders, owed approximately $672.5 million, supported the process and agreed to fund up to $65 million in additional financing in bankruptcy. That backing set the schedule. Bidding procedures and a stalking horse asset purchase agreement with SNBR Inc. were approved on July 2, 2026, less than three weeks after the petition date. The stalking horse bid guaranteed the estates a floor of $415 million.

The auction on July 13 ran multiple rounds. SNBR emerged as the winning bidder at $701,800,000, exceeding the guaranteed floor by $286.8 million.

The decision does not describe the composition of the winning bid or how proceeds will be allocated. The figures below are benchmarks within the sale process, not a statement of creditor recoveries.

The Official Committee of Unsecured Creditors was appointed June 23, 2026. In its joinder supporting the retention plan, the Committee stated that completion of the sale to SNBR would be a resounding success to all constituents in the cases, including general unsecured creditors. The Committee’s position matters to the retention analysis because the fiduciary for the creditors whose recovery the awards would reduce supported the awards.

Senior leadership formulated the plan in May 2026, before the petition date, with the assistance of compensation advisors and attorneys. Award letters went out on or around May 26, 2026, roughly two and a half weeks before the filing. The awards vest on continued active employment through December 31, 2026, and accelerate on a change in control, which meant the participants stood to be paid on completion of the sale rather than at year end.

The 38 participants break into three groups by title, and the composition is what the United States Trustee attacked.

Nine participants have vice president in their titles. None of the nine is an officer for purposes of Section 16 of the Securities Exchange Act of 1934, and all Sleep Number vice presidents report to senior or executive vice presidents. Thirteen have director or senior director in their titles. None sits on the board, and all thirteen are junior in seniority to the nine vice presidents. The remaining sixteen provide various management and support functions. None of the 38 sits on the board, the Executive Leadership Team, or the Management Committee. None was appointed by the board. None is involved in setting corporate policy.

Authorization for the retention payments was included in the debtors’ first-day employee motion, which sought the ordinary relief of paying prepetition wages and maintaining benefits programs. The United States Trustee objected on July 14, 2026, and made two arguments in the alternative.

The procedural sequence is worth noting on its own. The debtors filed a reply brief and a supporting declaration on July 19. The court took live testimony on July 20 and allowed full cross-examination. Both parties filed supplemental submissions on July 27. Oral argument followed on July 28. A dispute over $1.825 million in a case with a $701.8 million sale received an evidentiary hearing, supplemental briefing, oral argument, and a published opinion.

Everything turns on this threshold. If the participants are insiders, the retention payments run into 11 U.S.C. § 503(c)(1), which conditions payment on a bona fide competing job offer at equal or greater compensation, a finding that the services are essential to the survival of the business, and a hard cap tied to a multiple of what nonmanagement employees received. A debtor’s ability to pay a retention bonus to an insider is severely restricted, as the court put it, quoting Global Home Products.

Section 101(31)(B) defines insider for a corporate debtor to include directors, officers, and persons in control. Neither director nor officer is defined in the Bankruptcy Code, and the case law fills the gap. A director is understood as an individual who sits on the board. An officer is a person elected or appointed by the board to manage daily operations. Title alone is insufficient to establish either.

The court reached the same answer under both tests. Under the objective criterion from LSC Communications, the participants are not insiders because the board did not appoint them. Under the functional approach, they are not insiders because they lack the authority to dictate corporate policy. The decision rests on both grounds rather than either alone.

The United States Trustee’s most interesting theory was that at least some participants are insiders because they report directly to insiders and perform work for them. The CFO testified that some participants provide direct support to Sleep Number officers, so the factual premise was conceded.

The court rejected the inference. Directors and officers do not work in isolation when making important decisions for a corporation, and it should come as no surprise that officers receive contribution from corporate subordinates.

The distinction the court drew is between authority and proximity to authority. Section 101(31)(B) reaches directors, officers, and persons in control. Supporting an insider does not place an employee in any of those three categories.

Clearing the insider hurdle does not end the inquiry. Section 503(c)(3) bars transfers outside the ordinary course of business that are not justified by the facts and circumstances of the case. Courts in the Southern District of New York treat that test as no different than the business judgment standard under section 363(b), following Endo International, Velo Holdings, and Borders Group. The operative framework is the six-factor test from Dana Corp. The court found the plan satisfies that test. Its written analysis addresses the first four factors expressly and treats the remaining two through the same record evidence regarding how the plan was formulated.

Factor one had direct evidentiary support. During testimony on July 20, the CFO disclosed that one of the participants had resigned that same day.

The United States Trustee’s last argument was practical rather than doctrinal. The sale would close within days. Most participants would likely be offered jobs with the buyer. Retention money paid at that point buys nothing, because there is nothing left to retain them for.

The court measured the plan against the moment it was adopted, not the moment the objection was heard. Success was far from certain in May 2026 when senior management formulated the plan. The purpose was to stabilize operations, prevent value erosion, and ease the transition to a purchaser, and all three objectives were live risks at the time the award letters went out. The court declined to treat the outcome of the sale process as evidence that the incentive had been unnecessary.

The court closed with an equitable point. Having received the benefit of the participants’ contribution to what the court called a remarkably successful sale process, it would be wholly inequitable to renege on the incentive offered to them for providing it.

Forty-six days separate the petition date from the memorandum decision. The retention dispute was fully briefed, tried, argued, and decided while the sale process ran to completion.

The doctrinal holdings here are not new. Titles do not create insider status, and the business judgment standard governs section 503(c)(3). What the decision supplies is a clean, published application of both propositions to a sale case, with a record detailed enough to serve as a template.

Build the record on structure, not adjectives

The declaration did not assert that the participants were unimportant. It asserted the opposite, that they were critical to the business, and then separately established that none was appointed by the board, none sat on any of the three governance bodies, none set corporate policy, and none was a Section 16 officer. Criticality supports the section 503(c)(3) case. Absence of appointment and authority defeats the insider case. Those are different showings and the declaration made both.

Explain your title conventions before someone else does

The reason the vice president and director titles did not sink the plan is that the record explained what those words mean at this company: that all vice presidents report to senior or executive vice presidents, that the directors are junior to the vice presidents, and that every executive who is genuinely senior carries an executive vice president or senior vice president title. The court relied on that testimony in concluding that the titles signified increased responsibility or supervisory role rather than insider status.

LSC Communications cuts both ways, and you should say so

The district court’s objective criterion is usually invoked against debtors, because board appointment ends the analysis for anyone who has it. Sleep Number ran it in the other direction. If board appointment is dispositive of insider status, the absence of board appointment resolves the question the other way under the same framework, and the functional analysis only comes into play as a second line of defense. Resolving the question under both frameworks, as the court did here, produces a result that does not depend on which line of authority controls.

Get an economic stakeholder to say it

The committee’s joinder did real work in the section 503(c)(3) analysis. The court noted that no party who could possibly be pecuniarily affected by the loss of $1.825 million from the estates had objected, and that the fiduciary for unsecured creditors had affirmatively supported the plan and opined that the payments were within the range expected under similar programs. The court treated the absence of objection from any pecuniarily affected party, together with the Committee’s affirmative support, as material to the cost analysis.

Adopt the plan early and be able to prove when

The timing argument failed because the plan was formulated in May, before the petition and before the outcome was knowable. The prepetition award letters allowed the court to measure business judgment against the uncertainty that existed when the plan was adopted rather than against the result it produced.

The retention question is resolved at the bankruptcy court level. The awards are payable on completion of the sale, and the sale was scheduled to close on or around July 31, 2026. The court noted that the actual payout will be less than $1.825 million because of the July 20 resignation.

The related fight is not resolved. The sale order carved out a dispute between the United States Trustee and the debtors over whether the buyer’s satisfaction of severance obligations owed to officers and directors is proper. That hearing was set for August 3, 2026. The decision addressed in this report concerns payments to employees the court found are not insiders. The carved-out dispute concerns severance obligations owed to officers and directors, and the memorandum decision does not reach it.

Alkegen filed prepackaged chapter 11 petitions in the Northern District of Texas on July 26, 2026, and it filed them with the deal already done. Solicitation launched six days before the petitions, on July 20. The restructuring support agreement carries holders of 99 percent of First Lien Claims, 80 percent of Second Lien Notes Claims, 95 percent of Preferred A Stock, and 99 percent of Senior Common Stock. The voting deadline is August 17, 2026, and the debtors are targeting entry of a confirmation order within 45 days of the petition date.

The transaction eliminates approximately $3.1 billion of funded debt obligations. A company that entered these cases carrying $3.325 billion of funded debt principal, and roughly $3.5 billion including accrued interest and make-whole amounts, would emerge with $400 million of term debt, approximately $200 million of liquidity, and the ability to put up to $150 million of new revolver capacity in place.

Trade creditors are unimpaired and are being paid in the ordinary course, which the declaration identifies as a condition the Ad Hoc Group required in exchange for its support of the RSA and the DIP Facility. General Unsecured Claims are reinstated or paid in full. Existing Alkegen Holdco Interests, defined as all outstanding Preferred A Stock, Preferred A-1 Stock, and Senior Common Stock, are canceled without distribution. The Sponsor holds the vast majority of the Senior Common Stock and Preferred A Stock, and it signed the RSA. The Preferred A-1 Stock is held entirely by third-party investors, and the declaration does not state their level of support.

The Dates That Matter

The RSA milestones compress the case into a window most operating chapter 11 filings would use just to get through a final DIP hearing. If any milestone slips, the RSA outside date of December 31, 2026 sits behind everything.

The declaration gives its own reasons for the compressed schedule: minimizing disruption to the business and limiting the accrual of administrative expenses. It separately identifies the September 30 PIK expiration as a source of increased pressure on liquidity. The two sit nine weeks apart.

Alkegen makes the materials that sit between heat and everything else. Its products are high-performance fibers engineered into blankets, felts, papers, boards, and mats used in blast furnaces, petrochemical refining, glass production, catalytic converters, and electric vehicle battery packs.

The company is the product of two long corporate histories. Unifrax was founded in 1942 by the scientist who invented ceramic fiber, commercialized a decade later as Fiberfrax. Lydall traces to 1869, when two families began manufacturing knitting needles in Manchester, Connecticut, and became a specialty filtration and advanced materials business listed on the New York Stock Exchange. Investment vehicles affiliated with Clearlake Capital Group acquired Unifrax in December 2018. Unifrax acquired Lydall in September 2021, and the combined operations were consolidated under the Alkegen banner.

Revenue concentrates in the industrial side of the portfolio. Industrial Solutions carried nearly two-thirds of 2025 revenue on insulation materials, high-efficiency filtration, and micro fine glass fibers. Mobility Solutions sells emission control mats used by virtually every automaker for catalytic converter support, along with battery fire protection for electric vehicles and stationary storage. Industrial Filtration makes felt-based media for industrial waste gases. SiFAB, a structured silicon anode material launched as a research project in 2017, has not yet reached commercialization.

Geographically, North America accounted for roughly 55 percent of 2025 sales, Europe 30 percent, and Asia 15 percent. The Asian exposure runs through a separate and consequential asset. Since 2014 Alkegen has held a stake in Luyang Energy-Savings Materials Co. Ltd., a Chinese producer of ceramic, soluble, and alumina fibers. In June 2022 a debtor subsidiary took a controlling interest of approximately 52.43 percent, later increased to 52.66 percent through share cancellation. Luyang is not a debtor, and its performance since 2022 sits at the center of the distress narrative.

The declaration attributes the filing to five drivers, and they compound rather than sit side by side. Start with rates. Elevated interest rates have held industrial capacity utilization below its long-run average since the pandemic, and Alkegen sells into steel, petrochemical, automotive, and construction end markets that move with that utilization. High rates also slowed the electric vehicle transition, and electric vehicles now represent 5.3 to 6 percent of new-vehicle sales, down from a peak of 10.6 percent in 2025.

Then add Chinese overcapacity. Persistent oversupply in Chinese manufacturing produced aggressive domestic price competition with spillover effects for producers everywhere else, costing Alkegen market share and compressing margins already pressured by inflation. The controlling stake in Luyang converted that macro exposure into a specific balance sheet problem.

The remaining three drivers are company-specific. Several growth initiatives that underpinned the 2024 refinancing either failed to reach commercialization or ramped more slowly than planned, which matters because those initiatives were part of the case creditors underwrote in 2024. Capital allocation compounded the problem: deferred plant maintenance created operating difficulties across facilities, a complex organizational structure reduced efficiency, and the leverage itself pushed management toward high-impact, hard-to-execute projects while the core business went under-invested. Inflation hit the supply chain on top of all of it.

Management responded on the operating side. A new chief executive officer and a chief transformation officer were appointed in October 2025, with Alvarez & Marsal supporting both roles. Project Horizon began in late 2025. In March 2026 the company collapsed nine business units into the two primary groups it reports today, streamlining hierarchy, centralizing operations management, and driving headcount reductions worth approximately $9 million of annual savings. The full slate of performance improvement initiatives is forecast to generate approximately $40 million of Adjusted EBITDA improvement by 2030.

Forty million dollars of run-rate EBITDA improvement by 2030 is real work. It is also not a solution to $320 million of annual debt service. The declaration says as much: the cost measures have generated and will continue to generate meaningful savings, and they are insufficient to support the existing capital structure.

Six funded debt instruments, five of them secured across three lien tiers, all of them dated or amended on the same day in September 2024. The uniformity of the maturity profile is not a coincidence. It is the signature of a comprehensive liability management transaction.

Note the PIK toggles. The First Lien Term Loans, First Lien Notes, and Second Lien Notes each allowed the company to elect partial payment in kind, and each of those elections expires on September 30, 2026. On that date, interest across those three instruments must be paid entirely in cash. The incremental annual cash burden is approximately $110 million, layered onto forecast 2026 debt service of approximately $320 million, itself up from $297 million in 2025.

The equity above that stack is closely held. Approximately 450,000 shares of Preferred A-1 Stock sit with third-party investors, while the vast majority of the approximately 96,000 shares of Senior Common Stock and 803,000 shares of Preferred A Stock are held by sponsor-affiliated investment vehicles. Roughly 300 shares of Class A Common Stock are held by family members of a former employee. None of it is exchange-listed.

Every fact in the capital structure table traces back to a single transaction. In 2023, facing a 2025 maturity on its then-existing first lien facility, Alkegen engaged Kirkland & Ellis and Centerview Partners. A marketing process that began in February 2024 and included both existing creditors and third-party financing sources closed on September 30, 2024 as a three-part transaction.

The revolver was uptiered to a superpriority position in exchange for a sixteen-month maturity extension. The existing first lien term loan was refinanced in cash through the new Senior Facilities. And holders of a majority of the existing secured and unsecured notes exchanged into the newly issued Second Lien Notes, consenting along the way to strip substantially all affirmative and negative covenants, eliminate events of default, release guarantees, and reprice the lien priority of the Third Lien Notes from first priority to third.

By the standard metrics of a liability management exercise, that is a well-executed deal. It cleared the near-term maturity wall, captured discount, brought in new money, and added a two-year PIK option that reduced near-term cash interest. It was approved by a special committee of the boards comprising a single disinterested director appointed on September 10, 2024, who resigned following the closing.

It also did not deleverage the company. That is the sentence the declaration returns to, and it is the sentence that explains the 2026 filing. The 2024 refinancing assumed a recovery in petrochemical, steel, aluminum, automotive, and general industrial demand beginning in 2025. That recovery did not arrive. The growth initiatives underwritten in the deal did not commercialize on schedule. And the PIK option that made the arithmetic work in 2025 and 2026 was always going to expire in September 2026 and hand back roughly $110 million of annual cash interest.

The waivers tell you when the bridge started failing. On May 18, 2026, first lien Required Lenders and Required Holders granted a limited waiver of the requirement to deliver an unqualified audit opinion and financial statements for fiscal year 2025 and the first quarter of 2026, along with any resulting default. The same day, certain Second Lien Noteholders signed a forbearance covering the same delivery failures. On June 30, both were extended to July 30, 2026. The petitions were filed on July 26, four days before that runway ended.

The most consequential thing the 2024 refinancing did for this case has nothing to do with pricing or maturities. It has to do with the two intercreditor agreements executed on September 30, 2024, which together shaped the DIP and narrowed the objections available to junior creditors.

The Senior Intercreditor Agreement

The Senior Intercreditor Agreement governs relative priority among the RCF Lenders, the First Lien Term Loan Lenders, and the First Lien Noteholders. The remedies waterfall runs first to non-principal revolver obligations, second to revolver principal, third to the First Lien Term Loans and First Lien Notes pro rata, and fourth into the Junior Intercreditor Agreement. Embedded in it is a provision that governs precisely this scenario: if any DIP financing is secured by liens pari passu with or senior to the liens securing the RCF Obligations, the RCF must either be rolled up into the DIP with senior priority or repaid in full in cash upon interim funding.

Look at the use of proceeds for the DIP Facility. First on the list is paying off the First Lien Revolving Loan Claims in full. That is not a business judgment the debtors exercised at the last minute. It is a contractual output of a document signed 22 months before the petition date.

The Junior Intercreditor Agreement

The Junior Intercreditor Agreement subordinates the Second Lien Notes to the Senior Facilities and the Third Lien Notes to the Second Lien Notes. It also contains the covenant that matters most here: if the Senior Secured Parties consent to, or do not object to, DIP financing, the Second Lien Noteholders and Third Lien Noteholders agree not to object to that financing and to subordinate their liens on the same basis.

Combine that with the priming structure and you get the defining feature of this case. Approximately $1.07 billion of Second Lien, Third Lien, and Unsecured Notes claims sits behind a first lien tranche taking substantially all of the reorganized equity, and the holders of that junior debt contractually gave up their ability to fight the financing that gets the case there.

This is the practical lesson for anyone underwriting or documenting a liability management transaction. The pricing grid and the maturity schedule get the attention in the term sheet. The intercreditor provisions govern what happens when the trade fails, and they do it without further negotiation.

The debtors entered these cases with approximately $35 million of unrestricted cash, which is not enough to run a business with 50 plants in 23 countries through even a 45-day case. The $630 million DIP Facility solves for that and for the exit at the same time.

There is a participation mechanic worth flagging. Any party that wants to become a DIP Lender must sign the RSA and irrevocably commit to subscribe for its pro rata share of the Equity Rights Offering. The DIP and the equity are a single package. You do not get to lend into the case without underwriting the reorganized equity, and no assignment of a DIP commitment relieves a lender of the rights offering obligation unless the transferee expressly assumes it.

The exit is sized to match. A $400 million senior secured first lien term facility funds on the effective date, comprising $85 million distributed pro rata to holders of Allowed First Lien Claims and $315 million refinancing the new-money DIP on a cashless, dollar-for-dollar basis. Five-year term, one percent annual amortization, no financial covenants, no junior lien tranche. The reorganized company may also seek a new revolving facility of up to $150 million.

The plan runs nine classes, and only two of them vote. Everything below the first lien is either unimpaired and presumed to accept, or wiped out and deemed to reject.

The Equity Stack

Class 3 receives 100 percent of the New Equity Interests, and then a series of dilution mechanics carve that number down. The Equity Rights Offering allows holders of Allowed First Lien Claims to purchase their pro rata share of 59 percent of the New Equity Interests for up to $335 million, with the final rights offering amount set equal to the outstanding principal and accrued interest on the Roll-Up DIP Claims as of the effective date. Backstop Parties receive an Equity Backstop Premium worth 3 percent of the New Equity Interests. A management incentive plan takes up to 10 percent on a fully diluted basis.

That third gauge is the one to sit with. Class 4 combines First Lien Deficiency Claims, Second Lien Notes Claims, Third Lien Notes Claims, and Unsecured Notes Claims, which means roughly $1.07 billion of junior funded debt principal before any deficiency claim is added. Its recovery is 1.0 percent of the New Equity Interests plus five-year warrants on 5 percent of the equity, struck at an implied total equity value of $2.046 billion, exercisable only on customary liquidity events, with customary anti-dilution protection and no Black-Scholes protection.

Price the warrants against the deal itself. The Equity Rights Offering asks holders of Allowed First Lien Claims to pay up to $335 million for 59 percent of the New Equity Interests, which implies a total equity value of roughly $568 million on those terms. The Class 4 warrants do not come into the money until total equity value reaches $2.046 billion. One caveat on that arithmetic: the final Rights Offering Amount is set by reference to the outstanding Roll-Up DIP Claims rather than to an independent valuation, and the declaration does not include a valuation analysis. The disclosure statement is where that question gets answered.

One timing detail deserves attention. The RSA was executed on July 19, 2026. An amendment dated July 24, five days later and two days before the petitions, added the Unsecured Funded Debt Equity Interests, the 1.0 percent equity slice, to Class 4 treatment. Under the original term sheet, Class 4 received warrants only. Class 4 is one of the two voting classes.

The governance record in this case was built deliberately, and it was built before the negotiations concluded rather than after.

On March 10, 2026, two experienced disinterested directors were appointed to the boards of Ulysses Parent and ASP Unifrax, and a 2026 Special Committee comprising those directors was established the same day. The committee received exclusive authority over Conflicts Matters, defined as any matter where a conflict exists or is reasonably likely to exist between the company and its Related Parties, plus authority to review any strategic transaction. On April 16, 2026, at the sole direction of the disinterested directors, Katten Muchin Rosenman was retained as independent counsel to assist with an Independent Investigation into the merits and potential value of any claims the company might hold relating to Conflicts Matters.

That investigation began in April 2026 and, per the declaration, remains ongoing as of the petition date. The committee anticipates concluding it during these chapter 11 cases. The committee ultimately recommended that the company enter into the RSA, incur the DIP financing, and file.

The release construct is opt-out. Releasing Parties include all holders of claims that vote to accept the plan, all holders deemed to accept who do not affirmatively check the opt-out box on the applicable notice of non-voting status, all holders who abstain and do not opt out on the ballot, and all holders deemed to reject who do not opt out. Released Parties include the debtors, the reorganized debtors, agents and trustees, the DIP parties, the RCF Lenders, the Exit Facility parties, the Consenting Creditors, and the Sponsor, in each case unless that party opts out or timely objects, whether formally on the docket or informally in writing. Exculpated Parties are limited to the debtors, the reorganized debtors, and their directors and officers.

One limit on what the record supports. The declaration describes the Independent Investigation only by reference to Conflicts Matters, defined by the relationship between the company and its Related Parties. It does not identify which transactions or claims are under review, and it does not connect the investigation to the 2024 refinancing. What the filing establishes is the scope of the delegation and the fact that the work is unfinished.

The Reorganized Board

Post-emergence governance is set out in the Governance Term Sheet. New Alkegen would be a private entity with a single class of common equity and a seven-member board, with the jurisdiction and form of entity left bracketed in the term sheet pending tax and regulatory input: one manager designated by each of three Consenting First Lien Creditors that hold at least 15 percent of the outstanding equity, three independent managers designated by holders of a majority of the equity, and the chief executive officer. Each designating equityholder is also entitled to a non-voting observer. Control of the reorganized company sits with the same creditor group that funded the 2024 refinancing.

The debtors filed thirteen first day motions. One of the more consequential asks for authority to pay all trade claims in the ordinary course rather than to run a limited critical vendor program.

The rationale is geographic. Approximately 40 percent of the debtors’ vendor base consists of foreign trade creditors who may disregard the automatic stay and pursue remedies in non-U.S. jurisdictions, and the company sources highly specialized inputs that are difficult or impossible to replace on a useful timeline. The declaration is direct about the second reason: leaving trade claims and other non-funded debt claims unaffected was required by the Ad Hoc Group as a condition of its support for the RSA and the DIP Facility.

That is worth understanding as a value calculation rather than a courtesy. The creditors receiving substantially all of the reorganized equity are the ones insisting that trade be paid in full, because they are buying a going concern with 50 plants across 23 countries and a supply chain that does not survive a two-week payment freeze.

The same logic drives a companion request to restate and enforce the worldwide automatic stay, the anti-discrimination provisions, and the ipso facto protections. With entities incorporated in 24 countries and foreign governmental units able to condition licenses and permits, a domestic order confirming the extraterritorial reach of the stay is a practical necessity rather than a formality.

The section 163(j) carryforward figure is the one to note. Approximately $1 billion of disallowed interest carryforwards is a direct artifact of the capital structure that produced this case, and preserving it is a meaningful component of the reorganized company’s value.

If the plan is confirmed as proposed, the outcomes sort cleanly by where a stakeholder sat in the September 2024 documents.

What to Watch

Three things will determine whether this case matches its schedule. The first is the Independent Investigation. It is open, it is being conducted by independent counsel at the direction of two disinterested directors, and the plan asks the court to approve releases covering the Sponsor. How and when that investigation resolves is the variable the milestones cannot control.

The second is Class 4. Approximately $1.07 billion of junior funded debt principal is voting on a plan that gives it 1.0 percent of the equity and warrants struck well above the value implied by the rights offering. Second Lien support runs at 80 percent, and the Junior Intercreditor Agreement forecloses a DIP objection, but it does not foreclose a confirmation objection on valuation or best interests grounds.

The third is regulatory. The effective date milestone contains an automatic 60-day extension available solely for outstanding regulatory approvals. The debtors have entities incorporated in 24 countries and hold a controlling stake in a Chinese listed company, and the declaration does not identify which approvals are outstanding or when they are expected.

None of this is final. The voting deadline has not passed, the disclosure statement has not been approved, objection deadlines remain open, and the plan may be amended. What the first day record establishes is the shape of the deal and the assumptions behind it, which is precisely what makes it worth reading closely at the front of a case rather than at the end.

FreshRealm, Inc. and four affiliated debtors filed a disclosure statement in the United States Bankruptcy Court for the District of New Jersey on July 27, 2026, seeking approval to solicit votes on a liquidating Chapter 11 plan. The operating business has been sold or wound down. What the plan governs is what remains: the distribution of settlement proceeds, the wind-down of five entities, and the pursuit of insurance claims on which no insurer has yet paid.

Two features of the filing deserve attention before anything else. The Official Committee of Unsecured Creditors does not support the plan. And the disclosure statement itself states that the plan “remains subject to further negotiation.” The debtors are soliciting votes on a plan they describe as unfinished, and the statutory fiduciary for the largest impaired class has not signed on.

The disclosure statement was filed on the same calendar day as the general claims bar date. The debtors are asking creditors to evaluate a plan whose principal variable, the size of the general unsecured claims pool, was still being established as the document went to the docket. The liquidation analysis required to test the plan against Section 1129(a)(7) is attached as Exhibit B and marked “to be filed.” No valuation analysis is included, and the debtors say they do not anticipate filing one, relying instead on a completed marketing process as the market’s own answer on value.

The court has scheduled the confirmation hearing for September 24, 2026, on the same day as the hearing to approve the adequacy of the disclosure statement on a final basis. That combined structure compresses the timeline, and it means the objection deadline of September 15, 2026 is the practical pressure point for anyone who wants to be heard on either the disclosure or the plan.

The Dates That Matter

FreshRealm was founded in 2013 and spun off as independent companies in 2021. It built what the disclosure statement describes as a shared services platform for fresh and better-for-you food: rather than each emerging food brand constructing its own single-use manufacturing and fulfillment infrastructure, FreshRealm built the plant and spread the fixed cost across multiple customers and channels. The business ran direct-to-consumer, grocery, performance, and lifestyle and medically focused programs through the same physical footprint.

FreshRealm, Inc. is the main operating entity and the direct sole shareholder of the other debtors other than FreshRealm Holdings, Inc., which is the parent entity. The debtor group is compact: five entities, one operating company, and a single parent. The disclosure statement also refers to non-Debtor affiliates, which it does not describe.

The platform grew by acquisition. In June 2023 the debtors acquired Blue Apron’s production and fulfillment operations, including the Linden leasehold, equipment, transferred contracts, and intellectual property, and signed a ten-year production and fulfillment agreement making them the exclusive supplier of Blue Apron’s meal kits. Blue Apron itself was acquired by Wonder Group, Inc. three months later. In January 2024 the debtors acquired the United States operational assets of Marley Spoon and folded its supply chain into the same network, taking on fulfillment for the bistroMD, Martha & Marley Spoon, and Dinnerly brands.

Beyond Linden, the disclosure statement identifies operating facilities mainly in Lancaster, Texas and Tracy, California. It also references a facility in Montezuma, Georgia and plants in San Clemente, California and Indianapolis, Indiana that were closed at the end of January 2026. On January 9, 2026, the debtors announced a joint venture with UFC for a sports-affiliated meal plan offering nearly 200 meals on a rotating weekly menu. That announcement came in the same month Walmart informed the debtors it would end the customer relationship.

The shared services model that made FreshRealm efficient also made it fragile. Two customers accounted for roughly 90 percent of revenue. Blue Apron sales alone represented approximately 70 percent of the total, and Walmart, a growing account, comprised more than 20 percent. A platform built to spread fixed cost across many customers was in practice supported by two.

Beginning in late March 2025, the debtors experienced five separate withdrawal, voluntary recall, or recall incidents associated with Listeria monocytogenes. The disclosure statement attributes all five to the debtors’ receipt of contaminated material from suppliers. That attribution did not preserve either customer relationship.

The recalls did their damage through liquidity rather than through any single catastrophic loss. Production and fulfillment were disrupted, customers attrited, and cash drained. The debtors responded with a transformation plan built on SG&A reductions, facility consolidation, plant closures, and material optimization. In July 2025 they exercised a remaining option to sell $10 million of Series B preferred shares, funded the following month. In October 2025 they reached a recapitalization agreement with their lenders and raised $110 million in additional capital, conditioned on right-sizing the cost structure to the then-existing revenue base.

The turnaround was still being implemented when Walmart left. That is the sequence that undid the recapitalization. The debtors had borrowed $110 million against a revenue base sized in October 2025, and more than 20 percent of that base was gone by January 2026. By the debtors’ own account the business was materially improved by early 2026 and forecast to reach positive cash flow in the third quarter of that year. It never got there. Through January and February 2026 the debtors met with at least fifteen working capital lenders and multiple parties interested in monetizing the insurance claims. None of those efforts succeeded.

The debtors entered Chapter 11 with approximately $168 million of outstanding secured funded debt across two facilities, both executed within the fourteen months preceding the filing. The disclosure statement identifies no unsecured funded debt. Both facilities date to 2025, and the second lien position, signed in October of that year with the recalls already underway, is the larger of the two.

The first lien facility was signed on March 11, 2025, eight days before the USDA began sampling at Indianapolis. It provided a $75 million commitment consisting of a $45 million initial term loan funded at closing and up to $30 million of delayed draw capacity, with approximately $51 million outstanding at the petition date. The second lien facility followed on October 16, 2025, as part of the recapitalization, at up to $50 million fully drawn by the petition date, and was then upsized on December 4, 2025 by an incremental delayed draw of up to $70 million, of which $60 million was drawn.

The Amended and Restated Intercreditor Agreement dated December 4, 2025 created a collateral silo that shapes the entire distribution question in this case. The second lien lender holds a first priority lien on 2L Priority Collateral, defined as all accounts, rights to payment, receivables, inventory, and the proceeds and products of the foregoing, with the first lien lender taking a second position on that same collateral. On everything else, the priorities run the conventional way.

The defining controversy in this case is a contract fight, and the way it was resolved is the reason there is any distributable value at all.

The production and fulfillment agreement made the debtors the exclusive supplier of Blue Apron’s meal kits for an initial ten-year term beginning in June 2023. Starting in April 2025, Blue Apron asserted that the debtors had breached obligations under that agreement based on food quality and safety failures associated with the recalls, identifying alleged material breaches in a letter dated April 9, 2025. In December 2025 Blue Apron sent a notice of termination and moved to replace the debtors as its exclusive provider.

The debtors’ response led with procedure. They contended that the termination notice failed to comply with the agreement’s notice and cure requirements for the newly alleged breaches. They argued the conduct did not constitute a material breach, that they had cured the previously identified breaches, and that Blue Apron had failed to strictly comply with the notice provisions. The parties then entered a series of tolling agreements to preserve all rights, claims, and defenses, including the validity of the termination notice itself, with the most recent tolling period set to expire on May 4, 2026.

The petition was filed on April 27, 2026, one week before that tolling period lapsed.

The tolling arrangement did not neutralize the commercial damage. The disclosure statement is direct about this: the ongoing dispute negatively affected financial support to and investment in the debtors’ business. A counterparty asserting termination of an agreement representing 70 percent of revenue is a fact that any prospective working capital lender will price, and the debtors’ failure to raise capital from fifteen lenders through January and February 2026 followed accordingly.

What Was Actually at Stake

Both sides held exposure. If the termination notice was invalid, Blue Apron faced a claim on a supply agreement with roughly seven years remaining. If it was valid, the debtors lost their largest customer with no compensation. The parties engaged in settlement discussions while the tolling agreements preserved all rights, claims, and defenses, and the resulting settlement resolved the dispute without adjudicating it.

The settlement did three things at once. It resolved the termination dispute, it transitioned Blue Apron’s fulfillment to a new provider, and it funded the estate. The debtors filed the motion to approve it on the petition date, the court entered the order on June 2, 2026, and the transaction closed on June 4, 2026, thirty-eight days into the case.

The $47 million of cash consideration is not paid in a single tranche. A portion is paid on the effective date and a portion in installments over a subsequent fifteen-month period. The plan accounts for this directly: to the extent DIP claims, first lien claims, or second lien claims are satisfied in whole or in part from the Blue Apron Deferred Payments, those claims are funded by Blue Apron or Wonder Group, Inc. or an affiliate rather than by the estate. Secured creditors are taking installment payment risk on a non-debtor obligor, and the plan says so.

Beyond the cash, the transaction delivered value in forms that do not appear on a distribution waterfall. The debtors received net zero payment terms and an immediate payment of approximately $5.1 million in contractual end of life payments. Blue Apron agreed to address substantial remediation costs at the end of the lease term for the Linden facility, which removes what would otherwise be a significant unliquidated claim against the estate. And Blue Apron waived administrative claims that would have competed with every other administrative creditor for the same limited cash.

Note what the asset purchase agreement conveyed. The inventory and working capital sold to Misfits Market fall within the 2L Priority Collateral. The equipment does not. The transaction that generated the estate’s cash therefore also monetized part of the collateral pool on which the second lien lender holds first priority. The plan distributes to the DIP, first lien, and second lien claims through a single Distributable Waterfall rather than through separate collateral-by-collateral distributions.

The prepetition lenders funded the case. Before the filing, the DIP lenders advanced $3 million in protective advances as bridge financing. The final DIP order entered June 2, 2026 authorized a senior secured, superpriority multiple draw term loan facility of $18 million in new money loans, inclusive of the $3 million prepetition protective advance, plus a roll-up of $38 million of prepetition term loans. Read against the definition elsewhere in the disclosure statement describing a $15 million post-petition new money facility, the arithmetic reconciles: $15 million of genuinely new post-petition money on top of the $3 million already advanced.

The DIP facility carried case milestones designed to prevent a prolonged stay, and it functioned as intended. It funded the Blue Apron and Misfits closing, covered operations and administrative expense during the case, and funds the wind-down under an agreed budget. The debtors describe it as the product of arm’s-length negotiation, and the roll-up converted $38 million of prepetition term loans into superpriority DIP claims.

The Second Sale Process

Running in parallel with the Blue Apron settlement, the debtors marketed everything the settlement did not cover: inventory, accounts receivable, contracts, leases, intellectual property, and other residual assets. Rothschild & Co., engaged February 21, 2026, identified numerous strategic and financial parties as potential bidders. The disclosure statement characterizes the process as extensive and far reaching.

No person or entity submitted a qualifying bid by the June 10, 2026 deadline. The debtors filed a notice of cancellation of auction on June 11, 2026 and pivoted to liquidation sales, de minimis asset procedures, and ordinary course dispositions.

That outcome is doing real work in the plan. Because no bid emerged, the debtors argue the marketing process was itself the best available method of valuing the enterprise, and on that basis they decline to file a valuation analysis, citing orders in In re LBI Media, Inc. and In re Gastar Exploration Inc. for the proposition that Section 1125(b) permits approval of a disclosure statement without a valuation or appraisal. The absence of a qualifying bid is the evidentiary basis on which the debtors ask the court to approve the disclosure statement without a valuation.

The plan splits the estate in two. Wind-Down Debtors, run by a Plan Administrator serving as sole director and officer of each entity, hold the Plan Administration Assets and pay administrative, priority, secured, and lender claims. A Liquidating Trust, run by a Liquidating Trustee, holds the Liquidating Trust Assets for the benefit of holders of allowed general unsecured claims. The two vehicles have separate fiduciary obligations and separate retained causes of action, and the plan requires consultation between them at defined points.

Classes 4, 5, and 6 are the voting classes. Acceptance requires two-thirds in amount and a majority in number of claims actually voted in each class. Classes 9 and 10 are cancelled with no distribution. The debtors reserve the right to seek confirmation under Section 1129(b) over any rejecting impaired class, and Section 1129(a)(10) is satisfied by acceptance from any one of the three voting classes.

Treatment and the Distributable Waterfall

DIP claims, first lien claims, and second lien claims all receive distributions through the Distributable Waterfall. For Classes 4 and 5 the plan caps recovery at 100 percent of the allowed claim. DIP claims carry senior secured superpriority status under the final DIP order and are paid until indefeasibly paid in full, subject at all times to the waterfall. Holders of DIP claims also receive cash sufficient to pay the reasonable and documented fees of the lender professionals, with those payments made directly to the professionals rather than to the DIP holders. General unsecured creditors receive a pro rata share of Liquidating Trust Interests, which the plan expressly provides are not securities and are non-transferable except as required by law.

The treatment table in the disclosure statement describes what each class receives but states no estimated recovery percentage, for the first lien, the second lien, or general unsecured creditors. The identified funding sources are the settlement proceeds, proceeds of sales or liquidations of remaining assets, cash on hand, wind-down proceeds, and Liquidating Trust Assets. Set against approximately $168 million of prepetition funded debt plus $15 million of new post-petition money, the arithmetic that would produce a recovery estimate for any class is not presented.

One treatment provision deserves separate mention because it converts an insurance mechanic into a claim. Where a claim is covered by a policy carrying a self-insured retention or deductible, the plan allows the portion of the claim within the retention or deductible as a general unsecured claim against the applicable estate, and deems the retention satisfied through that allowance. Nothing obligates the Liquidating Trust to fund the retention in cash. For listeria-related personal injury or product claimants, that provision determines whether they reach the insurance at all.

The most consequential unresolved asset in this case is the insurance recovery, and the plan does not resolve it. The disclosure statement says so plainly: the plan does not resolve the insurance coverage matters with respect to the listeria-related claims, and the debtors are actively working with their insurers.

The product recall limits are stated as $20 million in the aggregate for each of the two periods, subject to various self-insured retentions and sub-limits. The insurers have reserved rights, identified potential defenses and limitations, and made no payments. The general liability insurer denied coverage outright based on a biological agents exclusion, and the debtors continue to pursue their rights under those policies.

The debtors dispute the denial and state that they continue to pursue their rights under the general liability policies. The plan neither resolves the coverage disputes nor waives any position in them.

The mechanics reflect that. The plan states that nothing in it or the confirmation order affects, impairs, or diminishes the Business Interruption Insurance Claims or any rights to them. Insurance policies are assumed rather than rejected and assigned to the Wind-Down Debtors. Directors and officers coverage continues for anyone who served in that capacity before the effective date, and the Wind-Down Debtors retain the ability to purchase tail coverage. To the extent D&O claims are designated as retained causes of action, the plan permits the Plan Administrator to prosecute them to judgment or settlement, with recovery expressly limited to proceeds actually received under available insurance.

The plan proposes debtor releases under Section 1123(b), consensual third-party releases with an opt-out mechanic, exculpation, and a supporting injunction. Because this is a liquidating plan, Section 1141(d)(3) means there is no discharge, and the release architecture carries correspondingly more of the load.

The Releasing Parties include the debtors, the Committee and its members, the DIP secured parties, the first and second lien secured parties, all holders of claims, all holders of interests, and their affiliates and related parties to the extent the releasing entity can bind them. Holders of claims or interests who opt out, or who timely object and whose objection is not resolved before entry of the confirmation order, are excluded. The plan then makes the mechanic symmetrical: an entity that opts out or objects is also not a Released Party. Opting out of giving a release costs you the benefit of receiving one.

The carve-outs are conventional. The releases do not cover post-effective date obligations under the plan, causes of action specifically retained on the Schedule of Retained Causes of Action to be filed with the plan supplement, or conduct determined by final order to have constituted actual fraud, gross negligence, or willful misconduct. The debtors state the releases meet the standard promulgated by the Third Circuit and commit to presenting evidence at confirmation.

Two features are worth flagging. First, the Exculpated Parties are limited to the debtors, the independent directors, the Committee and its members, and their respective professionals who served between the petition date and the effective date, a narrower perimeter than the Released Party definition. Second, the plan bars any person from commencing a claim against a Released or Exculpated Party relating to released conduct without the court first determining, after notice and a hearing, that the claim is colorable and specifically authorizing it. That gatekeeping provision is an enforcement mechanism that will draw attention independent of the releases themselves.

The Best Interests Argument

With no liquidation analysis on file, the debtors advance the Section 1129(a)(7) case qualitatively. Conversion to Chapter 7 would add trustee and professional expense under Sections 326(a) and 503(b)(2), reducing recoveries. It would require a new bar date under Bankruptcy Rules 1019(2) and 3002(c), potentially increasing the pool of allowed claims and diluting pro rata distributions. A Chapter 7 trustee would lack the technical expertise and knowledge of the business that the debtors possess. And the delay while a trustee came up to speed could cause bids already obtained to be lost.

That last argument should be weighed against the record. The auction was cancelled on June 11, 2026 because no qualifying bid was received, and the dispositions the disclosure statement describes are liquidation sales, de minimis asset sales, and ordinary course sales. The feasibility argument under Section 1129(a)(11) is more straightforward: the plan liquidates and distributes, no further reorganization is contemplated, and the obligations the plan creates are the obligations it can satisfy.

What follows is an assessment of position, not a prediction of outcome. No recovery percentages have been disclosed, the liquidation analysis has not been filed, and the plan may be amended before the September 24, 2026 hearing.

The open question is whether the Committee’s opposition resolves into a negotiated general unsecured recovery or into a contested confirmation. The Committee’s leverage does not come from the waterfall. It comes from the release architecture, the retained causes of action that have not yet been scheduled, the liquidation analysis that has not been filed, and the unresolved insurance claims. The objection deadline falls nine days before the confirmation hearing.

On July 17, 2026, a panel of the United States Court of Appeals for the Third Circuit affirmed the District of Delaware's order upholding the Bankruptcy Court's denial of two Direct Abuse Claimants' motions to rescind their elections of the $3,500 Expedited Distribution in the Boy Scouts of America and Delaware BSA, LLC Chapter 11 cases. The opinion, issued by a three-judge panel, was filed in the appeals docketed at Nos. 25-1826 and 25-1900 and entered on the bankruptcy court docket at Case No. 20-10343 (LSS), Doc 13536, on July 20, 2026.

Two features of the opinion define its reach. The first is that it is a non-precedential disposition, which under the court's internal operating procedures is not an opinion of the full court and does not constitute binding precedent. The second is that the panel affirmed on two connected grounds. The Plan's language does not permit rescission, and because the Plan incorporates the TDP election process, a request to undo an election is a request to modify the Plan, which creditors have no power to make.

The case was submitted under Third Circuit L.A.R. 34.1(a) on May 12, 2026, without oral argument.

The Plan channeled all abuse claims against the debtors to a Settlement Trust for liquidation and payment, and it incorporated Trust Distribution Procedures giving Direct Abuse Claimants three options for liquidation and payment of their claims. The Expedited Distribution was one of those three. The other two are not identified by name in the opinion, which describes them only as paths that might lead to a greater recovery.

The mechanism for choosing among them is the fact that drives the entire dispute. The same instrument that a claimant used to vote for or against confirmation of the Plan was the instrument used to make the remedy election. A claimant elected the Expedited Distribution by checking a box on the ballot. Claimants were instructed to read the instructions carefully before completing the ballot, and by signing it they acknowledged receiving the Disclosure Statement and the Plan and stated that they understood, and if accepting the Plan agreed with, the treatment provided for their claims.

Over 7,300 Direct Abuse Claimants checked the box. After the Plan took effect, 273 of them moved to rescind that election and to participate in the other options, contending they had checked the box by mistake. Both appellants stated that they did not intend to elect the Expedited Distribution and did not discuss the option with their counsel, and their counsel stated that they did not realize their clients' mistakes until they accessed a portal showing the elections, roughly ten weeks before the revocation motions were filed.

The Bankruptcy Court denied the 273 requests together. Two of those claimants carried the question to the District Court and then to the Third Circuit in the appeals resolved by this opinion.

The rescission dispute has now been decided the same way at three levels, over a period that runs from the plan confirmation ruling in 2022 to this month's affirmance.

The panel applied the standard framework for a bankruptcy appeal that reaches the court of appeals through the district court. It stood in the shoes of the District Court and applied the same standard of review, examining legal determinations de novo, factual findings for clear error, and discretionary decisions for abuse of discretion, citing In re Somerset Regional Water Resources, LLC, 949 F.3d 837, 844 (3d Cir. 2020).

The panel began where the Third Circuit begins with confirmed plans, applying contract principles under In re Shenango Group Inc., 501 F.3d 338, 344 (3d Cir. 2007). Delaware law supplied the interpretive rules because the parties selected it for interpreting the plan. Under Lorillard Tobacco Co. v. American Legacy Foundation, 903 A.2d 728, 739 (Del. 2006), clear and unequivocal contract language binds a party to its plain meaning, and under Samuel J. Heyman 1981 Continuing Trust v. Ashland LLC, 284 A.3d 714, 721 (Del. 2022), ambiguity exists only where the provisions in controversy are reasonably or fairly susceptible of different interpretations.

Applied to this record, the analysis was short. The TDP entitles claimants who elect the Expedited Distribution on their ballots to a one-time payment of $3,500. The ballot notified claimants that checking the box was the act of electing. The TDP states that claimants who elect are not eligible to receive any further distribution through either of the other two options. Neither the Plan, the TDP, nor the ballot provides a mechanism to rescind the election once made.

The claimants advanced a textual argument worth noting because it is the kind of argument that will surface again in other trust distribution regimes. They contended that checking the box did not complete the election, because the TDP requires a claimant to satisfy other criteria, including signing a release, before receiving payment. On that reading, the election is a multi-step process that is not final until the last step is taken, and a claimant who has not signed a release has not yet elected anything.

The panel rejected the argument in a footnote, and the basis was the preposition. Nothing in the TDP indicates that those criteria must be satisfied for a claimant to make an election. The TDP states that a claimant must satisfy the criteria to receive payment. Conditions on disbursement are not conditions on choice.

The fallback position was that if the Plan is silent or ambiguous about revocability, the Bankruptcy Court could supply an implied procedure for revoking an initial remedy election. Delaware law does allow courts to fill gaps in the express provisions of an agreement by cautiously supplying implied terms, but only where the contract is silent on the subject and the parties failed to foresee the need for a term or determined that such a need was unlikely, citing In re El Paso Pipeline Partners, L.P. Derivative Litigation, 2014 WL 2768782, at *16-18 (Del. Ch. June 12, 2014), and Reklam v. Bellator Sport Worldwide LLC, 2017 WL 5172397, at *5 (D. Del. Nov. 8, 2017).

The panel took this up in the alternative, framing the question as whether the Bankruptcy Court acted reasonably in declining to conclude that the Plan impliedly supplied a revocation procedure. Two record facts closed the door. The parties considered whether to provide for the opportunity to rescind an Expedited Distribution election at a hearing before the Plan was confirmed, and chose not to. And it was reasonable to conclude that the Plan was not truly silent, because it did not use conditional terms but instead gave claimants a choice without providing a means to change that choice once made.

The panel framed the consequence through Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004), which holds that gap filling is not warranted where it grants parties contractual protections that they failed to secure for themselves at the bargaining table. A term that was raised and abandoned in negotiation is not a gap. It is a decision.

The interpretive holding answers what the Plan permits. The next part of the opinion answers who may ask to change it. A confirmed plan binds all parties in interest under Section 1141(a), and it may be modified only by the plan's proponents or the reorganized debtor under Section 1127(b). The panel cited In re Rickel & Associates, Inc., 260 B.R. 673, 677 (Bankr. S.D.N.Y. 2001), for the proposition that Section 1127(b) is the only route to modifying a confirmed plan, and In re Port Liberte Partners, 1995 WL 11186, at *5 (D.N.J. Jan. 5, 1995), aff'd sub nom. In re Port Liberte, 77 F.3d 463 (3d Cir. 1996), for the conclusion that creditors are precluded by the Code from requesting modification.

Because the Plan incorporates the TDP process for elections of remedies, a request to revoke a selection that is irrevocable under the Plan is a request to modify the Plan. The supporting authorities are older and newer versions of the same idea. In Matter of Allied Supermarkets, 21 B.R. 45, 48 (Bankr. E.D. Mich. 1982), a creditor's attempt to file a tardy ballot and revoke an earlier election was treated as an attempt to modify the plan. In In re SC SJ Holdings, LLC, 2023 WL 2598842, at *5 (D. Del. Mar. 22, 2023), aff'd, 2024 WL 1328233 (3d Cir. Mar. 28, 2024), cert. denied, 145 S. Ct. 277 (2024), a change contrary to the express provisions of a plan was an impermissible modification even though the change was minor.

Both of the usual escape hatches were addressed and both were closed in the same footnote. Section 105 generally affords bankruptcy courts broad discretion to grant relief, but a bankruptcy court cannot exercise that discretion in a way that violates Section 1127. The panel quoted Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988), for the principle that whatever equitable powers remain in the bankruptcy courts can only be exercised within the confines of the Bankruptcy Code.

Rule 60(b)(1) fared no better. The rule permits relief from an order on the basis of mistake, and mistake is precisely what the claimants asserted. But a rule of procedure cannot negate the substantive impact of a restriction contained in the Bankruptcy Code, citing In re Fesq, 153 F.3d 113, 117 (3d Cir. 1998). The claimants' theory of the case was that they made an error. The panel's answer was that the existence of an error does not create a power in the bankruptcy court that the Code withholds.

The practical lesson sits in the drafting, not the appeal. If you are building trust distribution procedures that ask claimants to choose among liquidation options with materially different economics, this opinion tells you what the reviewing courts will do with the choices you did not write down.

Start with the instrument. A ballot that serves as both the confirmation vote and the remedy election compresses two decisions with different stakes into a single document, completed once. The opinion records that instructions were provided and that signature carried an acknowledgment of receipt and understanding. That was enough. If a plan proponent wants a different result for claimants who select in error, the mechanism has to be in the plan, the TDP, or the ballot, because the courts here found no basis to supply one.

Then consider the negotiation record. The most consequential factual finding in the gap-filling analysis is that the parties took up revocability at a pre-confirmation hearing and left it out. In Delaware contract analysis, that history supports treating the omission as deliberate rather than as a gap. If your negotiation touches a term and does not adopt it, assume that the record of having touched it will be used against a later argument that the parties never contemplated the issue.

Finally, note where the analysis lands for a claimant who checks the wrong box. Section 1127(b) means that the creditor cannot ask for a fix. Section 105 means the court cannot supply one that conflicts with Section 1127. Rule 60(b)(1) means the label of mistake does not change either answer. The remaining paths, if any exist, run somewhere other than a motion to modify the operation of the plan.

The opinion is marked not precedential and states that it is not an opinion of the full court and does not constitute binding precedent under I.O.P. 5.7. Its persuasive weight is what a practitioner makes of the reasoning, not its authority.

The published decisions underneath it are a different matter. The District Court's affirmance is reported at 772 F. Supp. 3d 496 (D. Del. 2025) and sets out the four grounds the panel cited by page. The Bankruptcy Court's opinion is available at 2024 WL 459571. For a practitioner researching irrevocability of remedy elections in a confirmed plan, those are the citable sources, and the Third Circuit's disposition confirms that the analysis survived appellate review.

It is also worth being precise about what the panel did not reach. The opinion addresses the two appellants before it and the arguments they raised. It does not describe the other two TDP options in detail, does not address remedies claimants might pursue outside the plan modification framework, and does not disturb the Confirmation Order, which was separately reviewed in In re Boy Scouts of America, 137 F.4th 126 (3d Cir. 2025).

Authorities Cited in the Opinion

On July 19, 2026, Alea Holdings US Company, FIN Alea LLC, and Alea Group Holdings (Bermuda) Ltd. filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Southern District of Texas, Houston Division, and requested joint administration under Case No. 26-90714 (CML). The declaration of the Chief Restructuring Officer, filed the same day as Docket No. 11 in support of the petitions and first day pleadings, sets out the record on which the Debtors ask the Court to move quickly.

The stated purpose of the case is narrow. Under a restructuring support agreement dated June 8, 2026, the Debtors launched a tender offer for trust preferred securities issued in 2004. No holder opposed it. Holders of the remaining securities, approximately 40 percent by the declaration's own participation figure, did not respond, and the offer carried a 100 percent participation condition. The declaration states that the Debtors filed these cases to implement the restructuring support agreement's transactions through plan confirmation, which supplies a mechanism to bind holders that a consent solicitation cannot reach.

Three features separate this case from a conventional operating company Chapter 11. The Debtors are holding companies with no revenue and, according to the declaration, no access to cash other than the Prepetition Facility Lender's cash collateral. All operating value sits at non-Debtor insurance subsidiaries regulated in Connecticut, New York, and California, and the Debtors seek a comfort order confirming that those subsidiaries are neither debtors in nor affected by the cases. And the prepetition secured lender, the proposed postpetition lender, and a holder of a portion of the securities being restructured are the same affiliate of the Debtors' ultimate parent.

The declaration traces the Alea franchise to KKR's 1997 purchase of Swiss reinsurer Rhine Re. Catastrophic hurricane losses in 2004 and 2005 triggered rating downgrades that forced the entire group into solvent run-off in late 2005. Fortress Investment Group bought the distressed parent in 2007 and maintained Alea Holdings US Company primarily as a runoff vehicle. Catalina Holdings (Bermuda) Ltd. completed its purchase of the entire Alea group from Fortress in 2014, at which point the company resumed acquiring, adding SPARTA Insurance Group and National American Insurance Company of California that year.

What the holding companies do today is oversight rather than underwriting. The declaration describes their function as holding and supervising the insurance subsidiaries as those subsidiaries establish reserves, negotiate settlements, pay outstanding claims, and manage regulatory and capital requirements across a run-off book that includes asbestos, hazardous waste, talc, PFAS, workers' compensation, and sexual-abuse claims.

The perimeter matters more here than in most cases. The declaration asks the Court to confirm that the insurance subsidiaries are separate legal entities regulated in their domiciliary jurisdictions, that commencement of the cases does not place them or their assets under the supervision or control of the Bankruptcy Court, and that their assets are not property of the estates other than the Debtors' equity interests in them. The estates hold equity and intercompany paper. The claims-paying operations sit outside.

The funded debt has two layers, and they were put in place under different owners for different reasons. The debentures date to 2004, when Alea Holdings US Company was still held by Rhine Re and the trust preferred structure delivered favorable tax treatment and other financing benefits under the framework then in effect. The revolving facility dates to 2023 and exists for one reason: to fund a subsidiary's unanticipated claim payments and litigation.

The asymmetry drives the case. Holders of the older instrument have no covenant package, no acceleration right, and no ability to put the securities back before 2034 and 2035. The affiliate lender holds a first lien on everything the Debtors own, including the stock of the three insurance subsidiaries and the proceeds of their sale. That distribution of leverage explains both the shape of the settlement and the speed at which the Debtors propose to confirm it.

The Prepetition Facility was established on July 25, 2023 with a $100 million commitment, amended and restated on June 20, 2024 to increase the commitment to $150 million, and amended again on June 30, 2026 to increase capacity to $160 million. The declaration characterizes the final increase as a loan to bridge the Debtors from expiration of the tender offer to the bankruptcy cases. As of the Petition Date the facility was drawn to $159,850,000, leaving $150,000 of the commitment unused.

Table as presented in the declaration. One row does not reconcile: the December 31, 2025 outstanding balance of $137,500,000 exceeds cumulative draws by $150,000, and adding the stated fees and accrued interest to it produces $190,432,761 rather than the $190,282,761 shown. Substituting $137,350,000 reconciles both the draw column and the total column, and every other row ties.

The composition of that balance is as instructive as its size. Commitment fees and accrued interest were capitalized as notes payable, and the declaration reports $19.3 million of interest expense for 2024 alone added to principal. By the Petition Date, fees and accrued interest of $71,185,190 accounted for roughly 31 percent of the aggregate amount outstanding.

The declaration is candid that the history is convoluted, and the sequence is worth following because every borrowing under the Prepetition Facility traces back to it. In 2007, before Alea Holdings acquired it, SPARTA purchased American Employers Insurance Company in what the declaration describes as a clean shell transaction, meaning an insurer no longer writing policies and carrying no remaining insurance liabilities but holding licenses in multiple jurisdictions. Those legacy liabilities had already been transferred to that company's direct parent, Pennsylvania General Insurance Company, later renamed Pennsylvania Insurance Company and now indirectly owned by Applied Underwriters, Inc.

The arrangement held until it did not. Bedivere Insurance Company had assumed the handling and payment of the legacy claims, and on May 1, 2020 SPARTA was notified that Bedivere had been placed into liquidation in Pennsylvania. The Pennsylvania liquidator disclaimed continued responsibility for those claims. That left a book of pre-2007 policies with claims still being tendered and no one contractually accepting them, and SPARTA began paying under a full reservation of rights while it litigated.

From inception to date, SPARTA has made approximately $114.3 million in claim handling and loss payments. One settlement within that figure is called out in the declaration. The Roman Catholic Church of the Archdiocese of New Orleans filed for Chapter 11 on May 1, 2020, and during that case the debtor and its tort claimants' committee asserted that SPARTA was obligated to satisfy claims arising under the legacy policies, with a liability demand at one point exceeding $360 million. SPARTA disputed any coverage obligation and settled for $21 million in exchange for a complete buyback and release of the policy.

The settlement in principle with the counterparty is favorable but constrained in a way that matters to creditors of the parent. Amounts paid to SPARTA are expected to remain available exclusively to SPARTA as part of the ongoing regulatory capital requirements imposed by the Connecticut Insurance Commissioner, subject to specified release conditions. The litigation recovery does not flow up to the estates on any timetable the declaration identifies.

The mechanics of how the borrowed money reached the operating subsidiary explain why the holding companies are the entities in Chapter 11. Alea Holdings drew on the Prepetition Facility and on-lent approximately $134.9 million to SPARTA. In exchange, SPARTA issued a series of surplus notes totaling approximately $179.0 million including contractual interest, maturing on varying dates in 2033 and 2034.

Surplus notes are subordinated instruments, and the declaration is explicit that these rank behind claims by policyholders, claimants, and beneficiaries. Repayment requires regulatory approval. So the largest asset the estates hold against the largest use of borrowed funds is a long-dated, deeply subordinated, regulator-gated receivable maturing seven to eight years after the proposed effective date. That is a substantial part of why the sale proceeds from the two other insurance subsidiaries, rather than the SPARTA position, are identified as the primary source of recovery for impaired creditors.

Interest was paid on the debentures from 2004 through 2023 in an approximate aggregate amount of $84 million. During 2023, Alea Holdings exercised its contractual right to defer, notifying the trustees of an intention to defer interest payments for up to twenty consecutive quarters, which runs through as late as May 2028. The instrument permits this. Holders have no acceleration right and cannot call the securities before maturity.

In 2024, the affiliate lender launched a tender offer for the securities at $10 per $100 of principal. Holders tendered $10 million of principal amount, acquired for $1 million, and the declaration states those securities are still held by the lender. That is the same entity that holds the first lien on all of the Debtors' assets and that would provide the postpetition facility.

In February 2025, the Debtors received a letter from Hildene Capital Management, LLC and its affiliates, through counsel, purporting to speak on behalf of certain holders. The letter alleged various claims and threatened litigation, which the Debtors disputed. Letters were exchanged through 2025, and the first of a series of education and negotiation sessions between the Debtors' counsel and Chief Restructuring Officer and the holder group's counsel occurred in December 2025. Negotiations that the declaration describes as spanning nearly eighteen months produced the restructuring support agreement, supported by Hildene as the direct holder or manager of $60 million in claims.

One detail shapes everything about the solicitation. The declaration states that, given the nature of the claims, the Debtors do not know the identity of any other direct holder, and that all communication runs through the indenture trustee and the Depository Trust Company. You cannot negotiate with counterparties you cannot identify, and you cannot chase a non-response you cannot attribute.

The restructuring support agreement, dated June 8, 2026 among the Debtors, Hildene, and the Prepetition Facility Lender, sets out a two-path construct. If 100 percent of the trust preferred securities were tendered in an out-of-court exchange, holders would receive $25 million. If that threshold was not met, Hildene would vote in favor of a Chapter 11 plan providing a $20 million cash pool for holders, with the Prepetition Facility Lender waiving any right to a distribution from the pool on account of the securities it holds and that distribution reallocated pro rata to the other holders. In either path, holders provide full and complete releases to the Debtors, the lender, and their respective related parties, by tendering in or through an opt-out mechanism under the plan.

The tender offer launched on June 11, 2026. Hildene and the Prepetition Facility Lender tendered, together representing approximately 60 percent of the securities. The declaration states that no holder raised any opposition to the offer. The remaining holders did not respond, and participation fell short of the threshold.

The Debtors maintain three bank accounts. Alea Group Holdings holds approximately $7,300 of unrestricted cash in its operating account at US Customers Bank. Alea Holdings holds approximately $3.1 million at Bank of America in an account subject to a deposit account control agreement in favor of the lender. The third account, also at Bank of America and also subject to a control agreement, holds $0 and is designated to receive the proceeds of the subsidiary sales. An escrow account at Western Alliance Bank has been established as the carve-out account under the proposed financing orders.

The declaration states that all of the obligors' cash constitutes the lender's collateral, that the Debtors have no revenue or other access to cash, and that they have no unencumbered assets. The lender consented to the use of cash collateral on terms that include compliance with a weekly budget and swift progression of the cases. Adequate protection would come through replacement liens, superpriority administrative expense claims, payment of certain fees and expenses, and information and budget-compliance covenants. Based on anticipated cash needs, the Debtors expect cash on hand to fund the interim period without additional borrowing.

The postpetition facility is framed as a backstop rather than an operating need. The Debtors seek authority to access up to $35 million of additional capacity under the existing Prepetition Facility, available upon entry of a final order. The stated purpose is to fund plan distributions and absorb unexpected case costs or timing delays in the sale transactions. If the subsidiary sales close, the proceeds would fund the $20 million pool instead.

Because the lender on both sides of the petition date is an affiliate of the ultimate parent, the declaration devotes substantial attention to establishing the arm's-length character of the arrangements. That record is worth cataloging, because it is the record any objecting party would test.

On the prepetition facility, the declaration states that Alea Holdings obtained a third-party fairness opinion before entry concluding that the terms were consistent with an arm's-length commercial lending relationship, that there is no overlap between the management of the lender and that of the Debtors, that the lender was separately represented by its own counsel, and that the parties negotiated through their advisors on an arm's-length basis throughout.

On governance, each Debtor appointed an independent director on July 24, 2025 and established a special committee comprised solely of that director to review strategic options and to investigate, evaluate, and settle or prosecute potential causes of action. With separate outside counsel, the independent director conducted an investigation that included review of thousands of pages of documents and interviews of key individuals, participated in board meetings since appointment, and recommended and approved entry into the restructuring support agreement, the launch of the tender offer, and the commencement of the cases.

On the postpetition facility, the declaration states that the Debtors canvassed alternative financing sources before filing and that none offered an actionable proposal or comparable terms. It attributes that outcome to three conditions: substantially all assets are already encumbered, including the stock and proceeds of the three insurance subsidiaries; the cash needs are relatively small; and the recovery prospects are uncertain and relatively defined. It also identifies a term the declaration says no third-party lender offered or would be expected to offer, which is the lender's agreement that the postpetition facility receives the same treatment as the prepetition facility under the plan and need not be repaid in full in cash on the effective date.

Operations run on affiliate paper as well. Alea Holdings obtains personnel, tax, and audit services from Catalina U.S. Insurance Services LLC under an administrative service agreement, billed at cost, with intercompany transactions tracked through the group's general ledger and enterprise resource planning system and receivables and payables generally settled annually. The Debtors seek administrative expense status for postpetition intercompany transactions so that no Debtor funds another entity's operations at the expense of its own creditors.

The declaration notes that the Debtors' limited operations produce a correspondingly limited first day package: one operational motion alongside several standard procedural motions, plus cash collateral and conditional disclosure statement relief. The Debtors do not anticipate needing additional relief and do not anticipate the appointment of an unsecured creditors' committee, which follows from the statement that there are no other third-party general unsecured claims, all other services having been provided by advisors who have been paid in full or by affiliates.

The proposed schedule compresses solicitation, the bar date, and confirmation into roughly seven weeks.

The targeted effective date leaves approximately twenty days between the combined hearing and the end of the third quarter. The declaration states that the milestones were a condition to the postpetition lender's commitment, were themselves negotiated at arm's length, and afford sufficient time to pursue confirmation and to consummate the sales.

Nothing in the first day record is a ruling. Objection deadlines have not run, the disclosure statement is only conditionally approved at this stage, the plan may be amended, and confirmation is not assured. Several items in the declaration will determine how the case actually resolves.

Whether the sales close on the assumed schedule is the first. Recovery for impaired creditors is tied to proceeds from two regulated insurers, and closing requires insurance regulatory approval in addition to entry of the sale order. The postpetition facility exists in part to cover the timing risk if they slip.

Second is how the releases fare. The restructuring support agreement contemplates full and complete releases in favor of the Debtors and the affiliate lender, delivered by holders through an opt-out mechanism. Those holders are the same population that did not respond to a tender offer, which is the reason the case exists. The record supporting the releases is the independent director's investigation, the fairness opinion, and the arm's-length negotiation history the declaration lays out.

Third is the treatment of the secured claim itself. The declaration describes the lender's claims as being addressed through some combination of cash repayment, replacement debt, reinstatement, and equity conversion or capital contribution, without specifying the mix. On $231.0 million of stated claims against a debtor group whose principal assets are equity in three insurers and a subordinated intercompany note, that allocation is where the economics of the plan get resolved.

Fourth is the completeness of the record on the affiliate transactions. Alea Holdings and FIN Alea redomiciled to Texas in September 2025, and the cases were filed in the Southern District of Texas in July 2026. The declaration presents the fairness opinion, the absence of management overlap, the separate representation of each side, and the independent director's investigation as the support for the prepetition and postpetition affiliate arrangements. Whether that support is tested, and by whom, depends on which parties appear before the September 2 objection deadline.

On July 20, 2026, Simply Interior Homes, LLC and six affiliated debtors filed a Combined Disclosure Statement and Chapter 11 Plan of Liquidation in the United States Bankruptcy Court for the District of Delaware at Docket No. 265. The filing came 42 days after the June 8, 2026 petition date, before the qualified bid deadline had passed and before any auction was held.

The structure is familiar. Substantially all assets are being marketed for sale and liquidated, remaining assets vest in a liquidating trust on the effective date, and a liquidating trustee distributes proceeds through a waterfall. What makes this plan worth reading closely is what sits inside the trust. The plan states that the retained causes of action and related rights constitute the majority of the liquidating trust assets, and it identifies the targets of those claims by name in a defined term: Non-Released Party. That definition captures the debtors' equity sponsor, two of its affiliated funds, a related noteholder entity, two individuals, and the seller entity under the Membership Interest Purchase Agreement.

Projected recoveries for Classes 3, 4, and 5, the three classes entitled to vote, are all listed as "Unknown." The plan explains why in a footnote to the classification table: actual recoveries depend on the ultimate litigation, settlement, or other monetization of the retained causes of action, and that value is described as inherently unknowable and speculative. No value has been ascribed to those claims anywhere in the document.

The debtors were formed in early 2025 through a carve-out of the soft goods business divisions from Keeco, LLC, a portfolio company of Centre Lane Partners. Keeco supplied both utility bedding and soft goods. The sponsor had scaled Keeco over roughly five years through acquisitions focused on utility bedding, and those acquisitions brought along soft goods categories that the disclosure statement describes as not synergistic with the manufacturing-focused utility bedding platform. The carve-out separated the two.

The transaction was structured in two steps. The collateral agent under Keeco's then-defaulted term loan facility conducted a partial strict foreclosure under Article 9 of the Uniform Commercial Code on collateral associated with the soft goods division and transferred that collateral to entities designated by the sponsor. The parties then completed the separation through a Membership Interest Purchase Agreement among the debtor purchaser entity, Live Comfortably Borrower LLC as seller, and the operating debtor as the company. Keeco rebranded as Live Comfortably and retained the utility bedding business.

The transaction was originally expected to close in late October 2024. It closed on February 21, 2025, approximately four months late. That delay is not a footnote in the debtors' account of what went wrong. It is the first link in the chain.

Because of the delay, the sponsor pre-funded a portion of the purchase price and released inventory, which the disclosure statement states enabled Live Comfortably to recognize approximately $21 million of revenue from the soft goods business for January and February 2025, before the debtors existed as an operating company. The revenue was recognized by the seller. The corresponding payables came to the debtors.

The disclosure statement sets out the sponsor's projections for the standalone company alongside what the debtors say they actually received at closing. It also notes that the projections were relied upon by the debtors' prospective lenders to underwrite the financing.

The disclosure statement states that the debtors started with no cash on hand, though they did draw on the prepetition revolving facility. Of the approximately $29 million of inventory delivered, it states that approximately $22 million consisted of excess and obsolete inventory. The usable inventory position was therefore a fraction of the roughly $49 million of finished goods the sponsor had projected. Management revised the 2025 revenue plan from $185 million down to $86 million. Actual fiscal year 2025 gross revenue came in at approximately $84.7 million with approximately $3.4 million of adjusted EBITDA.

The operational consequence followed the inventory position. On the first day of operations, fill rates were approximately 30 to 40 percent for most product categories against the 95 percent or greater that the debtors' retail partners expected. The disclosure statement states that the debtors lost material sales programs with certain major customers as a direct consequence, including Wal-Mart. A sales and operations planning process rebounded fill rates to over 90 percent by the fourth quarter of 2025, but certain programs were not recommenced.

Reciprocal tariffs took effect on April 15, 2025 and further reduced margins. The disclosure statement states that the sponsor directed the debtors to forgo passing tariff cost increases on to customers based on the sponsor's expectation that it would secure an exemption from all applicable tariffs, and that the sponsor provided limited financial support to address the tariff impact. By the petition date, the debtors had gone more than twelve weeks without making material payments to suppliers, including customs and duties, and service providers and customs brokers were holding inventory at ports and in transit.

A carve-out debtor that depends on the seller for back-office services is not unusual. What the disclosure statement describes here goes further. The debtors had no independent information technology systems at formation. The services provided under the transition services agreement span corporate information technology, finance and accounting including accounts receivable and treasury, human resources and payroll, operations support including customs bond access and distribution center access, and sales and marketing support including demand planning and merchandising. The disclosure statement states that the agreement was negotiated by the sponsor and Live Comfortably's leadership in 2024, before the debtors' management team was hired.

The dependency extended to cash. Delays in updating the debtors' formal name change with the Internal Revenue Service left the debtors unable to establish new vendor accounts with certain major customers, so customer remittances continued to flow to Live Comfortably throughout 2025 and into 2026. From January to May 2026, the debtors' customers remitted more than 75 percent of the debtors' collections to Live Comfortably's bank accounts, in amounts ranging from $300,000 to $1.5 million per week.

On April 28, 2026, Live Comfortably delivered a formal notice of breach asserting that the debtors had failed to pay approximately $5.1 million for transition services, and reserved the right to terminate the agreement and suspend services. The debtors dispute that characterization and have demanded a comprehensive reconciliation, including a full accounting of historical wrong-pockets payments received on the debtors' behalf and all setoffs applied. The reconciliation has not been completed. The disclosure statement states the debtors' belief that Live Comfortably, at the direction of the sponsor, may have inappropriately set off a significant amount of cash collections rightly belonging to the debtors.

The threatened termination is what forced the timing. Losing the services would have shut down substantially all of the debtors' back-office operations and would likely have triggered an event of default under the prepetition credit facility. The plan reflects that the dispute remains live: rather than assuming or rejecting the agreement on the effective date along with every other executory contract, the plan gives the post-effective date debtors and the liquidating trustee up to 180 days from the effective date to decide, with automatic rejection if no cure notice is served within that window.

Three layers sit on the balance sheet, and the second and third are where the litigation lives.

The first layer is the prepetition credit facility, a revolving facility with $30,000,000 of aggregate commitments maturing February 21, 2029 and secured by a first-priority lien on substantially all assets. As of the petition date, the debtors were obligors for not less than $17,916,002.34 plus accrued interest, fees, and expenses.

The second layer is the subordinated sponsor secured notes. Two promissory notes dated February 8, 2024 were issued in favor of two sponsor-affiliated funds, in original principal amounts of $5,000,000 and $42,000,000. Each accrues interest at 12 percent per annum, compounded annually, with interest capitalized and added to principal. As of the petition date, the smaller note carried a total outstanding balance of $7,954,818 and the larger carried $61,680,012, for a combined $69,634,830 against $47,000,000 of combined original principal. Both are purportedly secured by second-priority liens granted under second lien security agreements dated February 21, 2025, and both are subordinated in right of payment and lien priority to the prepetition credit facility under a subordination and intercreditor agreement. The word "purportedly" is the disclosure statement's own.

The third layer is the 11th Lane Unsecured Note, dated September 13, 2024, in an original principal amount of $17,000,000 and issued in favor of a sponsor affiliate. It is unsecured, and although papered as a promissory note, it is not reflected as a debt obligation on the debtors' balance sheet. The amounts advanced are carried on the books as an equity contribution.

The disclosure statement identifies two concerns with that note. First, the debtors are not in possession of any duly executed copy of the note or any amendment to it. Second, the debtors are in possession of an unsigned amendment dated November 26, 2025 alleging that one of the sponsor funds paid $1,952,362 to the noteholder on behalf of the debtor purchaser entity, reducing the note obligations from $17,000,000 to $15,047,638. The disclosure statement states the debtors' belief that the amounts ostensibly paid down were then added to the secured note held by that same fund, converting an equity investment into a secured debt obligation without the debtors' consent and with no consideration to the debtors.

Beginning in June 2025 and continuing through April 2026, the prepetition agent delivered notices asserting defaults and events of default under the credit agreement. The borrowing base was in an overadvance position, leaving the debtors with no available financing. Since December 2025, the prepetition lenders had been funding critical obligations such as payroll, lease payments, vendor payments, and payments to the third-party logistics provider in their permitted discretion, notwithstanding those defaults.

On April 27, 2026, after what the disclosure statement describes as repeated refusal by the sponsor to provide requested liquidity and capital support, the agent delivered a Notice of Exercise of Proxy Rights. Acting as proxy and attorney-in-fact under the prepetition collateral documents, the agent adopted a written consent removing the non-debtor intermediate holding company as sole member of the debtor purchaser entity and appointing an independent manager vested with sole and exclusive decision-making authority.

The sequence matters for how the plan is constructed. Newly constituted management, acting through replacement restructuring counsel, directed the sponsor and its affiliates to cease engaging with the debtors' customers, vendors, lenders, and other counterparties, and to cooperate with the transition, while demanding that the transition services counterparty continue performing. One day later, the notice of breach under the transition services agreement arrived. Six weeks after that, the cases were filed. The parties investigating the sponsor and the parties who removed the sponsor from control are aligned, and the plan's release architecture reflects that alignment.

The debtors ran a dual-track process. A liquidation consultant was retained prepetition, after soliciting proposals from four liquidation firms, to conduct liquidation sales of inventory, receivables, furniture, fixtures and equipment, and intellectual property. In parallel, a sales agent was engaged to market the business as a going concern and to conduct lender outreach for debtor in possession financing.

The sales agent contacted approximately 200 parties, 65 strategic and 135 financial, sent marketing materials, established a data room, and offered advisor and management calls. The bidding procedures order set July 1, 2026 as the stalking horse designation deadline, subsequently extended by notice to July 13, 2026. No stalking horse bidder was designated.

The plan carries the consequence of that timing on its face. The definition of Asset Purchase Agreement leaves the date blank. The definition of Sale Order leaves the docket number blank. The wind-down DIP draw that will fund the wind-down account is stated as a bracketed placeholder. Exhibit A, the liquidation analysis that supports the best interests test under section 1129(a)(7), is marked "To Come." The plan asserts in the body text that the analysis reflects a greater distribution to creditors than a hypothetical chapter 7 liquidation would produce. The exhibit supporting that assertion has not yet been filed.

The disclosure statement states that cash proceeds from a sale, if any, together with the liquidation process, will form the preliminary basis for distributions, augmented by monetization of other liquidating trust assets. The conditional phrasing is the debtors' own.

The plan places all claims and interests other than administrative claims, professional fee claims, DIP facility claims, and priority tax claims into nine classes. Classes 3, 4, and 5 vote. Classes 1 and 2 are unimpaired and deemed to accept. Classes 6 through 9 receive nothing and are deemed to reject, and the debtors state that they will seek confirmation as to those classes under the cramdown provisions of section 1129(b)(2)(B).

Each holder of an allowed claim in Classes 3, 4, and 5 receives a pro rata share of liquidating trust interests entitling the holder to a pro rata distribution of distributable value in accordance with the waterfall recovery. The waterfall runs in six steps: allowed administrative claims and allowed priority tax claims first, then allowed other secured claims, then allowed priority non-tax claims, then the allowed prepetition secured claim, then allowed subordinated sponsor secured note claims, and finally allowed general unsecured claims and allowed deficiency claims.

Two figures in the table deserve a closer look before voting. The Class 3 estimate of $7.9 million sits well below the not less than $17,916,002.34 that the disclosure statement reports as outstanding under the prepetition credit facility at the petition date. The plan does not reconcile the two figures in its narrative sections, and a holder evaluating relative position in the waterfall will want to understand what accounts for the difference, including paydowns from liquidation proceeds during the case and the interaction between the prepetition facility and the DIP facility under the final DIP order.

The Class 5 range spans just over $100 million. General Unsecured Claim is defined to include deficiency claims, and the plan provides that no subordinated sponsor note deficiency claim is counted in the aggregate amount of allowed general unsecured claims unless and until it has been finally determined by litigation or by a court-approved settlement. The general bar date of August 10, 2026 has not yet passed. Both variables cut in the same direction: the denominator against which each general unsecured creditor's pro rata share is calculated is not knowable today.

The plan's release architecture is built around a single defined term. Non-Released Party captures the equity sponsor, the noteholder affiliate, both sponsor funds holding the subordinated secured notes, two individuals, the seller entity under the Membership Interest Purchase Agreement, and the related parties of each of them other than the debtors. The definition then carves back in as released parties the independent manager, the chief restructuring officer, the debtors' professionals, and their related parties.

Every protective provision in the plan is drafted to fail as to that group. Non-released parties are excluded from the exculpation. They are excluded from the debtor releases. They are excluded from the opt-in third party releases, with the plan stating for the avoidance of doubt that no releasing party is deemed to have released any claim against a non-released party. They are excluded from the injunction, and the plan adds that no non-released party may assert or invoke any injunction, release, exculpation, or other protection under the article to bar, limit, or impair the prosecution of any retained cause of action against it.

The subject matter of the retained causes of action is identified in the body of the plan: the Carve-Out Transaction, transactions between the debtors and the transition services counterparty including the agreement itself, the subordinated sponsor secured notes, and the 11th Lane Unsecured Note. A non-exclusive schedule of retained causes of action will be filed with the plan supplement, in form and substance reasonably acceptable to the committee, seven days before the voting deadline.

The governance follows the money. The liquidating trustee is selected by the committee with the consent of the debtors and the DIP lenders. The trust oversight board has three members, two appointed by the DIP secured parties and one by the committee, with the plan naming the DIP agent and one of the DIP lenders as the two appointing parties on the lender side. The trust succeeds to the debtors' and the committee's privileges, and the plan states that sharing privileged information with the trust, the trustee, or board members does not waive those privileges given the joint and successor interest in investigating and prosecuting the claims. The trust receives the benefit of section 108 tolling.

The plan is candid about the risk. There is no guarantee that any retained cause of action will be prosecuted, no guarantee that any is viable as a matter of fact or law, and no guarantee that success would increase funds available for distribution. Expenses incurred investigating and prosecuting the claims may materially affect recoveries. No value has been ascribed to them.

Setting the non-released parties aside, the release package is conventional for a Delaware liquidating plan. The debtor releases run to the released parties and carve out claims determined by final order to have constituted fraud, gross negligence, or willful misconduct. The exculpation covers acts between the petition date and the effective date, subject to the same carve-out. The third party releases are opt-in only, requiring an affirmative election on a separate opt-in form circulated with the solicitation package. The plan does not discharge the debtors, consistent with section 1141(d)(3).

One provision is worth flagging for creditors evaluating the lender side of the structure. The released party definition provides that the inclusion of the prepetition lenders, the prepetition agent, the DIP lenders, and the DIP agent, along with their related parties, is subject to and limited by the challenge period and related provisions in the final DIP order. If a challenge is timely commenced and results in a final order sustaining it in whole or in part, those parties are not released with respect to the claims and causes of action that were the subject of the successful challenge.

The plan seeks limited substantive consolidation of the seven debtors' estates solely for voting and distribution purposes. On the effective date, assets and liabilities would be treated as if merged for those purposes, each claim would be deemed a single claim against a single obligor, and intercompany guarantees would be eliminated and canceled. The plan states that the consolidation would not otherwise affect the debtors' legal and corporate structures.

The plan applies the standard from In re Owens Corning, 419 F.3d 195 (3d Cir. 2005), which requires the proponent to prove either that prepetition the entities disregarded separateness so significantly that creditors relied on the breakdown of entity borders and treated them as one, or that postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors.

The debtors offer three supporting propositions: that many creditors effectively treated the debtors as a single entity prepetition, that the business was operated as an integrated enterprise as a practical matter, and that the nominal assets held by certain debtors combined with the expense of separate plans make consolidation beneficial to creditors.

The second proposition is stated with a qualification that a party in interest may find useful. The plan says the debtors believe that while they did observe appropriate corporate formalities and separateness during the prepetition period, as a practical matter the business was operated as an integrated enterprise. Owens Corning treats mere administrative benefit as insufficient and characterizes consolidation as a rare remedy of last resort. Five of the seven debtors were formed for a transaction that never closed and, according to a footnote in the disclosure statement, never operated. Whether that fact supports consolidation or complicates it is a question the confirmation record will need to address.

This is a plan filed in advance of the events that will determine what it is worth. The confirmation hearing date, the objection deadline, the voting deadline, and the voting record date are all blank in the filed version, to be set by a solicitation procedures order on a motion filed contemporaneously with the plan. Interim approval of the disclosures for solicitation purposes and final approval at the combined hearing are both still ahead.

The claims objection deadline runs 180 days from the effective date, subject to extension. The trust must dissolve no later than five years from the effective date unless the court grants a fixed extension of up to three years on a timely motion. The plan sets a de minimis distribution threshold of $100, below which no distribution is made and the claim is forever barred against the trust assets.

For a creditor deciding how to vote, the analysis reduces to two questions that the filed document cannot answer. What will the sale and liquidation produce, and what are the claims against the sponsor worth net of the cost of prosecuting them. The plan is transparent that it cannot answer either one. It ascribes no value to the retained causes of action, states that their value is inherently unknowable and speculative, and reports every impaired class recovery as unknown. The plan supplement, the liquidation analysis, and the auction results are where those answers will begin to take shape.

Cryptocurrency does not sit still. Between the day a Celsius customer withdrew coins and the day a judgment enters against that customer, the value of what was withdrawn can double, collapse, or vanish entirely. That volatility turns an ordinarily mechanical question, what a defendant must return once a transfer is avoided, into a genuinely difficult one. On July 10, 2026, Chief United States Bankruptcy Judge Martin Glenn answered it.

The Memorandum Opinion and Order resolves two questions the parties were directed to brief under a joint scheduling order: whether the Litigation Administrator may recover the transferred digital assets themselves or their value, and, if value, at what point in time that value is measured. The Court declined to pick a single valuation date. It adopted instead a scenario-based framework that keys the measure of damages to the direction the asset moved and to what the defendant did with it.

The framework resolves into a handful of situations. For assets that have depreciated since transfer, the Litigation Administrator recovers the transfer-date value, whether or not the defendant still holds the asset. For appreciating assets a defendant still holds, the Litigation Administrator recovers the asset itself. For appreciating assets a defendant has sold at a profit, the Litigation Administrator recovers the sale price, with the defendant bearing the burden of proving both that a sale occurred and the price it produced; a sale at a loss reverts to the transfer-date value. And for appreciating assets a defendant no longer holds for any reason other than a sale, the Litigation Administrator recovers the judgment-date value. Section VIII sets out the complete framework.

The significance is not the depreciation half of the framework, which follows settled law. It is the appreciation half. The Court observed that it was not aware of another court that has ruled on how to value appreciating digital assets in the context of avoidance actions. A prior matter involving transferred Bitcoin in the Northern District of California came close, but it settled and was voluntarily dismissed before the court rendered a final decision on the proper measure of damages. This opinion fills that gap for the thousands of Celsius customer avoidance actions that follow it, and it supplies the first reasoned template for the next crypto estate that has to litigate the same problem.

Celsius Network and its affiliates filed for Chapter 11 on July 13, 2022. The Court confirmed a modified plan in November 2023, and the plan went effective on January 31, 2024, at which point distributions to creditors began. The avoidance litigation that produced this opinion runs on two tracks, and understanding the opinion requires keeping both in view.

The first track is the insider proceeding. In July 2024, the Litigation Administrator sued the company's former directors and executives, asserting claims that included breach of fiduciary duty, avoidance and recovery of preferential and fraudulent transfers, fraudulent misrepresentation and violation of state consumer protection laws, and equitable subordination. Three entities named in that suit, Koala1 LLC, Koala3 LLC, and AM Ventures Holding, Inc., never answered. The Litigation Administrator moved for default judgment against those three, and the entries of default gave the Court a set of defendants whose liability was already established. That detail matters, because it is what made the damages question ripe.

The second track is the customer proceeding. Also in 2024, the Litigation Administrator filed thousands of avoidance actions against former Celsius customers, seeking to claw back transfers those customers received in the 90 days before the Petition Date. To manage that volume, the Court entered streamlined procedures and structured the litigation so that group-wide legal questions could be decided once rather than thousands of times. The damages framework is one of those group-wide questions.

Section 550(a) provides that, to the extent a transfer is avoided, the trustee may recover for the benefit of the estate the property transferred, or, if the court so orders, the value of that property. The purpose of the provision, as the Court restated it, is to restore the estate to the financial condition it would have enjoyed had the transfer never occurred. That restorative aim is the fixed point around which the entire analysis turns.

The statute grants a choice between the property and its value, but it does not say when a court should order one rather than the other, and it does not say as of what date value is measured. Both gaps are left to the court's discretion. In deciding whether to order turnover of the property or a money judgment for its value, the Court applies three familiar factors: whether the value of the property is contested, whether it is readily determinable, and whether it has been diminished by conversion or depreciation.

Two structural rules bound the analysis. First, the recovery must benefit the estate, language the Customer Defendants would later try to leverage. Second, the estate is entitled to only a single satisfaction. The Litigation Administrator may recover the transferred assets or their value under the framework that follows, but not both from the same defendant.

Against that backdrop, the scheduling order posed two questions. The first asked whether the Litigation Administrator is entitled to recover the transferred digital assets when they remain in a defendant's possession, custody, or control, or, alternatively, their value. The second asked, if value is the measure, what value applies when the assets have appreciated since transfer and what value applies when they have depreciated. The first question sorts defendants by possession. The second sorts them by direction of value. The opinion answers both by combining the two sorts.

Before reaching the merits, the Court had to clear an objection. The Customer Defendants argued that any ruling on Section 550 damages would be an advisory opinion, because the measure of recovery in each customer action will ultimately depend on that case's own facts, and because no customer has yet been found liable. Deciding damages before liability, they argued, puts the cart before the horse.

The Court agreed with the premise and rejected the conclusion. It cannot rule on what the Litigation Administrator may recover from any Customer Defendant, because none has been found liable. But the defaulting insider entities are in a different posture. Their liability is already fixed by the entries of default. A dispute over what the Litigation Administrator may recover from those three entities is a real and concrete controversy, not a hypothetical one, and it is therefore ripe. The opinion decides the damages question as to the defaulting insider defendants and no one else.

Two consequences follow. The defaulting insider defendants retain the right to litigate the extent of their liability in a subsequent damages inquest, because a default is not an admission of damages. And the Customer Defendants keep the ability to litigate their own damages issues if and when liability is established against them. The framework supplies the legal principles. It does not resolve any particular defendant's number, and it does not foreclose the fact-intensive arguments that will decide those numbers later.

Where the transferred asset is worth less on the judgment date than it was on the transfer date, the answer is straightforward and well supported. The Litigation Administrator recovers the transfer-date value, and it makes no difference whether the defendant still holds the asset.

The reasoning tracks the restorative purpose of the statute. If a defendant had to return only a depreciated coin, or pay only its diminished current value, the estate would absorb the entire post-transfer decline. That outcome inverts the point of Section 550, which exists to put the estate where it would have been absent the transfer, not to saddle it with a loss the transfer caused. As the Court put it, returning a depreciating asset would thrust the loss incurred entirely onto Celsius's bankruptcy estate.

The proposition draws broad support. The leading bankruptcy treatise notes that depreciation due to market fluctuations may warrant restitution of the property's value as of the transfer date. Courts have applied that measure to a depreciated oil and gas lease, to a yacht destroyed by fire, and to software that had become worthless by the judgment date. The through-line is consistent: when the thing transferred has lost value in the transferee's hands, the estate recovers what the thing was worth when it left.

The hard problem is appreciation. When a coin has gained value since it was withdrawn, three candidate measures compete: the value on the transfer date, the value on the judgment date, and whatever the defendant actually realized if the defendant sold. The Litigation Administrator pressed for judgment-date value across the board, reasoning that the estate would have captured the full appreciation had the coins never left, and that anything less lets the transferee keep a gain the estate should have enjoyed.

The Court did not accept that. It began from the recognition that there is no bright-line rule fixing the date on which avoided property is valued. The only generally applicable principle is that the time at which value is measured depends on the circumstances of each case, and trial courts are given broad discretion precisely because avoidance actions run the range from innocent conveyances to conspiracies to defraud creditors. The timing of the valuation is a tool for reaching an equitable result, not a mechanical rule to be applied without regard to what actually happened.

Discretion here is disciplined by a specific congressional concern. In drafting Section 550, Congress sought to prevent a transferee from taking a wait-and-see posture, holding appreciating property and betting on further gains at the estate's expense. Where a transferee knowingly solicits a vulnerable transaction, the estate should get the benefit of the most favorable recovery. That concern points toward letting the estate capture appreciation. It does not, by itself, tell you at which date to stop the clock.

The Court also rejected the Litigation Administrator's affirmative case for judgment-date value on two independent grounds, each rooted in the same equitable instinct that no party should receive a windfall. First, it is not clear the estate would ever have realized judgment-date value even if the coins had stayed put, and the Litigation Administrator offered no evidence that Celsius would have held rather than sold, hedged, or redeployed them. Second, charging a defendant the current price of an asset the defendant sold years earlier could expose preference defendants to what the Court called essentially limitless liability, tethering their exposure to market swings long after they parted with the coins.

Much of the parties' briefing turned on analogies. The Litigation Administrator leaned on real property cases, where a trustee can usually recover the very parcel that was transferred and thereby capture its appreciation. The Customer Defendants leaned on closely held equity cases, where courts have refused to hand the estate a value that reflects post-transfer changes attributable to the transferee's own efforts. The Court found both analogies unpersuasive, and the reasons it gave define the character of digital assets for avoidance purposes.

The real property analogy fails because it assumes recoverability. A trustee can usually get the parcel back, so awarding the asset itself captures appreciation without unfairness. Digital assets frustrate that assumption. Many Celsius defendants no longer hold the coins they withdrew, having sold or moved them, and the market for crypto is liquid and speculative in a way the market for land is not. You cannot build a damages rule on the premise that the estate can simply take the coin back when, for a large share of defendants, the coin is gone.

The closely held equity analogy fails for the opposite reason. Cases refusing to award post-transfer appreciation did so because the increase reflected the transferee's own work or unforeseen developments, or because the equity carried marketability and minority discounts that made its value contingent on who held it. None of that describes cryptocurrency. A coin's appreciation is a product of market forces, not the defendant's effort, and its price does not change based on whose wallet holds it. The equity cases protect a transferee who built value; they say nothing about a transferee who merely held a liquid asset while the market moved.

Having rejected both a flat transfer-date rule and a flat judgment-date rule, the Court built a measure that varies with what the defendant actually did. The organizing idea is to give the estate the benefit of real, realized gains while insulating defendants from liability that floats on market movements after they have let the asset go. The table below sets out the complete framework, combining the depreciation rule from Section V with the appreciation rules that are the heart of the opinion.

The sale-price rule is the mechanism that resolves the tension. When a defendant sold an appreciated coin, the price the defendant received is the cleanest available measure of the gain that changed hands. It hands the estate a meaningful recovery pegged to the value of the asset as of the date it was disposed of, and it denies the defendant the fruits of any post-receipt speculation. At the same time, it stops the clock at the sale. A defendant who sold in a given year does not remain on the hook for a rally that arrives two years later. That is how the Court answered the limitless-liability concern without giving defendants a free pass on appreciation they actually captured.

The sale-price rule only works if someone can establish that a sale happened and what it produced. The Court placed that burden squarely on the defendant. A defendant who wants the benefit of the sale-price measure must demonstrate both that the transferred asset was sold and the price at which it was sold. A defendant who cannot carry that burden does not fall back to the transfer-date value. The defendant faces the judgment-date value instead.

That allocation is deliberate, and its practical weight is easy to underestimate. The information about a sale, the exchange records, the transaction confirmations, the wallet history, sits with the defendant, not the estate. Putting the burden on the party that holds the proof is orthodox. The consequence of failing to meet it is what makes the rule consequential. In an appreciating market, the judgment-date value will generally be higher than a transfer-date price or an earlier sale price. A defendant who sold coins at a modest profit years ago, but who cannot produce records to prove the sale and its price, is exposed to the current, higher value rather than the smaller sum actually received.

For anyone advising a preference defendant, the instruction is concrete. The transaction record is the asset. Preserving exchange statements and disposition data is not housekeeping. It is the difference between a judgment measured by what the defendant actually received and a judgment measured by a market price the defendant never saw.

The opinion is disciplined about its own reach. Several arguments the Customer Defendants raised were set aside as unproven, unnecessary to the ripe dispute, or simply not before the Court. Reading the framework without reading these boundaries would overstate what has been decided.

The Estate-Recovery and Standing Argument

The Customer Defendants argued that the avoidance actions cannot benefit the estate because creditors have been or will be paid in full, and that recovery yielding no benefit to the estate should not be awarded. They asserted that creditors have already recovered roughly 80 percent of their Allowed Claims, with an additional 900 million dollars in value still to be distributed from sources that include the Tether settlement, the disputed claims reserve, and net assets held by the Post-Effective Date Debtors. They pointed to authority dismissing an avoidance claim for lack of standing where creditors had been paid in full.

The Court did not resolve this. It treated the paid-in-full contention as unsupported by evidence and as an issue not properly before it, and the Litigation Administrator reserved the point for a later stage. The 80 percent recovery figure and the 900 million dollar estimate are the Customer Defendants' assertions, not findings, and nothing in the opinion adopts them.

Jury Rights and Constitutional Authority

The Customer Defendants also argued that determining damages would invade their Seventh Amendment right to a jury and exceed the Court's constitutional authority to enter a final judgment, invoking the line of authority that limits a bankruptcy court's power over certain private-right claims. Those arguments were directed at whether the Court could bind the Customer Defendants. Because the opinion confines its ruling to the defaulting insider defendants, whose liability is fixed by the entries of default, the Court did not resolve the jury-right and constitutional-authority questions. They remain open for the customer actions.

Because the framework was decided for three defaulting insider entities, its application to the thousands of pending customer actions is still prospective, and the measure of recovery against any individual defendant will depend on that defendant's own facts. The observations that follow are offered in that light.

The opinion's most durable contribution may be organizational. It does not announce a single rule so much as a sequence, and the sequence is one other estates recovering appreciating digital assets can borrow. Direction of value comes first. A depreciated asset points to the transfer-date measure. An appreciated asset then sorts by possession: still held toward recovery in kind, sold toward the sale price, other dispositions toward judgment-date value. The sequence does not decide any case, and individualized facts can still move the result, but it gives a practitioner a structured place to start.

For the estate, the opinion reads as a caution against overreach. The Litigation Administrator asked for judgment-date value across all appreciating assets and did not get it, in part for lack of evidence that Celsius would ever have realized that value. A plaintiff drafting a damages theory has reason to anchor it to something the record can support: a transfer-date price, a realized sale, or a current market quote where nothing better exists. Whether another court adopts the same reasoning remains to be seen, but the evidentiary lesson is not confined to these facts.

For the defense, the burden-shifting rule directs attention to the record. In many of these matters, the decisive work will likely precede any legal argument, in the reconstruction and preservation of disposition data. A defendant who can prove a sale at a modest profit stands to convert an open-ended judgment-date exposure into a capped, realized-gain figure. A defendant who cannot is exposed to the higher measure. The distinction turns less on advocacy than on documentation.

The broadest implication warrants the most restraint. This is one bankruptcy court's opinion, and it does not bind other courts; later decisions may refine it or take a different path. Even so, large crypto estates that reach the avoidance stage face the same volatility this Court faced, and until now there was little reasoned authority to consult. The opinion supplies a considered framework, grounded in the restorative purpose of Section 550 and in the economics of digital assets, that distinguishes realized gain from market speculation. It will not settle the question in every forum. It does move the inquiry from whether an estate can recover appreciation toward how a given defendant's facts fit the analysis.

On July 15, 2026, Judge Alfredo R. Pérez of the United States Bankruptcy Court for the Southern District of Texas approved the Disclosure Statement, confirmed the Second Amended Joint Prepackaged Plan of Reorganization, and overruled every objection to it. The decision runs 103 pages and rests on a four-day evidentiary record.

The case is not about whether QVC Group can survive as an operating business. Its creditors had already lined up behind a prepackaged deal. The case is about a single structural question that had to be answered before anything else could proceed: whether a comprehensive settlement of intercompany claims, negotiated among affiliated debtors who sit on both sides of the table, can be approved and then carried into a confirmed plan. The parent-level preferred shareholders said no, arguing the process was unfair and the plan violated several provisions of the Bankruptcy Code. The court found the opposite at each layer of the analysis.

The court's summary of the record is direct. Eight debtor witnesses testified and the court found each of them highly credible. The preferred shareholders chose not to put on witnesses of their own. On that record, the court concluded the negotiations were a thorough, fair, arm's-length process in which no disinterested fiduciary capitulated to another, and the outcome for stakeholders was not preordained. The treatment of the preferred shareholders followed from the range and magnitude of claims the parent entity was facing, not from a defect in the process that produced the settlement.

QVC Group and its debtor affiliates comprise one of the world's largest multimedia retailers. They reach more than 200 million households each day across 15 television channels and more than 12 million customers through QVC+ and HSN+ streaming, social platforms, and mobile apps, and they operate ecommerce sites for the four home and apparel brands in their Cornerstone division: Frontgate, Ballard Designs, Garnet Hill, and Grandin Road. A company that began as a radio broadcaster in 1977 now sells consumer products through video-rich interactive shopping.

The corporate structure reduces to four Key Entities. QVCG sits at the top and owns all of Liberty Interactive, LLC. LINTA owns Qurate Retail Group, which owns QVC, the primary operating entity. Under a separate silo, QVCG owns 62% of the Cornerstone chain and LINTA owns the remaining 38%. That 62-38 split matters later. The 62% stake becomes the consideration the settlement conveys.

The capital structure is the product of years of liability management transactions, mergers, internal reorganizations, dividends, intercompany notes, and shared-service and tax-sharing agreements. At the Petition Date the debtors carried roughly $6.53 billion in funded debt across three categories, plus preferred equity at the parent with a liquidation preference of approximately $1.272 billion. Neither QVCG nor the Cornerstone entity carried funded debt of its own.

The distribution of that debt matters to the eventual result. The secured RCF and QVC Notes sit at the operating company. The convertible LINTA Exchangeable Notes are unsecured and unguaranteed. The preferred equity sits at the very top, at QVCG, behind everything. When intercompany claims run between the silos, the entity that holds the least valuable collateral and the fewest independent assets is the one whose stakeholders are most exposed.

The distress was real, and the court treated it as a fact that could not be ignored. The debtors faced eroding cash flows as customers cut cable, record inflation, pandemic-era supply chain disruption, elevated labor costs, and uncertainty from recent tariff policy. In December 2021 a fire at the Rocky Mount distribution center cost the debtors more than one million customers and more than $500 million in revenue.

Management did not sit still. Between 2020 and 2025 the debtors ran a series of liability management transactions and debt paydowns to cut funded debt, borrowing costs, administrative expense, and tax burden. In June 2022 they launched a two-phase turnaround, first Project Athens and then the WIN Growth Strategy. They executed sale-leaseback transactions, opened a dialogue with their investment banker on capital structure in 2023, and engaged restructuring counsel and a financial advisor in 2025. Each of those moves later became a potential source of intercompany claims, because each moved value among the silos.

Every transaction that moved value between the silos over the prior several years created a claim that one estate could assert against another. The petition did not simplify that web. It froze it in place and put it in front of a court.

Consider what a litigating estate would have on the table. QVC paid roughly $586.7 million in dividends up to QVCG and LINTA between January 2023 and February 2025, during a window when the QVC Notes indenture restricted dividends to debt service and tax-sharing payments. That invites illegal-dividend and avoidance theories. The 2022 transfers moved $800 million from QVC to the parent. The parent, in turn, paid approximately $456 million in preferred dividends to its own shareholders before suspending them in May 2025, which exposes those shareholders to avoidance risk. Solvency was contestable at both the QVC and QVCG levels, and solvency is the fulcrum on which most of those theories turn.

Then there is the tax problem, which sits in a category of its own. The Deferred Tax Liability arises because the consolidated group deducted interest on the LINTA Exchangeable Notes at approximately 9% while only 4% was actually paid to bondholders. The debtors held a tax opinion at the "should" level concluding the liability was more likely than not never to materialize. The magnitude is the point. Out-of-pocket exposure ranged from roughly $550 million to $800 million, and once you layer in a Section 382 change-of-ownership issue, a gross-up on insurance proceeds, accrued interest, penalties, and litigation cost, the tail runs past $1 billion.

This is the difficulty the disinterested fiduciaries inherited. The claims were numerous, they ran in multiple directions, they implicated bankruptcy and non-bankruptcy law, and the largest of them was the one least likely to come due but most capable of destroying value if it did. Litigating any single claim to judgment would take years and require extensive expert testimony, and QVCG had limited cash to fund that fight. The alternative to a settlement was not a clean trial. It was leaving the parent, in the court's phrase, on the operating table with limited assets.

The debtors anticipated the conflict rather than papering over it. In September 2025, months before filing, they restructured governance around the recognition that the Key Entities had discrete capital structures and were parties to historical transactions that could generate claims against one another. Disinterested directors were appointed at each level, given exclusive authority over conflicts matters, and each governing body retained its own separate conflicts counsel.

The mapping is deliberate. The QVCG special committee retained one firm, the LINTA board another, the QVC board another, and the Cornerstone special committee another. Four silos, four sets of independent fiduciaries, four sets of conflicts counsel. The structure was designed so that no single set of directors negotiated against itself and no adviser sat on both sides of any claim.

The investigation that followed was not cursory. The disinterested directors collectively reviewed tens of thousands of documents drawn from the debtor entities and from Liberty Media, participated in more than 25 meetings with one another, and conducted seven separate 90-minute interviews of current and former executives. A forensic team ran funds-flow and additional-paid-in-capital analyses across bank records and general ledgers spanning 2019 through 2025. The QVCG governing body retained independent tax counsel to assess the tax exposure specifically.

The forensic and advisory work fed information to each group of directors without dictating conclusions. The court was specific on this point. The joint debtor advisers provided diligence, funds-flow analysis, projections, solvency analysis, and valuation to inform each disinterested group equally, but they did not tell the directors what opinions to reach. Each group made its own determinations, on the advice of its own counsel, about the existence and magnitude of the potential claims. That distinction between informing and directing carries the weight of the fairness analysis later in the opinion.

The negotiation did not begin with agreement. It began with four term sheets and open disagreement on every material point: how to fund the cases, what the RCF lenders would recover, what the LINTA lenders would recover, how much the general unsecured creditors would receive, how to fund Cornerstone, and whether the preferred shareholders would recover anything at all.

What followed was an arm's-length negotiation, and the court found it to be one. QVCG's counsel opened by taking the most aggressive position available, calling QVC's potential claims against the parent "without merit" and pointing to the Duff & Phelps solvency opinions. The court read that not as a considered valuation but as posturing to advance the client's interests at the outset. One day earlier, that same counsel had privately advised the QVCG committee of the parent's genuine exposure. The retreat from the opening position was therefore expected once it became clear the QVC side understood it held the leverage.

The preferred shareholders pointed to the $400 million figure as evidence that the claim had been manufactured to support the other debtors' restructuring. The court rejected that reading on the timeline. The $400 million was not a number pulled from the air. It represented the QVC disinterested directors' lowest acceptable figure, and the record showed the parties moving toward it through offer and counter rather than arriving at it by design. The restructuring support agreement's terms were contingent on the settlement result, not the other way around.

Strip away the procedural history and the settlement is a value allocation. QVC held claims against QVCG. Under the settlement, QVC consented to fix those claims at a $400 million general unsecured claim and to accept, in full satisfaction, the parent's distributable cash together with the 62% equity interest in reorganized Cornerstone. The 62-38 ownership split of the Cornerstone chain, noted at the outset, is the asset that changes hands. The preferred shareholders at the top receive no cash and no equity. What they receive instead is a broad release from the debtor estates of avoidance and related claims arising from the approximately $456 million in preferred dividends they had already received.

The creditor response was close to unanimous. The RCF class accepted in full. The QVC Notes and LINTA Notes classes accepted by overwhelming margins in dollar amount. The LINTA noteholders accepted despite taking roughly a 92.5% haircut on their claims, which the court treated as a meaningful signal that the settlement fell within the range of reasonable outcomes rather than one imposed on unwilling parties. No creditor objected to the settlement or the plan. Only equity holders and the United States Trustee did.

The treatment across the structure follows priority and character. The court identified the secured RCF and QVC Notes classes and the unsecured LINTA Notes class as impaired classes of claims that were entitled to vote, and each took a negotiated recovery and accepted. Third-party general unsecured creditors are unimpaired and paid in full. The parent-level preferred equity is extinguished. The distribution below reflects the plan as confirmed. It is not yet effective, and the court expressly reserved judgment on the preferred shareholders' motion to terminate exclusivity in the event the plan does not go effective.

A plan may settle claims belonging to the estate under Section 1123(b)(3)(A), and the court evaluated the settlement under Bankruptcy Rule 9019. In the Fifth Circuit the governing framework is the three-part test from Jackson Brewing: the probability of success in litigation, the complexity and likely duration of that litigation, and the balance of other factors drawn from Foster Mortgage. The burden is not high. The debtors needed to show only that the settlement fell within the range of reasonable litigation alternatives.

The harder question was which standard of review governed. The preferred shareholders argued that because the settlement was struck among debtor insiders, the court should apply the heightened entire fairness standard borrowed from Delaware corporate law, examining both the fairness of the dealing and the fairness of the price. They argued the QVCG directors were inadequately informed and effectively deferred to the other silos and to the joint advisers.

The court declined to apply entire fairness. The reasoning is worth stating precisely, because it is the load-bearing holding of the opinion. The Fifth Circuit has not adopted a categorical rule requiring entire fairness for a Rule 9019 settlement merely because it involves affiliated debtors. Entire fairness is a state-law concept that applies when one party stands on both sides of a transaction, and the courts the preferred shareholders cited had applied it only after first finding the underlying transaction was conflicted. Here, the debtors were statutory insiders, but the governance architecture answered the conflict before it could taint the settlement.

The reliance argument failed for the same reason the manufactured-claim argument did. Informing the directors is not directing them. The joint advisers supplied analysis to every silo equally and left the conclusions to each independent group and its counsel. Once the process cleared entire fairness, the three-part test resolved in the settlement's favor. The outcome of the intercompany claims was genuinely uncertain, the litigation would be complex, lengthy, and expensive, and no creditor objected. The court concluded each prong weighed toward approval.

The preferred shareholders' strongest confirmation argument invoked the Fifth Circuit's decision in Serta Simmons and Section 1123(a)(4)'s command that a plan treat every member of a class alike. Their theory: within the preferred class, a release of avoidance liability is worth a great deal to shareholders who received the challenged dividends and nothing to those who did not, so the plan treats co-class members unequally. Look below the surface, they urged, and the treatment is equal in form only.

The court read Serta narrowly and precisely. In Serta the two classes of noteholders each received an indemnity, and the Fifth Circuit held the plan violated equal treatment because the indemnity was worth millions to members who had participated in the uptier and little or nothing to members who had not. The differential in realized value made the treatment unequal. The distinction the QVC court drew is a distinction in the kind of value at issue.

An indemnity has make-whole characteristics. It creates an affirmative right to payment if litigation materializes, and that right is worth more to some holders than others. A release creates no such right. It removes a potential liability rather than granting an asset. Because no preferred shareholder receives a payment of value under the settlement, and because the release confers no affirmative entitlement, the plan does not pay co-class members different settlements or require some to tender more consideration than others. The court also observed that the preferred shareholders tendered no consideration in exchange for their treatment, and that debtor releases have no bearing on how the plan treats claims or interests. On that framing, Section 1123(a)(4) was satisfied.

With the settlement approved and equal treatment resolved, the remaining confirmation requirements fell in sequence. The pattern across them is consistent: each objection assumed a defect that the settlement's approval had already cured.

The best-interests analysis deserves emphasis because it answers the preferred shareholders on their own terms. Their complaint was that confirmation stripped them of value. The court's response was that no alternative available in bankruptcy produces value for them. If a Chapter 7 trustee adopted the settlement, equity would receive nothing. If the trustee instead litigated the intercompany claims, that litigation would be value-destructive and equity would still likely receive nothing. Even crediting the high end of Cornerstone's valuation, 62% of $135 million plus the parent's cash does not reach the $400 million claim standing ahead of the preferred. There is no version of the counterfactual in which the preferred shareholders do better.

The third-party releases drew the United States Trustee's objection as nonconsensual and impermissible after the Supreme Court's decision in Purdue Pharma. The court applied the opt-out framework from Container Store and held that a failure to opt out constitutes consent under the appropriate circumstances. The plan excluded from the releasing parties every class deemed to reject unless it affirmatively opted in, the notice and opportunity to opt out were sufficient, and the disclosure statement described the releases in detail. Because the releases were therefore consensual, they are consistent with Purdue, which barred nonconsensual releases but left consensual ones intact. The objection was overruled.

This is one bankruptcy court's decision on a specific record, not a statement of settled law, and the plan it confirms is not yet effective. Read with that in mind, the opinion still offers several observations worth weighing when you structure an intercompany settlement in an enterprise with multiple silos and conflicting stakeholder groups.

First, the governance architecture did the heavy lifting here. The disinterested directors at each silo, their exclusive authority over conflicts matters, and their separate conflicts counsel are what let this court apply business judgment review rather than entire fairness. On this record, that choice of standard shaped the burden the debtors had to carry. Whether another court would draw the same line is a separate question, but the decision suggests that building the independence into the governance structure before filing, and documenting it, gives a settlement its best chance under the more deferential standard.

Second, the distinction between informing and directing mattered a great deal to the outcome. The preferred shareholders' theory depended on recasting the joint advisers' analysis as control, and the court declined to accept that characterization because the record cut the other way: diligence delivered to every silo equally, conclusions left to each independent group. The point is not that advisers can never serve multiple constituencies, but that where they do, a record showing they supplied facts rather than verdicts is what this court found persuasive.

Third, the court read Serta narrowly. It treated the equal-treatment question as turning on the kind of value conveyed, distinguishing an indemnity, which creates an affirmative right to payment that can be worth different amounts to different holders, from a release, which extinguishes a liability and confers no such right. That is a meaningful line, though it is one trial court's application of a recent appellate decision, and how far it travels to other facts and other courts remains to be seen. For now, it is a distinction worth keeping in view when you structure intra-class value in a settlement.

Fourth, the court upheld opt-out third-party releases after Purdue, applying the Container Store framework already developed in this district. Its analysis rested on notice, an opportunity to opt out, detailed disclosure, and the exclusion of deemed-rejecting classes unless they opt in. Purdue foreclosed nonconsensual releases; it did not disturb consensual ones, and this decision reflects one court's view of what a sufficient consent record looks like. Courts continue to differ on the mechanics, so the opinion is useful less as a rule than as a worked example.

The thread running through all four is where the reasoning actually lives. This was not a case resolved by a single reported holding. It was resolved on a 103-page record built from four days of testimony, hundreds of exhibits, four term sheets, and a negotiation captured meeting by meeting across February through April. The findings of fact, the forensic analyses, the sequence of offers and counters, and the declarations of directors who never became named defendants are where the analysis sits. Reading the confirmation order alone would tell you the plan was confirmed. It would not tell you why, or how a similar record might be built again. That is in the docket, and finding it quickly is the difference between knowing an outcome and understanding the process that produced it.

The Fifth Circuit settled one question about Serta's 2020 uptier in December 2024. It was not a permissible open market purchase. What it left open was the question that actually decides money: if the transaction was not permitted, did the participating lenders breach the credit agreement, and if so, what do they owe.

On July 7, 2026, the United States Bankruptcy Court for the Southern District of Texas answered both. The participating lenders breached Section 2.18(c) of the credit agreement, the sacred right of pro rata sharing, by taking payment on their first-lien debt without buying participations in the loans held by the lenders they left behind. Judgment is for the plaintiffs, the excluded lenders and the LCM lenders. The award is $261.13 million, measured as of the closing of the 2020 Transaction, with prejudgment interest running at nine percent per year from that date through the date of the opinion.

This ruling translates the Fifth Circuit's open market purchase holding into a damages number. It does so on the text of a pro rata sharing provision of a kind found in many syndicated credit agreements, and it rests on three determinations that are not specific to Serta's facts: what the word "payment" means, how a court measures the benefit that must be shared, and the consequences of the choice of New York law. Read together, they describe the exposure that sits behind an uptier a court later finds impermissible.

A note on posture. The opinion is a final memorandum of findings of fact and conclusions of law, but the court directed the plaintiffs to submit a proposed form of final judgment that identifies each remaining defendant, the face value of its holdings, its several share of the award, and the interest accrued on that share. Per-defendant numbers are therefore still to be computed, and the decision is subject to appeal.

Serta borrowed $1.95 billion under a First Lien Term Loan Agreement in November 2016. That agreement carried a pro rata sharing provision in Section 2.18(c) and a narrow set of carve-outs, including one for an open market purchase in Section 9.05(g). By 2019 the company carried more than $2 billion in secured debt, its largest retail partner had restructured, and the pandemic had closed more than half of its manufacturing capacity. Serta needed to reduce debt and raise new money, and it ran a process designed to make its lenders compete on discount.

Two groups formed. One, later the excluded lenders, brought a drop-down structure that would move intellectual property into an unrestricted subsidiary and lend new money against it. The other, later the participating lenders, brought an uptier open to a majority that would prime everyone else. Serta accepted the uptier. It closed on June 22, 2020. The participating lenders provided $200 million of new-money first-out loans and exchanged existing first-lien and second-lien debt into an $875 million second-out tranche, with an open-ended basket for future third-out exchanges that would rank ahead of the legacy first-lien debt left with the excluded lenders.

The exchange itself is the fact that decides this case. The participating lenders sold and assigned more than $990 million of first-lien term loans back to Serta and received roughly $734 million of new first-lien second-out debt, a ratio of 74 cents on the dollar. Serta then retired and cancelled the loans it took in. To keep that exchange outside the pro rata sharing requirement, the parties papered it as an open market purchase under Section 9.05(g). The Fifth Circuit later held that it was not one.

Before the transaction, the two sides of the first-lien class were close to evenly matched. The participating lenders held about $992 million, roughly 52.6 percent of the class. The plaintiffs held about $895 million, roughly 47.4 percent. Those percentages carry through the entire damages analysis, because Section 2.18(c) shares value in proportion to holdings across the class.

Six years separate the transaction from the award. The interval is not incidental. It is the base over which mandatory prejudgment interest compounds, and it is the product of a procedural path that ran through state court, a bankruptcy filing, the Fifth Circuit, and a denial of certiorari before returning here for trial.

The participating lenders' position depended on one word. Section 2.18(c) is triggered when a lender "obtains payment" in respect of principal or interest and ends up with a greater proportion than others in its class. If a debt exchange is not a "payment," the provision never fires, and there is nothing to share. So the participating lenders argued that "payment" means cash, and that an exchange of one instrument for another is not a payment at all.

The court read the contract against that argument and rejected it. The credit agreement does not define "payment," so its meaning comes from how the word is used across the document. The participating lenders leaned on the "in Dollars" language in Section 2.18(a), which governs how the borrower pays its lenders through the administrative agent. But Section 2.18(c) governs something different. It governs what happens when a lender receives consideration in any form and from any source, and it carries no "in Dollars" limitation. The text of Section 2.18(c) itself reaches "payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise)." A set-off is not cash. The "or otherwise" catch-all is open-ended. A debt exchange sits inside it.

The court's other basis was structural, and it closes the reading the participating lenders proposed. Section 2.18(c) carves out four transaction types from ratable treatment, in Sections 2.22, 2.23, 9.02(c), and 9.05(g). Every one of them is a non-cash exchange of one loan for another. If a debt exchange could never be a "payment" that triggers Section 2.18(c) in the first place, there would be nothing for those four carve-outs to carve out. They would be surplusage, and New York law does not read contracts to make provisions meaningless. The presence of the carve-outs is proof that the drafters understood debt exchanges to be payments. The participating lenders tried to fit their exchange into one of those carve-outs, the open market purchase. That is the whole point. You do not need an exception for something the rule never covered.

The court also declined to import an industry definition. The participating lenders offered a Loan Syndications and Trading Association guide that defines payment as a cash transfer. That guide was never referenced or incorporated into the credit agreement, "payment" is not a technical term of art, and several of the plaintiffs' witnesses testified they had never used the guide or heard of it. New York law does not let industry custom rewrite a term whose meaning is found within the four corners of the contract. The word "payment" carried its ordinary breadth, and the exchange was a payment.

Once the exchange is a payment, the remaining elements of Section 2.18(c) follow quickly, and the participating lenders' own transaction documents supply the proof. The provision requires that the payment be "in respect of" principal or interest on a loan in the class. The phrase appears several hundred times across the credit agreement and consistently means concerning, regarding, or in connection with. The participating lenders received their second-out debt as direct consideration for their first-lien term loans, at a ratio tied precisely to the principal of those loans. The signature pages to the exchange agreement show each participating lender receiving new debt equal to 74 percent of the principal amount of the first-lien loans it surrendered. The connection is not inferred. It is documented.

The court pointed to the exchange agreement's own recitals, which state that Section 2.18(c) "does not apply to any payments made as consideration for the assignment of Existing First Lien Term Loans" under Section 9.05(g). That recital is an admission built into the deal. The parties knew Section 2.18(c) would otherwise apply, which is exactly why they wrote language to escape it. The escape depended on the open market purchase holding up. It did not.

That leaves the last two elements. The participating lenders received a payment on their first-lien term loans. The plaintiffs, holding the same class of loans, received nothing. And the participating lenders never purchased participations in the plaintiffs' loans, which is the specific remedy Section 2.18(c) requires to restore ratable treatment. The court noted that the discount the participating lenders accepted is beside the point. Section 2.18(c) asks whether one lender recovered a greater proportion of its loans than another lender in the same class. The participating lenders recovered a payment. The plaintiffs recovered zero. The proportion is unequal on its face.

With liability established, the participating lenders' remaining arguments were efforts to avoid or shrink the award. The court addressed each and rejected each. Two are worth pausing on before the table, because they show how the Fifth Circuit's mandate constrains what a defendant can still argue on remand.

The ratification defense argued that a majority of lenders amended Section 9.05(g) to confirm the transaction, so the majority ratified it. But ratification presupposes a transaction that was valid to ratify. The Fifth Circuit held the transaction was not an open market purchase, and it held that changing the ratable-sharing protection required unanimous consent precisely so a majority could not bargain away a right belonging to all lenders. The ratification argument is the open market argument in new packaging, and it lost for the same reason. The law-of-the-case defense fared no better. It leaned on the prior judge's statements about the excluded lenders' "objective lack of good faith," but those statements were dicta that could be deleted without disturbing any ruling. Dicta decides nothing, so there was nothing for the excluded lenders to appeal and nothing they forfeited.

The mitigation defense deserves a word, because it is the one most likely to recur. The participating lenders argued the plaintiffs should have sold their positions rather than hold them through a decline. The court found no market to sell into. In the eighteen months after closing, only about $162 million of first-lien term loans traded, against plaintiff holdings of more than $700 million, and dealers were sitting on inventory they could not move. The plaintiffs' fact witnesses testified to weekly and biweekly calls with brokers that never produced a buyer. The court also held that a plaintiff need not sell to mitigate when selling would extinguish the very breach claim it is trying to preserve. For the LCM lenders, whose business depends on the senior-secured-lending model the transaction threatened, that claim was worth more than any price the thin market could offer.

The liability holding decides who pays. The damages holding decides how much, and the method the court used to reach it applies beyond this transaction. The dispute reduced to a single question. When Section 2.18(c) requires that "the benefit of all such payments shall be shared ratably," what is the benefit? The plaintiffs' expert measured it at the face value of the consideration the participating lenders received. The participating lenders' expert measured it at economic value, discounted for the risk that the new paper might not perform. The court took face value.

The mechanics are clean once the benefit is fixed. The participating lenders received $734 million of second-out consideration. Spread ratably across the $1.887 billion first-lien class, that benefit is worth about 38.9 cents per dollar of class principal. Applied to the plaintiffs' $895 million position, the ratable share the participating lenders should have delivered is roughly $348 million. That figure is the baseline for the entire award.

The court rejected two competing methodologies for the same reason: both drifted away from the text. The plaintiffs' first method measured damages at the time Serta emerged from bankruptcy in 2023, three years after the breach, which folded in independent market forces like the pandemic-era mattress downturn and Serta's later refinancing failure. New York law measures contract damages at the time of breach, so the court rejected it. The participating lenders' method measured the change in expected recoveries across the first-lien class from the first to the third quarter of 2020, an attempt to show that everyone's recovery improved and that the plaintiffs therefore lost nothing. The court rejected that too. Section 2.18(c) shares the benefit of the payment, not the benefits of the transaction as a whole. New money, second-lien buybacks, the price at which lenders bought their debt, and the general economics of the deal are all outside what the provision measures.

With the benefit fixed at face value and the measurement date fixed at closing, the court adopted the plaintiffs' time-of-breach model using the 25-cent first-lien price that prevailed on the closing date. The model compares a but-for world, in which the plaintiffs receive the $348 million cash payment and keep the balance of their loans, against the actual world, in which they kept all their loans and received nothing. The table below shows the sensitivity of that calculation to the assumed first-lien price. The court adopted the 25-cent column.

The participating lenders' principal objection was that the result makes no economic sense. It requires them to pay $348 million for a participation worth roughly $87 million at the closing price, a trade no rational party would accept. The court answered that the objection proves the point rather than defeating it. The parties structured a transaction that always carried the risk of not complying with Section 2.18(c). They accepted that risk, litigated it, and nearly won. When the Fifth Circuit held the open market purchase did not qualify, the consequence the provision was written to impose became the consequence they owed. Strict textual analysis decided whether the transaction complied. The same strict text decides the price of getting it wrong.

The damages number is not the exposure. The exposure is the damages number plus six years of interest at a rate the court had no discretion to reduce. The credit agreement is governed by New York law, and under New York law prejudgment interest on a breach of contract claim is mandatory at nine percent per year. It is not a penalty and not a matter of equity. It runs from the earliest ascertainable date the claim existed, which here is a single date, the closing of the transaction on June 22, 2020, and it runs through the date of the opinion.

The participating lenders argued that nine percent over six years on a multi-hundred-million-dollar award is inequitable, that New York's rate is among the highest in the country, and that the plaintiffs dismissed early suits and waited before filing again. The court held that none of that matters, because equitable considerations do not enter a breach of contract case where interest is mandatory by statute. The cases the participating lenders cited all involved federal claims or non-New York law, where no mandatory New York provision applied.

How far this reaches is best seen in the authority the court relied on. In one New York Court of Appeals case, a 1982 breach produced a damages trial thirteen years later, and prejudgment interest ran the full interval across multiple appeals. By the time judgment entered, the interest award of $417,785 exceeded the damages award of $338,521. The court also cited authority holding that a plaintiff's delay in bringing suit is not a controlling factor in computing interest. The lesson for the party that structures the transaction is direct. Choosing New York law for a credit agreement means that a breach found years later carries a mandatory nine percent running from the breach, and time is not on the breaching party's side.

The award is not a single joint number that any one defendant might be forced to satisfy alone. The credit agreement makes the lenders' obligations several and not joint, so each remaining defendant is liable only for its own proportionate share of the total, calculated by its individual first-lien holdings as of the closing date against the total holdings of all participating lenders at that time. A defendant's liability does not grow because other defendants have settled or been dismissed, and there are several who are no longer in the case.

Two adjustments sit on the plaintiffs' side of the ledger. The portion of the award attributable to any excluded or LCM lender that is no longer a plaintiff drops out of the recoverable amount. And one of the plaintiffs, Apollo, has its recovery limited to 50 percent of its holdings, consistent with a ruling on a motion in limine and a May 2023 stipulation and agreed order under which half of the applicable purchases were deemed null and void.

The court directed the plaintiffs to submit a proposed form of final judgment. That judgment must identify each remaining defendant, the face value of its first-lien holdings as of June 22, 2020, its several share of the adjusted damages total, and the prejudgment interest accrued on that share through July 7, 2026. Until that document is entered, the $261.13 million figure is the aggregate before these several allocations, and the individual exposures remain to be computed.

The significance of this opinion is not that an uptier lost. The Fifth Circuit's 2024 decision already held that Serta's structure did not fit the open market purchase exception. What this opinion adds is a method for turning that holding into a damages number, and the method rests on reasoning that is not specific to Serta. If you advise on either side of a liability management exercise, three parts of that reasoning bear on how you price risk.

The first is the "payment" holding. The participating lenders' best textual argument was that a debt exchange is not a payment and never triggers pro rata sharing. That argument is now harder to make against a credit agreement built on the common New York template, because the same carve-outs that appear in most agreements are the proof that debt exchanges are payments. The escape hatch that some structures counted on is closed by the very exceptions those structures rely on. When you evaluate whether an exchange sits inside or outside a sacred right, the presence of non-cash carve-outs cuts against the argument that the sacred right never applied.

The second is the measure of damages. A minority lender's exposure is not the discounted market value of the paper the majority received. It is the face value of the consideration the majority negotiated for itself, shared ratably across the class. That distinction is the difference between a modest number and a large one. In this case it was the difference between an economic-value theory that produced little or nothing and a face-value theory that produced $261 million. When you model the downside of a transaction that might fail the sacred right, the face value of what the participating group takes is the right input, and it is a number the participating group sets itself.

The third is time and law. Nine percent mandatory interest running from the breach turns litigation risk into a growing liability that neither delay nor a favorable early ruling can arrest. Serta's participating lenders won at the bankruptcy court and lost at the Fifth Circuit, and the interest ran the entire time. A choice-of-law clause that reads as boilerplate carries a real and compounding cost when a transaction is later unwound. That cost belongs in the model at signing, not in the post-mortem.

Two cautions keep this in proportion. This is a trial court's decision, applying New York law to one credit agreement, and it is subject to appeal. Another agreement with different sacred-right language, different carve-outs, or a different governing law could come out differently, and the proposed final judgment that fixes each defendant's several share has not yet been entered. But the direction is clear enough to act on. The instruments and the mechanics that made these transactions attractive are the same instruments and mechanics a court now reads strictly against the party that built them. The discipline that goes into structuring an exchange to satisfy a sacred right is the same discipline that will be applied, word for word, when a court decides what the failure costs.

On July 10, 2026, Central Falls Detention Facility Corporation, which owns and operates the Donald W. Wyatt Detention Facility in Central Falls, Rhode Island, filed for Chapter 11 in the United States Bankruptcy Court for the District of Rhode Island. The Debtor filed with a restructuring already negotiated. A restructuring support agreement signed by holders of about 71.2 percent of its bonds and by the City of Central Falls preceded the petition by roughly three weeks.

The first day declaration describes the source of the distress. According to the declaration, the Debtor is on solid footing as to its current operating liabilities, but its bond debt is not sustainable and cannot be repaid on its existing terms. The filing therefore addresses the balance sheet rather than day-to-day operations. That framing is the reason the case is structured the way it is.

The mechanics are straightforward to state and consequential in effect. Holders of the existing 2005 bonds would exchange more than $167 million in claims for $67.5 million in face amount of new bonds. The reduction in principal alone is approximately 60.1 percent, and the total relief between principal and interest exceeds $101.6 million. Every other class of creditor, from trade suppliers to litigation claimants, would be paid in full or reinstated. The only two classes that vote are the bondholders and the City.

The Debtor is a public corporation created under Rhode Island's 1991 Act authorizing municipal detention facility corporations, codified at R.I. Gen. Laws § 45-54-1 et seq. The Act allowed each city and town in the state to charter such a corporation, and the City of Central Falls acted on that authority through a pair of 1991 resolutions, an intergovernmental agreement with the United States Marshals Service, and the zoning approvals the statute required. The Debtor was formed for a specific purpose: to acquire land and to build, manage, and operate a detention facility in the City.

The Facility opened in December 1993 as a three-story building at 950 High Street. A 2006 expansion raised its maximum occupancy from 300 male detainees to 782, including a 40-bed unit for female detainees. The Debtor now also owns an adjacent training building at 935 High Street, acquired in 2019 when it exercised a purchase option under a prior lease. Its revenue is a function of a single operating variable, the average daily population of detainees, multiplied by a fixed per-diem rate.

The first day declaration reports that approximately 204 of the Facility's employees are covered by collective bargaining. The Facility houses detainees under three government arrangements: an intergovernmental agreement with the United States Marshals Service dating to 2022, a 2019 addendum adding Immigration and Customs Enforcement as a party, and a Navy contract for military personnel in the custody of a general court-martial convening authority that was recently extended through March 2027. Over the 2020 through 2024 period, the Facility paid Rhode Island-based employees and vendors an average of roughly $27 million a year and employed an average of more than 200 state residents annually. The Facility serves at once as the bondholders' collateral, as a detention resource for federal agencies, and as a source of employment and spending in the state, and that combination of roles is a recurring feature of the disputes described below.

To fund the 2006 expansion, the Debtor issued $106,380,000 of Series 2005A revenue refunding bonds under a 2005 indenture of trust. The current bond trustee is UMB Bank, N.A. The bonds are secured by the Facility's revenues and by a first-priority mortgage lien on the real property, personal property, and associated leases and rents, perfected by recording in 2005. In plain terms, the bondholders hold a lien on nearly everything the Debtor has and on the money the Facility generates.

The Facility has not generated enough revenue to cover both. According to the declaration, over the life of the Facility it has been consistently unable to sustain a population rate high enough to fund both its operations and its obligations under the indenture. Capacity is 782, but the practical inflow and outflow of detainees means the Facility cannot hold that many at once, and average daily population has run near 675 over the past five years. The bonds were sized against a capacity the Facility has not filled in practice. That gap between the debt and the revenue available to service it underlies the restructuring.

The Debtor reports no equity security holders, which follows from its status as a public corporation, and only a de minimis level of general unsecured claims because it pays its invoices as presented and carries no unpaid accounts payable. That profile matters. When almost the entire liability side of the balance sheet is a single secured bond issue, a restructuring becomes a negotiation with one creditor group rather than a contest among many, and that is precisely the negotiation this filing resolves.

The road to this filing runs through more than a decade of receiverships, forbearance agreements, and litigation. Each step was an attempt to manage the same structural gap between the bond obligations and the revenue the Facility could produce, and each step postponed rather than solved the problem.

The 2019 federal action was the turning point in the dispute. The bond trustee alleged that the City's attempt to dissolve the Debtor, and the board's short-lived suspension of the ICE addendum, amounted to tortious interference with the trustee's collateral, which includes the government contracts that generate the Facility's revenue. Those claims, together with the City's crossclaims for the Debtor's failure to make payments owed under the 2015 forbearance agreement, produced a three-way dispute among the Debtor, the bondholders, and the City. The mediation that followed produced not a freestanding settlement but a restructuring to be implemented through this Chapter 11 case.

The restructuring support agreement, signed roughly three weeks before the petition, is the spine of the case. Its signatories are the consenting holders, who hold approximately 71.2 percent of the outstanding bond principal, and the City. Together they have agreed to support the plan and to carry it through confirmation. A prearranged plan built on that level of committed support does not eliminate risk, but it changes the shape of the case, because the largest creditor group and the host government are aligned before the first hearing rather than after months of contested negotiation.

The agreement also commits the Debtor to a set of behaviors during the case. It will operate the Facility in the ordinary course, will not incur new debt senior to the bonds outside narrow exceptions, will not challenge the validity or priority of the existing bond documents, and will not seek to terminate its own exclusivity. In exchange, the consenting parties support a plan that pays every non-bond, non-City creditor in full or reinstates them. The agreement threads a familiar needle. It concentrates the economic compromise on the one class large enough to absorb it, the bondholders, while leaving trade creditors, litigation claimants, and employees whole.

On the effective date, the existing bonds and all related obligations would be cancelled and exchanged for two new series issued under an amended and restated indenture. The two series are built to do different jobs. The first is a hard obligation the Debtor must service on a schedule. The second is a contingent obligation payable only when the Facility produces surplus cash. Splitting the recovery this way lets the plan hand bondholders a meaningful fixed claim without recreating the fixed burden that broke the old capital structure.

The two series divide the recovery along the same line. The amortizing 2026A bonds carry a 7.25 percent coupon on $27.5 million, the portion the Debtor projects it can service on a fixed schedule. The larger 2026B tranche carries a 1.5 percent rate and is paid down only from excess cash flow, with express language that an insufficiency of excess cash flow does not constitute an event of default. Under that structure, bondholders recover more through the 2026B series if the Facility generates surplus cash, and the Debtor does not carry a fixed obligation on that tranche if it does not. On the effective date, remaining trustee-held balances would also fund a $2.75 million debt service reserve under the restated indenture.

The plan divides claims into seven classes. Five are unimpaired and do not vote. Only the bondholders and the City are impaired, and only they are being solicited. The structure leaves the remaining creditors unimpaired and puts the compromise to the two impaired classes that negotiated it.

The bondholder class carries the economic compromise. In full and final satisfaction of their claims, holders of Class 3 claims would receive their pro rata share of the new Series 2026 bonds, and any deficiency claim under Section 506(a) would be deemed waived as of the effective date. That waiver is what allows the plan to leave the other classes unimpaired. Rather than assert an unsecured deficiency that would share in distributions alongside other unsecured creditors, the bondholders would take the new bonds and release the balance of their claims.

The City is both a creditor and the government whose appointees sit on the Debtor's board, and the plan treats it as both. The settlement embedded in the plan resolves the City's claims in the federal litigation and establishes a go-forward financial relationship. The Debtor paid the City $250,000 in April 2026 for annual local impact fees covering the prior year, a payment made in connection with the RSA, and the plan carries that arrangement forward.

The payments carry conditions. The annual impact fees flow monthly only so long as the scheduled payments on the 2026A bonds are current and no default exists under the restated documents, and the City's 5 percent share is tied to the same excess cash flow that redeems the 2026B bonds. The City's recovery is therefore tied to the bondholders' recovery and to the Facility's performance. Where the 2019 litigation had positioned the City and the bondholders against one another, the settlement links their recoveries to the same source of funds.

The November 2023 ransomware attack exposed the information of approximately 18,500 current and former detainees, employees, and vendors, and produced a putative class action filed in federal court in July 2024. The Debtor reached an agreement in principle before the petition, and the plan folds that settlement directly into the reorganization. Class members who do not opt out are treated in Class 6 and take the settlement; those who opt out fall into Class 5 and have their claims reinstated. Both classes are unimpaired.

The settlement is a claims-made structure funded from a dedicated settlement fund. Each class member who suffered losses fairly traceable to the incident may claim up to $5,000 in documented losses, plus up to four hours of time responding to the incident compensated at $20 per hour, subject to a maximum aggregate cost to the Debtor of $100,000. Class members are also offered five years of single-bureau credit monitoring, with the Debtor covering the cost of that monitoring and of notice and claims administration. The plan provides for up to $90,000 in plaintiff's attorneys' fees and a $2,000 incentive fee for the named plaintiff, and the settlement fund would be funded into escrow on the effective date pending final approval.

The case is running on a compressed schedule set by the RSA. The Debtor is funding operations through cash collateral rather than new debtor-in-possession financing, and the milestones point toward confirmation within roughly ninety days of filing and emergence shortly after.

The Debtor is represented by Troutman Pepper Locke LLP as lead counsel and Partridge Snow & Hahn LLP as Rhode Island counsel. Getzler Henrich & Associates LLC serves as financial advisor, and Epiq Corporate Restructuring, LLC serves as claims, noticing, and solicitation agent. UMB Bank, N.A. is the trustee for the existing bonds. The plan and disclosure statement were both filed on the petition date, consistent with a case designed to move quickly from filing to confirmation.

A prearranged case with committed support and full recoveries for ordinary creditors carries a lower confirmation risk profile than a contested restructuring, but the risk is not zero, and several open questions will shape the outcome. None of the pending relief described here has been approved, the objection deadlines have not passed, and the plan may be amended before confirmation.

The first question is feasibility. The entire structure rests on the assumption that the Facility can service $27.5 million of amortizing 7.25 percent debt and still generate excess cash flow to service the 2026B bonds and the City's share. That assumption depends on average daily population and the fixed per-diem rate holding near recent levels, and the disclosure statement's financial projections and feasibility analysis will draw scrutiny given the Facility's long history of operating below capacity. The second question is the durability of the government contracts. The Facility's revenue depends on its agreements with the Marshals Service, ICE, and the Navy, and the 2019 litigation showed how quickly a dispute over those contracts can escalate. The third question is approval of the embedded settlements. Both the City settlement and the data-security class settlement require the court's blessing, and the class settlement in particular runs through its own notice, opt-out, and final-approval process.

The distinguishing feature of the case is its structure rather than the size of the debt. A public detention corporation has taken more than a decade of receiverships, forbearance agreements, and federal litigation and addressed them through a single prearranged plan that reduces the bond debt, settles with its host city, and resolves the class action, while providing for its trade creditors and employees to be paid in full or reinstated. Whether the financial projections hold is the principal open question, and the plan, disclosure statement, and supporting projections are now on the docket for parties in interest to test.

On July 4, 2026, Pacifica of the Valley Corporation, which operates as Pacifica Hospital of the Valley, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware. The case is docketed as Case No. 26-11060 (TMH). Three days later, the Debtor's President and Chief Executive Officer submitted a first-day declaration in support of a set of emergency motions.

The declaration describes a hospital that functions as a safety-net provider for its area and, at the same time, holds very little cash. The Debtor reports approximately $240,797 in unrestricted bank accounts as of the petition date. It employs roughly 697 people and operates a 231-bed acute care facility that treats more than 50,000 emergency patients each year. The contrast between the hospital's operational scale and its cash position is the backdrop for the emergency relief the Debtor seeks.

The Debtor attributes the filing to its liquidity crisis, legacy liabilities, and ongoing operational challenges, compounded by litigation in Colorado that had reached a receivership posture. Shortly before filing, the Debtor appointed a Chief Restructuring Officer from Berkeley Research Group to evaluate strategic options and install treasury controls. The sections that follow trace how a hospital delivering care to one of the region's most vulnerable populations arrived at an emergency Chapter 11, and why the validity of its largest secured claim is now an open question.

The Debtor describes itself as an integrated healthcare system that has provided more than $3.3 billion of care over the last 30 years from its campus at 9449 San Fernando Road in Sun Valley, California. The hospital sits at the center of a catchment area spanning 13 zip codes and has been designated a Top Safety Net Provider by the Los Angeles Business Journal. Its service lines extend well beyond a conventional community hospital, and several of them carry distinct financial and clinical significance.

The declaration also describes a working farm on three acres adjacent to the hospital, converted to grow fresh produce for inpatients in response to federal dietary guidance, with a first corn harvest anticipated in September 2026. The breadth of these programs matters for the case: each service line the Debtor operates is a program a restructuring will have to preserve, fund, or unwind, and several of them, including the subacute unit where every patient requires ventilator support and the Department of Mental Health referral program, serve medically complex populations.

The Debtor's payer mix explains both its mission and its fragility. Approximately 84% of its patients live at or below the poverty line. As a consequence, the hospital depends heavily on Medi-Cal, California's Medicaid program, which the Debtor reports supplies roughly 85% of its total revenue and patient volume. The hospital states that it frequently ranks among the highest in the nation for the share of Medi-Cal patients it serves, currently around 81%.

Reimbursement at those levels does not cover the cost of care. The Debtor relies on two government programs to bridge the gap: the Hospital Quality Assurance Fee, established in 2010, and the Disproportionate Share Hospital program. Together these are meant to supplement Medicare and Medi-Cal, which the Debtor states pay only about 80% of the cost of treating covered patients. The problem is that neither supplemental program pays reliably. Payments arrive retroactively, in lump-sum quarterly intervals, and they have been repeatedly reduced and delayed.

The receivables illustrate the timing risk. Under Program 9 of the Hospital Quality Assurance Fee, covering calendar year 2025, the Debtor received $7 million and estimates that roughly $16 million more is still owed. It projects another $10 million from Program 10, covering 2026, without a firm date for receipt. A hospital that books the majority of its revenue through government channels, and cannot predict when that revenue will land, has little margin for a liquidity shock. When the shock came, there was almost no cash to absorb it.

The Debtor is incorporated in Delaware and licensed by California to operate the hospital. Its Executive Chairman and sole shareholder owns the enterprise. The prepetition capital structure centers on a single senior secured loan, layered against significant lease arrears and a purchased interest in future government receivables.

In July 2020, at the height of the pandemic, the Debtor sought financing under the Main Street Loan Program created by the CARES Act. On December 10, 2020, it entered into a Main Street Priority Loan Agreement with First Western Trust Bank and the Federal Reserve Bank of Boston, under which First Western extended a senior secured loan of $35,000,000. The Debtor granted a security interest in personal property, and its sole shareholder executed an unconditional personal guaranty and pledged 100% of his equity in the Debtor as additional security. As detailed in Section VII, First Western's interest was later purchased, at least nominally, by Axios Capital Solutions, LLC, and the validity of that purchase is now disputed.

Amounts as estimated in the first-day declaration. The obligations differ in nature and priority and are not directly comparable in recovery terms.

Two other prepetition claimants sit against the estate. Since 2013, the Debtor has operated the hospital under a long-term Master Lease with four landlord entities, and it estimates roughly $9.5 million in accrued and unpaid rent and related obligations as of the petition date. The landlords filed a UCC-1 in November 2022 that was subordinated to First Western, and now to Axios, under a subordination agreement the Debtor is still investigating. Separately, the Local Initiative Health Authority for Los Angeles County, operating as L.A. Care Health Plan, purchased the Debtor's right to future Hospital Quality Assurance Fee payments and filed UCC-1 statements in January and May 2026 asserting an interest in those proceeds. The Debtor estimates it owes L.A. Care approximately $7.5 million and has not yet determined the validity of that security interest.

On the asset side, the Debtor holds a $2.9 million grant awarded in December 2023 by the Mental Health Services Oversight and Accountability Commission to establish and operate its EmPATH behavioral health unit, distributed across three annual payments. The Debtor's 2024 audited financials reflect revenue of approximately $100 million, down from roughly $107 million in 2023, and no audited statements exist for 2025. Against $35 million in matured senior debt and roughly $17 million in other estimated secured or purchased claims, the roughly $240,000 of unrestricted cash on hand frames the urgency of the first-day relief.

The declaration traces the Debtor's distress to the pandemic and to obligations that outlived it. When COVID-19 arrived, the hospital expanded substantially at the state's request, increasing its intensive care capacity from 7 beds to 66, adding beds in hallways, closed units, and outside areas, and securing three National Guard strike teams in December 2020 to stabilize operations. It later reopened a closed Los Angeles hospital to serve as a satellite surge facility. The Debtor states it received only nominal reimbursement for these costs and never fully recovered, in part because a roughly 60% drop in emergency occupancy reduced its future Quality Assurance Fee funding.

The seismic obligation compounded the damage. California law requires acute care hospitals to retrofit their facilities to meet seismic performance standards, and the Debtor's role as a surge center kept contractors off-site and caused it to miss construction milestones. The consequences are quantified in the declaration.

A 2022 assembly bill granted an 18-month extension, but post-pandemic construction costs ran well past pre-COVID estimates and the resulting litigation delayed the work further. The extension expired on January 1, 2025, and fines of $15,000 per day have accrued since, totaling roughly $9 million through June 2026. The Debtor intends to seek another legislative extension, to April 20, 2028, and to abate the daily fines. In April 2026, it obtained fresh quotes for the remaining retrofit work totaling approximately $6.5 million from a contractor and $650,000 from an architectural firm.

Two further pressures round out the picture. Rising labor costs, including elevated rates for traveling nurses hired during the staffing shortages, added ongoing strain. And in February 2024, the cyberattack on Change Healthcare, a UnitedHealth Group subsidiary that processes claims for hospitals nationwide, disrupted the Debtor's operations and cash collections. Each of these factors on its own is survivable. Layered against a hospital with no cash reserves and unpredictable government receivables, they left the Debtor without the cushion to withstand the litigation described next.

The immediate cause of the emergency filing was a receivership motion pending in Colorado state court. The dispute began as a straightforward collection action and escalated into a fight over control of the hospital itself.

The petition was filed four days before the scheduled receivership hearing. The Debtor states that the Colorado Action, together with its liquidity and operational pressures, precipitated the filing. The commencement of a Chapter 11 case triggers the automatic stay under Section 362 of the Bankruptcy Code, which generally halts the continuation of litigation against the debtor and the enforcement of remedies against estate property. The filing placed the matter before a federal bankruptcy forum, with the Debtor remaining in possession, and it brings the validity of Axios's claim, examined next, to the foreground.

Attached to the declaration as Exhibit B is the Colorado court's June 26, 2026 order denying Axios's motion for partial summary judgment. The order is short, but its reasoning bears directly on the largest claim in the case. Several facts are undisputed: the loan was for $35,000,000, the guarantor signed both the note and an unconditional guaranty, and the produced payment ledger shows that between 2021 and 2024 the Debtor paid $5,132,050.21 in interest and late fees and nothing toward principal. The loan matured on December 10, 2025, and the full amount remains unpaid.

The dispute is not whether the debt is owed. It is whether Axios holds it. The loan was issued under the Main Street Loan Program, and the co-lender arrangement incorporated the program's standard terms, which prohibit assignment to any of the borrower's affiliates or subsidiaries or to a natural person. Before the Federal Reserve's Main Street special purpose vehicle would release its 95% participation to allow the sale to Axios, it required confirmation that there was no common ownership between the buyer and the borrower.

The ownership chain is where the facts diverge. Axios's sole member is Brain Health, whose sole shareholder is an individual who, the Debtor contends, also holds a controlling interest in the Debtor. The court's order recounts that during the sale process Axios represented to First Western and its investment bank that a different individual was Axios's sole member and manager, and that the transaction documents, including the sale and assignment agreement, were updated to reflect that representation before execution. The documents also carried a representation that neither Axios nor its affiliates had any ownership or control over the borrower or guarantor. The Debtor produced a complaint from a separate California lawsuit and an institutional affiliation agreement that it argues demonstrate the alleged common owner's controlling interest in the hospital.

The court found that Axios missed the thrust of the argument. The question is not whether the program restrictions bound the assignment in the abstract. It is whether the Federal Reserve would have approved any of the documentation had the ownership interest been disclosed. Because a factual dispute exists over whether the alleged common owner holds any interest in the Debtor at all, the court held that a jury must resolve that question before the validity of the assignment can be decided as a matter of law. On that basis, it denied summary judgment.

The declaration supports a set of first-day motions, several of which the Debtor asked to be heard on an emergency basis. For a hospital operating on roughly $240,000 in cash, with patients who require continuous ventilator support, the operational motions are not routine housekeeping. They are the mechanism for keeping the doors open through the first days of the case.

The cash management motion carries the most weight. The Debtor operates 13 bank accounts across California Federal Credit Union and Columbia Bank, and it states plainly that it lacks meaningful cash reserves and needs immediate access to its receipts. Any delay in collecting available funds, in the Debtor's telling, could force it to cease operations. The relief sought is standard for a healthcare Chapter 11, but the thin liquidity behind it is what makes the emergency posture credible.

Three features of this case will shape how it develops. The first is the contested secured claim. A Chapter 11 in which the largest lienholder's standing is genuinely in question is a different case from one in which the capital structure is settled. The Colorado court has already found a triable dispute over whether the assignment to Axios violated Main Street Loan Program terms, and that question does not disappear because the forum has changed. Expect the validity of the assignment, the related subordination arrangement with the landlords, and the L.A. Care security interests to be litigated early, whether through claim objections, an investigation by any committee that is appointed, or contested cash collateral and financing proceedings.

The second is liquidity. With roughly $240,000 on hand and revenue that arrives late and in unpredictable government installments, the Debtor has little cushion, and it states that any delay in collecting available receipts could force it to cease operations. The anticipated $16 million in Hospital Quality Assurance Fee receivables and the projected Program 10 funds are the near-term sources of relief, but their timing is uncertain and L.A. Care asserts an interest in a portion of them. How the Debtor funds operations while those questions are resolved is the central operational issue.

The third is the patient population. Many debtors can slow operations or wind down gradually while disputes are resolved. This Debtor operates a subacute unit where every patient requires ventilator support, a Department of Mental Health referral program for recently incarcerated patients, and an emergency department that treats more than 50,000 patients a year in a community where most patients cannot pay. Those clinical realities constrain the restructuring options and raise the stakes of every liquidity decision. Whatever the outcome of the dispute over who holds the loan, the hospital must continue operating while it is resolved.

The Second Circuit had never squarely decided whether a contractual blocker actually defeats a claim for short-swing profits under Section 16(b) of the Securities Exchange Act. On July 7, 2026, it did.

In 20230930-DK-Butterfly-1, Inc. v. HBC Investments LLC, a unanimous panel affirmed the dismissal of a claim seeking to disgorge more than $300 million in trading profits, holding that a comprehensive, self-executing cap keeps an investor below the ten-percent beneficial-ownership threshold that triggers strict liability. The plaintiff was the post-bankruptcy successor to Bed Bath & Beyond. The defendants were the investment manager and fund that anchored the retailer's last capital raise before it failed.

The holding matters well beyond this case. Blockers are standard equipment in distressed capital raises, private placements, and convertible structures across the restructuring market. Until now, a plaintiff in this Circuit could argue that a blocker was a paper formality that a court should look past in favor of how the arrangement functioned in practice. The panel rejected that invitation and told plaintiffs exactly what they must plead instead.

By the early 2020s, Bed Bath & Beyond was in a position familiar to anyone who has worked a prepetition liquidity crisis. Pandemic-related store closures, supply disruptions, and management missteps had pushed a national home-goods retailer toward the edge. In desperate need of cash, the company went to the capital markets and issued three classes of derivative securities: convertible preferred stock, preferred-stock warrants, and common-stock warrants. Each was a route to freely tradable common stock at a potential discount, whether by converting preferred into common, exercising warrants for preferred and then converting, or exercising warrants directly for common. Hudson Bay bought up almost all of it and anchored the offering in exchange for the right to acquire heavily discounted, freely tradable stock.

That structure carried a problem Hudson Bay wanted no part of. An investor with the right to acquire more than ten percent of a public company's common stock takes on regulatory responsibility, including the disclosure and disgorgement obligations that Section 16 imposes on insiders. To stay clear of that line, Hudson Bay wrote blockers into every instrument. The blockers capped its beneficial ownership at 9.99 percent, and they did so with teeth. Any conversion or exercise that would carry it over the cap was, by the contract's own terms, null and void and treated as if never made. Hudson Bay had no power to vote or transfer any shares issued above the threshold. And every time it converted preferred stock or exercised a warrant, it had to certify that the transaction would not push its beneficial ownership past 9.99 percent.

One further document shaped the dispute. Hudson Bay and BBBY signed a side letter providing that the public-offering documents set out the complete set of procedures for exercising warrants and converting preferred, that BBBY would not demand additional information or instructions when Hudson Bay invoked those rights, and that BBBY would honor Hudson Bay's requests in accordance with the terms of the offering documents. The side letter also stated, in terms, that it neither superseded nor altered those documents. That last point became the hinge of Butterfly's final theory, and it did not hold.

The cash infusion was not enough. BBBY filed for Chapter 11 in April 2023. By then, according to the complaint, Hudson Bay had made more than $300 million by acquiring newly issued stock at a discount and reselling it into the market, over and over. On the trading records attached to the complaint, Hudson Bay's end-of-day beneficial ownership stayed below the ten-percent threshold throughout.

Section 16(b) is not a fault-based rule. The Second Circuit calls it a blunt instrument, and the label is precise. To remove any temptation to trade on inside information before it can arise, the statute imposes strict liability on corporate insiders who profit from buying and selling a company's securities inside a six-month window. Intent is irrelevant. The insiders it reaches are a public company's directors and officers, and its most powerful shareholders: anyone who is, directly or indirectly, the beneficial owner of more than ten percent of a class of equity security.

The reach extends past current holdings to potential ones. So long as an investor has the right to acquire beneficial ownership of the underlying security, it falls within the statute's field of view. That is why warrants, options, and convertible preferred stock are squarely within Section 16's ambit, and why an investor holding large volumes of those instruments has to think carefully about where the ten-percent line sits.

A blocker is the tool built to neutralize that exposure. Drawing on Levy v. Southbrook International Investments, its seminal decision in this area, the panel described a blocker, or conversion cap, as a contractual provision that denies an investor the right to acquire more than ten percent of an issuer's equity at any one time. The operative words are any one time. Beneficial ownership under the statute is measured at a single moment, not cumulatively. A blocker lets an investor move enormous cumulative volume through a position while never crossing the line at any given instant. By extinguishing the right to acquire beneficial ownership above the cap, the blocker takes the investor outside the statute. Butterfly's whole case was an effort to prove that Hudson Bay's blockers did not really do that.

Courts disregard blockers that are a sham or illusory. The difficulty, as the district court noted and the panel accepted, is a genuine dearth of case law on when a blocker crosses that line. Levy supplies the framework the Second Circuit applied, and it reduces to three commonsense questions. Can the investor waive the blocker in its sole discretion? Does the blocker lack a means of ensuring compliance? And has the investor, as a practical matter, ever actually exceeded the cap?

Those three questions were not conjured for this appeal. The Securities and Exchange Commission had once proposed a longer list of factors in an amicus brief in Levy, but most courts have never expressly applied the Commission's criteria, and the three Levy factors largely track three of the SEC's own: whether the blocker lacks an enforcement mechanism, whether it is easily waivable, and whether it has been adhered to in practice. Butterfly argued all three. On each, the blockers held.

Sole-discretion waiver

Butterfly's theory was that the blockers were wafer-thin because they could be waived or amended like any other contract. The panel had a short answer. Every contract can be amended by its parties, so a rule that equated amendability with illusoriness would turn every clause of every agreement into a sham. That is not what Levy asked. Levy asked something narrower: whether the investor alone could waive or nullify the cap in its sole discretion. Hudson Bay could not. Changing the deal required BBBY's consent, and that is the difference between a real constraint and a phantom one.

Means of ensuring compliance

Butterfly next argued that enforcement depended entirely on Hudson Bay policing itself, and that the side letter made matters worse by stripping BBBY of any ability to monitor compliance in real time. The panel was unpersuaded, and the reason repays attention. The court has never held that a clause is illusory simply because one party cannot audit the other's compliance as it happens. Levy asked only whether the contract contained mechanisms that would prevent the investor from crossing ten percent, and it found that an investor's own ability to revoke an over-cap conversion was enough. Hudson Bay's blockers went a step further. They did not depend on anyone electing to revoke anything. An over-cap acquisition was void automatically, treated as if it had never occurred, and every exercise carried a fresh certification that the cap remained intact.

Adherence in practice

The final factor asks whether the cap was ever actually breached, and here the complaint's own exhibits cut against the plaintiff. The trading records attached to the pleading showed Hudson Bay's end-of-day beneficial ownership staying below the threshold throughout. To argue otherwise, Butterfly had to do some arithmetic that the panel did not credit, and that arithmetic is where the case turned.

Butterfly's sharpest factual argument was a single snapshot. At 9:27 a.m. on February 10, 2023, it alleged, Hudson Bay had 10.1 percent of BBBY's outstanding common stock sitting in its brokerage account. If ownership is about what is in the account at a given instant, that number is over the line.

But that is not what beneficial ownership measures. The controlling question is investment power: the power to dispose of a security or to direct its disposition. Hudson Bay had no such power over shares it had already agreed to sell. To reach 10.1 percent, Butterfly counted shares that Hudson Bay had already committed to sell but still technically held for the moment they transited its account. As the case law makes clear, it is the moment the trading decision is made, rather than the mechanics of settlement or the passing of title, that governs Section 16(b). The panel called Butterfly's method dubious, and the complaint undercut it directly. Butterfly conceded that Hudson Bay's exercise requests were staggered with intervening sales, and the pleading's own chart tracked advance sales of millions of shares. Where a share happens to be sitting for an instant is not the test. Whether the holder still controls its disposition is.

Beneath the factual dispute ran a methodological one, and this is the part of the opinion that will matter most to future litigants. Butterfly argued that the district court had fixated on the text of the blockers and ignored how they functioned in practice. It pointed to a footnote in Levy stating that the commercial substance of a transaction, rather than its form, must be considered to guard against sham transactions, and it read that line as an endorsement of a substance-over-form standard that looks past the contract language to how a blocker could have operated ineffectively.

The panel closed that door. The Levy footnote was itself quoting an older decision for an uncontroversial principle: an insider may not disguise the effective transfer of stock through devices like shell companies or proxies. That is a rule against artifice, not a license to rewrite an unambiguous contract. The panel then anchored itself in Supreme Court guidance. Section 16(b) imposes liability without fault only within its narrowly drawn limits, and courts should not exceed a literal, mechanical application of the statutory text in deciding who is subject to it. Given that guidance, the court declined to trade the plain text of the offering documents for an uncertain standard focused on how the blockers could have functioned ineffectively in practice, absent specific allegations that they in fact did.

Out of that reasoning came the rule. A comprehensive and legally binding blocker should generally insulate a defendant from Section 16(b) liability. Only when the parties have ignored their own contract and allowed the investor to exceed the cap will a court look past the blocker's language. To survive a motion to dismiss, a plaintiff must allege that a facially unambiguous, self-executing blocker actually failed in practice. Speculation that the parties could have waived it, or that the investor could have breached it without the counterparty knowing until after the fact, does not state a claim.

Butterfly's last theory invoked SEC Rule 13d-3(b), which treats a person who uses any contract, arrangement, or device to prevent the vesting of beneficial ownership as if that person actually owned the security, where the purpose is to evade the statutory reporting requirements. Read broadly, that language could swallow every blocker, since a blocker is precisely a contractual device that prevents ownership from vesting.

The panel drew the line that keeps the Rule coherent. There is a difference between a scheme that conceals ownership the investor effectively holds and a provision that prevents the investor from holding it in the first place. Judge Winter's concurrence in CSX Corp. v. Children's Investment Fund Management, which both sides cited approvingly, supplied the map. Rule 13d-3(b) reaches transactions that carry the substantial equivalence of the rights of ownership relevant to control, or that stop short of or conceal the vesting of ownership while nonetheless ensuring that ownership will vest at the signal of the would-be owner. Its targets are secret side deals, straw buyers, and proxies dressed up to hide control. It does not reach an arrangement that genuinely denies the investor the substance of ownership.

That distinction aligns with Supreme Court precedent, which expressly permits an investor to structure a transaction with the intent of avoiding Section 16(b) liability, and with the Second Circuit's own approval of effective blockers. An investor is free to limit its ownership rights so as not to take on regulatory responsibility. What it may not do is conceal the vesting of ownership in order to evade its duties.

That principle disposed of Butterfly's reading of the side letter. Butterfly argued that the side letter quietly rewrote the offering documents and handed Hudson Bay an unlimited right to acquire, despite the ten-percent cap. The document said the opposite. It required BBBY to honor Hudson Bay's requests only in accordance with the terms of the offering documents, blockers included, and it stated that its terms did not supersede or alter those documents. Far from poking a hole in the blockers, the side letter expressly preserved them. Because the blockers prevented Hudson Bay from ever enjoying the substantial equivalence of beneficial ownership, Rule 13d-3(b) had no role to play.

The opinion resolves a question the Second Circuit had left open, and it resolves it on the text of the blocker rather than on how the arrangement might have operated in practice. A comprehensive, self-executing blocker is now a defense that holds at the pleading stage in this Circuit. Courts will read the blocker's text first, and they will treat a facially unambiguous cap as doing what it says unless the plaintiff pleads that it actually failed. A nine-figure profit and an intraday snapshot showing 10.1 percent did not clear that bar.

The panel was equally careful about what it did not decide. It reserved the case in which the parties ignore the cap in practice and let the investor exceed it. A plaintiff who can plead specific facts showing an actual over-cap holding that the investor controlled, or a concealed side arrangement that vests control on demand, still has a path under both Levy and Rule 13d-3(b). The opinion narrows the theories available to a Section 16(b) plaintiff facing a well-drafted blocker. It does not eliminate them. And because this is a court of appeals decision issued only days ago, the ordinary avenues of further review remain theoretically open.

For the practitioner, the opinion draws a usable map, and it points in different directions depending on where you sit.

If you are advising a distressed issuer raising rescue capital, the case confirms that you can offer an anchor investor deep discounts and large cumulative volume without saddling it with the insider status that would deter the investment in the first place. The condition is that the blocker has to do its work on its own. A cap that reads as a self-executing nullity, rather than one that merely gives the investor an option to pull back, is the version that survives a challenge from a successor estate later.

If you are the anchor investor, the drafting lesson is specific. The blockers that carried the day here shared three features worth reproducing: over-cap acquisitions that are void and treated as if never made, an express denial of any power to vote or transfer excess shares, and a certification at every conversion or exercise that the cap remains intact. Each of those is stronger than a bare right to revoke, and together they leave a plaintiff with very little to attack. Just as important, keep any ancillary agreement consistent with the cap. The side letter here did not sink the structure precisely because it honored the offering documents and disclaimed any power to alter them. A side letter drafted less carefully is exactly the kind of concealed arrangement that Rule 13d-3(b) is meant to catch.

If you are a successor estate, litigation trust, or plan administrator weighing a Section 16(b) claim against a prepetition anchor investor, the opinion sets the bar higher than a large profit and a suggestive snapshot. You need to plead that the cap actually failed: an over-cap position the investor genuinely controlled, or a side arrangement that quietly restored the ownership the blocker purported to remove. A theory built on what the parties could have done, or on shares briefly transiting an account after they were already sold, will not survive a motion to dismiss in this Circuit. That is a hard message for an estate sitting on an apparent nine-figure recovery, and it is the right time to test the theory against the pleading standard before committing estate resources to the claim.

The larger point is that the value in this decision lies in separating a real constraint from a paper one. A blocker that genuinely denies the substance of ownership is enforceable and worth the effort to draft with precision. A blocker that leaves the investor with effective control, or an ancillary agreement that quietly gives it back, invites exactly the scrutiny this plaintiff could not muster. As the law stands today, the burden sits with the plaintiff to show the cap gave way in fact rather than in theory.

On June 30, 2026, DISH DBS Corporation and seventeen affiliated debtors filed jointly administered Chapter 11 cases in the United States Bankruptcy Court for the Southern District of Texas, Houston Division, before the Honorable Christopher M. Lopez. What makes the filing worth studying is not its size, though it ranks among the larger prepackaged filings in recent history. It is the architecture.

A single corporate family arrived in bankruptcy carrying two businesses that could not be treated the same way. One is a Pay-TV operation under the DISH and Sling TV brands that generated roughly $9.7 billion in revenue and $2.4 billion in operating income in fiscal year 2025. The other is a wireless business that built a 5G network at a cost exceeding $46 billion, then lost the ability to operate it. The debtors did not try to force a single solution onto both. They filed one set of cases and ran two restructurings inside it.

The DBS Debtors pursue a prepackaged plan of reorganization that, if confirmed as proposed, would reduce funded debt from $9.75 billion to $5.0 billion. The DISH Wireless Debtors pursue a Section 363 sale of substantially all assets, with the ultimate parent serving as stalking horse bidder at $300 million in cash, less outstanding debtor-in-possession financing. The two tracks are legally distinct. They are economically joined by an $8.856 billion intercompany loan and a claims trust that caps what the wireless estate can return to the noteholders above it. Understanding this case means understanding how those two tracks were separated, and where they remain tied together.

Most large Chapter 11 filings trace back to leverage, a liquidity wall, or a demand shock. This one traces back to a regulator. According to the disclosure statement, the sequence began on May 9, 2025, when the FCC Chairman sent a letter raising concerns about the parent's spectrum use. The debtors read that letter as a directive to divest the wireless spectrum licenses. Note the sequence: the same Chairman had confirmed on September 8, 2025 that the company satisfied all of its buildout obligations. Compliance did not preserve the asset.

You cannot operate a radio access network without spectrum. Once the licenses were headed out the door, the wireless business had a network and no legal means to run it. Beginning in September 2025, the operating wireless debtor sent force majeure notices to its tower lease counterparties and started decommissioning the network. The debtors take the position that the FCC directive is a force majeure event that renders performance impossible or commercially impracticable. The counterparties disagreed, and the disputes moved to court.

Two facts from this chronology carry into every other part of the case. First, the spectrum sales are large, and the proceeds do not stay with the wireless business. The AT&T and SpaceX agreements together bring the parent roughly $42.6 billion, and it is the movement of that money, not the operations of any debtor, that funds the plan. Second, the FCC did not approve the sales unconditionally. It required the parent to establish a $2.4 billion trust to pay qualifying claims tied to the 5G network. That trust reshapes the recovery landscape for the wireless creditors, and Section VIII returns to why.

The corporate hierarchy explains why one filing could hold two restructurings. DISH DBS Corporation, a Colorado corporation, sits above the wireless debtors: the direct or indirect parent of the DISH Wireless Debtors is itself wholly owned by DISH DBS Corporation. The plan is a separate plan for each debtor, with no substantive consolidation. That choice preserves the distinct creditor constituencies and priority structures at each level, which is exactly what a bifurcated strategy requires.

Set the two groups side by side and the logic of treating them differently becomes clear. One is a going concern with margin and subscribers. The other is a wind-down with a decommissioning network and more than 170 pending lawsuits.

One detail sharpens the wireless group's position. Neither the operating wireless debtor nor any of its subsidiaries owns the spectrum licenses being sold to AT&T and SpaceX. Those licenses sit with non-debtor parent affiliates. What the wireless debtors own is the physical network they built to use spectrum they do not hold. That is the asset going up for sale under Section 363, and it explains why the stalking horse bid is measured in hundreds of millions against a network that cost tens of billions to construct.

A structural point worth flagging early: none of the debtors directly employs the roughly 10,400 workers who run these businesses. A non-debtor affiliate is the employer of record, and the workforce reaches the debtors through a Shared Services Agreement. The debtors sought and received interim authority to continue performing under that agreement on the first day, because without it there is no one to operate the enterprise.

The DBS Debtors carry approximately $9.75 billion in funded debt across five series of notes. Two series mature in 2026, two in 2028, and one in 2029. The secured series sit on first-priority liens; the rest are unsecured.

The proposition for DBS creditors is straightforward, which is part of why it drew the support it did. The near-dated maturities come off the balance sheet in cash, and the longer-dated notes stay in place on amended terms. The result is a company that emerges with the two 2026 series retired and $5.0 billion in reinstated debt behind it.

The question that matters is where the $4.75 billion in cash comes from. The DBS Debtors do not anticipate needing debtor-in-possession financing, which is notable at this scale and reflects the Pay-TV business's cash generation. But the cash paydown is not funded by operations. It is funded from above and below at once, through the intercompany loan structure that connects the spectrum proceeds to the notes. That structure is the subject of the next section, and it is the single most important mechanism in the case.

Trace the money and the whole structure resolves. The spectrum sales bring the non-debtor parent roughly $42.6 billion. That cash reaches the DBS Debtors through intercompany loan repayments, and the plan projects total intercompany repayments to the DBS Debtors of approximately $9.8 billion. Those repayments are what fund the $4.75 billion cash paydown of the 2026 notes and the rest of the plan. The Pay-TV business is solvent and profitable, but it is the spectrum proceeds flowing through the intercompany ledger that make the numbers work.

Running in the other direction is a separate obligation that does the opposite work. The operating wireless debtor carries an intercompany loan, extended beginning in 2020 to fund the network build and fixed at $8,856,507,760.88 as of June 28, 2026, after $5 billion of prior forgiveness, with interest no longer accruing. In liquidation terms that is a large claim against the wireless estate. Under the plan, that claim is assigned to a claims trust for the benefit of the 2028 and 2029 noteholders, subject to a $300 million recovery cap. So the 2028 and 2029 noteholders hold an indirect claim against the wireless estate, and the cap deliberately limits how much they can pull out of it.

The cap is the design choice to watch. It keeps most of the wireless estate's modest value available to the wireless creditors rather than letting the much larger intercompany claim sweep it upward. Whether that allocation holds is a question the wireless creditors, not the DBS noteholders, have the incentive to press.

Prepackaged cases turn on the support assembled before filing, and this one arrived with a broad base. The Restructuring Support Agreement was signed on March 19, 2026 with holders of 82% of the DBS Notes. By the petition date, support had grown to more than 88%, or $8,610,754,200 of $9,750,000,000 in aggregate principal.

The headline percentage clears the two-thirds in amount threshold under Section 1126(c) with room to spare, but the more useful read is series by series, because acceptance is measured by class. Support ranges from strong to comfortable across every series, with the thinnest margin in the 2028 senior notes.

Two provisions in the agreement are worth noting for how they clear the runway. The parties settled certain claims for a combined $125 million, with the DBS Debtors paying $75 million on execution and the parent paying the remaining $50 million on June 1, 2026. And a bondholder lawsuit was dismissed with prejudice on March 20, 2026, one day after the agreement was signed. The support level does not guarantee confirmation, and the plan and disclosure statement objection deadline has not passed. But entering a case with this base of support, and with the near-term disputes already resolved, is what allows the debtors to propose the compressed schedule the next sections describe.

The wireless track runs on a sale, and the stalking horse is the debtors' own parent. That fact drives nearly every design choice in the sale process, because an insider stalking horse invites exactly the objections that a well-run sale is built to withstand. The debtors' answer is governance and the deliberate absence of the protections a stalking horse usually demands.

The stalking horse agreement, dated the petition date, sets a purchase price of $300 million in cash, less any outstanding DIP financing, for substantially all of the wireless debtors' assets. What is missing is as important as what is present. There is no breakup fee, no termination fee, and no expense reimbursement. A parent bidding on its subsidiary's assets with no bid protections carries the risk of being outbid without compensation, which is precisely the point. It removes an objection ground and signals that the process is open to competing bids.

The bidding procedures set a minimum overbid of $500,000 above the stalking horse bid, a good faith deposit of 10% of the cash purchase price, and a bid deadline of August 10, 2026, with an auction, if one is needed, on August 12 at counsel's Houston offices. The sale hearing is combined with confirmation on August 17. An investment bank's declaration supports the reasonableness of the timeline and the adequacy of the marketing process.

The DIP Facility

The wireless debtors seek approval of an $85 million DIP facility from the same parent, priced at 11.50% per annum payable in kind, maturing December 31, 2026, secured by substantially all wireless assets junior to the prepetition secured loan. The terms are notably clean for an insider facility: no upfront or commitment fees, no milestones, no cross-collateralization, and no roll-up. A pre-filing release of roughly $56 million from a securities account on June 29, 2026 gave the wireless debtors a liquidity cushion going in.

The DIP budget shows why the timeline is compressed rather than merely aggressive. Over the thirteen-week period, the wireless debtors project consuming nearly all available liquidity, ending at approximately $5.7 million absent DIP draws. The $80 million of available commitment is the cushion, but the tight projection is the clock. The sale has to close on schedule because the estate cannot fund an extended process.

Now the piece that makes this case different from a conventional wind-down. The largest creditor constituency in the wireless cases is the tower lessors and other network counterparties, asserting more than $6 billion across more than 170 lawsuits, six of which also name the parent for tortious interference. A motion to consolidate that litigation before the Judicial Panel on Multidistrict Litigation was denied on June 4, 2026. In an ordinary sale-and-wind-down, that constituency would be fighting for every dollar of estate value. Here, its primary recovery does not come from the estate at all.

The FCC Trust, funded at $2.4 billion as a condition of the spectrum approvals, is where qualifying 5G network claims get paid. It runs a three-tier structure: covered claims of $100,000 or less, backed by a dedicated $200 million reserve secured by the operating wireless debtor's perfected first-priority interest, alongside higher-dollar covered claims divided into two further tiers. That reserve is what creates an unimpaired secured class in the wireless cases. The trust is governed by Delaware law with an outside termination five years from its effective date.

Set the two recovery avenues next to each other and the dynamic is clear. The estate offers the general unsecured wireless class an estimated 1.9% under the plan, which the disclosure statement contrasts with 0.5% to 0.6% in a Chapter 7. The trust offers $2.4 billion. A creditor whose real recovery sits in an out-of-estate trust has limited incentive to spend money contesting a bankruptcy that governs the smaller pool. That does not eliminate objection risk, but it changes who is motivated to bring it.

Two legal questions determine how large the estate claims end up being, and both are live. The debtors assert that the tower lease termination claims are subject to the Section 502(b)(6) cap, which would compress claims that the lessors assert in the billions. The lessors have the obvious counter, that their agreements are service or license arrangements rather than leases within the meaning of the statute. Running alongside is the force majeure defense: if the FCC directive excuses performance, the claims shrink or disappear regardless of the cap. Neither question is resolved, and each bears directly on the size of the allowed wireless claims.

Two evidentiary showings sit under any confirmable plan: that the reorganized company can service its debt, and that impaired creditors do at least as well as they would in a Chapter 7. The debtors address both with projections and liquidation analyses filed alongside the plan.

The DBS projections show a business in secular decline that still throws off substantial cash. Revenue steps down each year, consistent with a shrinking pay-TV subscriber base, while OIBDA holds in a range that comfortably covers debt service and lets cash accumulate.

The projections are projections, not results, and one line warrants attention. The 2028 fiscal year shows negative net cash flow of roughly $1.0 billion and an ending cash balance near $137 million, reflecting the maturity of the combined 2028 notes. Cash rebuilds afterward, ending fiscal 2030 above $2.4 billion, but 2028 is the tightest point in the plan and the one a careful reader monitors.

The liquidation analyses do the best-interests work, and the contrast between the plan and a hypothetical Chapter 7 is stark on both tracks.

The DBS side is what explains the support the plan attracted. Full cash recovery for the 2026 notes and reinstatement of the rest translate to a 100% recovery for the DBS noteholders, measured against a Chapter 7 outcome that ranges from partial recovery for the secured series down to nothing for the unsecured notes. That gap between plan and liquidation recovery is what the disclosure statement ties to the level of creditor support. On the wireless side the numbers are small in both columns, which is consistent with a stranded asset, but the plan still clears the best-interests bar it has to clear.

The schedule the debtors propose is tight even by prepackaged standards, and it is the timeline that most directly tests the case. A 27-day general claims bar date is what stands out. The debtors need claims identified and quantified, particularly the tower lease claims, before the combined hearing, and the entire path from petition to confirmation and sale runs 48 days. The dates below are proposed or set by early orders, and several relief items remain subject to final hearings.

The DBS Debtors also resolved the adequate protection question early. A stipulation with the ad hoc group of DBS noteholders, whose secured parties hold first-priority interests securing not less than $5.25 billion, grants replacement liens, current cash interest at contractual non-default rates, a Section 506(c) surcharge waiver, and anti-marshaling protection, with the group's professional fees capped at $10 million for the first 180 days. A fee cap set at that level against $5.25 billion in secured claims is itself a signal that the parties expect a short case.

On the DBS side, the elements that usually support confirmation are in place: support above 88%, no need for DIP financing, and a projected 100% recovery for the noteholders. Confirmation is not guaranteed and the objection deadlines have not passed, but the friction in this case, to the extent there is any, sits on the wireless side and around the edges of the schedule. Four questions on the merits are worth tracking, plus one number on the balance sheet.

The Section 502(b)(6) cap. Whether the tower agreements are leases subject to the cap, or service or license contracts outside it, determines the size of the largest claim pool in the case. This is likely to be contested, and the answer is not obvious.

The force majeure defense. If the FCC directive excuses the wireless debtor's performance, the tower claims contract or vanish. The strength of the defense turns on the specific provisions in each lease and applicable state law, which means it may not resolve uniformly.

Insider-transaction scrutiny. The parent is stalking horse, DIP lender, spectrum seller, and intercompany creditor at once. The Special Committee and the absence of bid protections are built to answer that scrutiny, but the concentration of roles is the kind of fact that draws a closer look.

The compressed schedule. A 27-day bar date and a 48-day path to a combined hearing leave little margin. The schedule is what enables a clean prepackaged outcome, and it is also the thing most exposed to a due-process objection from a creditor who says it did not get enough time.

The larger significance sits above the docket. This case puts a regulatory action at the front of a bankruptcy and asks the estate to absorb the consequences. A directive to sell spectrum, issued after the company was told it had met its buildout obligations, stranded a network built for more than $46 billion and produced billions in claims. The response was not a single restructuring but two, joined by an intercompany ledger and separated by a claims trust, with an out-of-estate fund carrying most of the load that would otherwise fall on creditors. For practitioners, the value here is not the outcome, which is still months away. It is the template: how a debtor family isolates a healthy business from a stranded one, funds the good side with proceeds routed through intercompany loans, and channels the hardest claims to a trust the estate does not control. Those mechanics travel, and this is a clean example of them working together.

A general partner files for bankruptcy. State partnership law says that filing strips the general partner of its right to manage the partnership the moment the petition hits the docket. The limited partners read the statute, hold a meeting, and vote the debtor out. Did they exercise control over property of the estate, or did the estate never hold that property to begin with?

That question had not been answered in the Ninth Circuit, and the California Supreme Court has not answered it either. On June 29, 2026, the Bankruptcy Appellate Panel answered it in a published opinion, In re LeFever Mattson, with Judge Brand writing for the panel. The answer matters to anyone who structures, finances, or litigates around partnerships and limited liability companies in which an entity manager might one day file for Chapter 11.

The Panel held that California Corporations Code sections 15906.03 and 15906.05, which dissociate a general partner and terminate its management rights the instant it becomes a debtor in bankruptcy, are impermissible ipso facto clauses inconsistent with section 541(c)(1)(B) of the Bankruptcy Code. Because those statutes are preempted, the debtor's management rights did not evaporate on the petition date. They became property of the estate. And because they became estate property, the limited partners' vote to remove the debtor as general partner was an act to exercise control over property of the estate, a violation of the automatic stay under section 362(a)(3), and therefore void.

LeFever Mattson Inc. is a California corporation that invested across the real estate spectrum: single family homes, multi-unit residential property, commercial property, and raw land. By the time it filed, it directly or indirectly controlled or held interests in roughly 60 limited partnerships and limited liability companies. Live Oak Investments, LP was one of them.

Live Oak traces back to an apartment complex called Southwood. LeFever Mattson and a group of investors had bought Southwood years before the partnership existed. In 2015, refinancing the property required a formal vehicle, so LeFever Mattson and its founder formed Live Oak and drafted the limited partnership agreement that governs it. The investors contributed their individual Southwood interests in exchange for percentage interests in the new partnership. The agreement named LeFever Mattson as general partner. The founder became president. Everyone else, including the appellant, held limited partner interests.

The structure is a common one: a corporate general partner holding the management rights, with the investors as limited partners. That ordinariness carries through to the analysis, because the Panel resolved the case on generally applicable statutes rather than anything peculiar to these facts.

The dispute that set this appeal in motion began with a sale. In August 2024, Southwood sold for $10.8 million, netting Live Oak nearly $4 million. About $2.3 million of that went to LeFever Mattson, which characterized the payment as its 21.24% partnership interest plus a 3% sale commission. The limited partners received nothing. They say that withholding breached both the partnership agreement and the general partner's fiduciary duties.

What happened next is what the appeal is actually about. Shortly after the sale, LeFever Mattson filed Chapter 11 for itself and its affiliates, Live Oak among them, and the cases proceeded as jointly administered debtors in possession with an official committee of unsecured creditors in place. A year into the cases, the limited partners noticed a partnership meeting with three items on the agenda: remove LeFever Mattson as general partner, install the appellant as the new general partner and president, and authorize Live Oak to retain its own bankruptcy counsel. They held the meeting, with the debtor present, and cast the votes to do all three.

The committee, having secured standing to pursue estate claims, moved for an order declaring the removal a violation of the automatic stay and void. The bankruptcy court agreed on every point, and this appeal followed.

The appeal presented three questions, and the Panel reviewed each one de novo, giving no deference to the bankruptcy court. The questions build on one another. The stay analysis depends on whether the management rights were estate property, and that in turn depends on whether the state statutes stripping those rights survive preemption. Resolve the preemption question, and the rest resolves with it.

Section 541(a)(1) sweeps every legal and equitable interest of the debtor into the estate, and the Supreme Court has instructed courts to read that scope broadly. What counts as an interest, and how far it extends, is a question of state law under Butner. So the Panel went to California law and found the management right in two places.

The statute supplies the first. Each general partner has equal rights in the management and conduct of the partnership's activities. The partnership agreement supplies the second, and it goes further than the statute. Article 5.1 vests the general partner alone with all decision-making authority over the partnership, including any action in connection with financing or refinancing the property. A partnership agreement is an enforceable contract under California law, and a contract right is property. The debtor's right to run Live Oak was therefore a property interest, and prepetition contract rights are property of the estate.

The limited partners tried to shrink that interest to nothing. A partner's property, they argued, is only its transferable interest, the right to distributions, because that is the only piece of a partnership interest the statute allows a partner to transfer. The Panel rejected the premise. The fact that a management right cannot be sold does not mean it is not owned. Non-transferability is a limit on what a partner may do with an interest. It is not proof that the interest does not exist. Reading a partner's property down to the distribution right alone reads the interest too narrowly.

Having established that the management right is property, the Panel turned to the statutes the limited partners relied on to make it disappear. Section 15906.03(f)(1) dissociates a person as a general partner upon that person becoming a debtor in bankruptcy. Section 15906.05(a)(1) then provides that on dissociation, the person's right to participate in management terminates. Read together, they perform a single function: the bankruptcy filing itself, and nothing else, extinguishes the management right.

That is exactly the operation section 541(c)(1)(B) forbids. An interest of the debtor becomes property of the estate notwithstanding any applicable nonbankruptcy law that is conditioned on the commencement of a case and that effects a forfeiture, modification, or termination of the debtor's interest in property. A state statute that terminates a management right the moment its holder files is a textbook ipso facto clause. It is conditioned on the filing, and it terminates the interest. The Bankruptcy Code overrides it.

The Panel was not writing on a blank slate so much as extending a settled line to a setting that had not yet reached this circuit's published law. Court after court has treated state statutes and operating-agreement provisions that strip an entity manager's rights on a bankruptcy filing as ineffective ipso facto clauses. Almost all of that authority involves limited liability companies rather than partnerships, but on this question the Panel found the difference to be no difference at all.

The limited partners had case law of their own, three California decisions they said compelled the opposite result. The Panel read them and found the reliance misplaced. None of the three analyzed whether the partnership statutes are impermissible ipso facto clauses. Each simply stated, on what was an unopposed point in the record, that a partner is dissociated on filing. Two of them involved the same debtor, so the second was repeating an undisputed fact from the first. A blanket statement about dissociation that no one contested is not a holding on preemption, and the Panel treated those cases as distinguishable and of little use.

That left the limited partners' fallback that partnership cases and LLC cases occupy separate doctrinal boxes. The Panel closed it in one line of reasoning. Virtually every court to confront a state law or contractual provision that terminates an entity manager's interest solely because of a bankruptcy filing has found it preempted, and there is no logical reason the result should change when the entity is a limited partnership rather than a limited liability company.

The limited partners had one argument left. Suppose the partnership agreement is an executory contract that the estate can neither assume nor assign. Then, they reasoned, sections 365(c)(1) and 365(e)(2) let the ipso facto clauses stand, and the management rights never reached the estate after all. The bankruptcy court had not decided whether the agreement was executory, but the Panel took up the legal question anyway, because whether a non-assumable executory contract becomes estate property is a pure question of law. It called the argument wrong as a matter of law, and it did not have to reach far to say so.

The rule has a structural logic that the Panel drew out. If the parties could decide for themselves whether a contract was executory, and whether its rights entered the estate, then the parties, rather than the bankruptcy court, would be drawing the boundaries of estate property. The Code does not permit that. Prepetition contract rights are property of the estate regardless of whether the contract is executory or not. Labeling the partnership agreement executory, even if the label fit, would not carry the management rights out of the estate.

Once the management rights are estate property, the rest follows quickly. Section 362(a)(3) stays any act to obtain possession of, or to exercise control over, property of the estate. Voting a debtor general partner out of the partnership and installing a replacement is an exercise of control over that property. The acts violated the stay, and acts that violate the stay are void as a matter of law, not merely voidable. The Panel had company here too: a bankruptcy court reached the same result where partners held a postpetition meeting to dissociate a debtor and elect a new managing partner.

One boundary is worth marking. The Panel did not decide whether the limited partners had cause to remove the debtor for its alleged prepetition breach of the partnership agreement. The bankruptcy court expressly declined to decide that question, and the Panel followed suit. The holding is about who may act, and when, not about whether the underlying grievance has merit. The limited partners' claims about the withheld sale proceeds remain undecided. What the opinion resolves is that the way to pursue removal during the case runs through relief from the automatic stay and a determination by the bankruptcy court, not through a partnership vote.

Strip away the partnership specifics and the opinion states a general rule with wide reach. When an entity's manager files for bankruptcy, the manager's governance rights are presumptively property of the estate, and neither a state statute nor a private agreement can switch them off at the petition date. Section 541(c)(1)(B) neutralizes the trigger, and the Panel drew no line between limited partnerships and limited liability companies in getting there.

That has consequences on several fronts. For anyone holding a minority position behind a manager who might file, self-help through the entity's own governance machinery is off the table once the case begins; the path runs through a motion for relief from the stay, decided by the bankruptcy court, not through a partnership or membership vote. For anyone drafting operating and partnership agreements, a bankruptcy-triggered removal clause is worth little against a debtor manager, and diligence on a counterparty should treat that manager's governance rights as an asset that will follow it into bankruptcy. And for anyone who still files the partnership cases and the LLC cases in separate mental folders, the Panel was direct that, for this question, the difference between them is a distinction without a difference.

A quieter lesson sits in a footnote. The parties, and to a degree the bankruptcy court, briefed the wrong chapter of the California Corporations Code, citing the general partnership provisions rather than the limited partnership provisions that actually governed. The Panel called the error harmless because the two regimes track each other and the result held. It is a useful reminder that in an area this reticulated, citing the statute that governs the entity in front of you is not a formality.

Opinions like this one are where the operative rules of restructuring actually live. A first-impression holding on ipso facto preemption will not surface in a treatise for years, and it sits in a single published decision inside a docket carrying thousands of entries. Finding it, along with the majority line of LLC authority the Panel built on, before your adversary does is the difference between arguing from the current state of the law and arguing from where the law stood the last time you happened to look.

U.S. TelePacific Corp. and eleven affiliates, operating nationally as TPx Communications, filed for Chapter 11 on June 28, 2026, in the Southern District of Texas before the Honorable Alfredo R. Pérez. The company is not failing. It is over-levered.

TPx generates positive adjusted EBITDA from a recurring-revenue book of roughly 11,000 business customers across all fifty states, built on a subscription model for managed connectivity, cybersecurity, unified communications, and IT services. What it cannot do is service the capital structure sitting on top of that business. Roughly $1.1 billion of funded debt across six facilities, with approximately $300 million of it maturing in 2026, outran the cash the operations produce. The business generates positive EBITDA. The capital structure still costs more than the operations can support.

The consequence of that distinction shapes everything that follows. When the problem is the balance sheet rather than the business, the fix is a deleveraging rather than a liquidation, and the parties who hold the debt become the parties who set the terms. Here they did exactly that before the petition was ever filed. The case arrives with a Second Amended Restructuring Support Agreement already executed by holders of substantially all secured debt, the sole equity holder, and the accounts receivable purchasers, and with a plan and disclosure statement already on file.

Those four numbers frame the analysis. A billion dollars of debt comes off. First lien holders recover a fraction of their claims and everyone below them recovers nothing. And the whole thing is built to confirm inside ten weeks. The sections that follow trace how the company got here, how the deal is structured, and where the genuine open questions still live.

TPx did not arrive at the courthouse suddenly. The company originated in 1998 as TelePacific Communications, a California competitive local exchange carrier, and grew through acquisitions of NextWeb, Tel West, and DSCI into a national managed services provider. The current capital structure is the residue of two out-of-court restructurings, a $70 million growth equity investment led by Siris Capital in 2022 and a broader 2023 transaction that up-tiered half of the old first lien into a new super-senior tranche and pushed the other half down into a subordinated second lien held by the Siris affiliate. Those two deals bought time and extended maturities. They did not solve the leverage, and they are now the subject of an active investigation discussed in Section VII.

When the extended maturities began coming due, the parties moved through the familiar sequence of forbearance, bridge financing, and support agreement. Each step bought a few more months and tightened the eventual outcome.

Read as a chain, the timeline explains the compressed schedule that governs the case. The restructuring was negotiated over roughly eight months out of court. Chapter 11 is not where the deal gets made. It is where an already-made deal gets implemented, which is why the milestones can be as aggressive as they are.

Six secured facilities sit on top of the business, all secured by liens on substantially all assets, with Wilmington Savings Fund Society, FSB serving as administrative and collateral agent across the stack. The distribution of that debt shapes both who controls the restructuring and where the recoveries fall.

The chart below shows the same figures by relative size, and it makes the point faster than the table does. The second lien is the center of gravity in this capital structure.

The 2023 restructuring is what produced this shape. Half of the old first lien was up-tiered into the super-senior first lien term loan that now carries a make-whole premium of not less than $32.9 million. The other half was bought by the Siris affiliate at a discount and subordinated into the $658 million second lien, with roughly $65 million of new capital layered in at the same time. The practical result is that the single largest creditor in the case is also the sole equity holder, a fact that drives the governance structure in Section VII and the conditional treatment of the second lien in Section VI. Two intercreditor agreements, a pari passu agreement from 2023 and a multi-lien agreement from March 2026, govern the priorities among these tranches.

The RSA establishes two tracks. The first is a court-supervised Section 363 sale with a minimum bid of $175 million. The second is a standalone reorganization that equitizes the first lien debt into 100 percent of reorganized common equity, issues preferred equity, and provides warrants to junior secured holders. On paper the debtors elect between them, with the Ad Hoc Group's consent. In practice, one track already ran, and it came up empty.

PJT Partners was engaged in August 2025 and launched a formal marketing process that was neither narrow nor casual. Sixty-five parties were contacted, twenty-five strategic and forty financial. Thirty-three signed confidentiality agreements and worked a data room of more than 260 documents. Twenty-six diligence sessions followed. Five indications of interest came in at the January deadline. By the final bid deadline in April, that funnel had narrowed to one in-court sale proposal and one debt purchase proposal, and the debtors deemed neither actionable.

That result reframes the sale track. If a full process reaching sixty-five parties produced no actionable bid at or near $175 million, the postpetition auction is unlikely to produce one on a compressed timeline. The bid procedures are worth running anyway, and not as a formality for its own sake. They convert the equitization value into a tested number. If no qualified bid arrives by the August 7 deadline, the debtors cancel the auction and pursue the reorganization, and they do so having demonstrated that the market was given a real chance to say otherwise.

The debtors entered Chapter 11 with roughly $16.4 million of cash and a DIP facility totaling $73,549,998 in aggregate commitments. Only $20 million of that is new money. The rest is a roll-up of prepetition obligations.

The roll-up breaks into approximately $34.7 million of prepetition superpriority obligations and $13.8 million of the PIK bridge interest, both rolled up at the interim stage, plus a further $5 million of first lien principal rolled up only at the final hearing. The court found the roll-up a necessary inducement for the lenders and made the good faith finding under Section 364(e). The economic terms sit where a lender with leverage would put them.

Additional terms include a 2 percent commitment premium payable in kind, a 1.25 to 1.00 MOIC on new money advances, a scheduled maturity of December 31, 2026 extendable three times in three-month increments, and a minimum liquidity covenant of $7.5 million tested weekly. That covenant is where the runway gets tight. The 13-week budget projects net receipts of $97.5 million against operating disbursements of $101.7 million, an operating cash flow deficit of roughly $4.2 million that the new money is sized to bridge. The lowest projected cash balance lands in week 13 at approximately $8.02 million.

The joint plan establishes ten classes. The pattern of impairment and voting tells you where the value goes and where it stops. Value stops at the first lien.

Under the reorganization, Class 3 receives 100 percent of the common equity, subject to dilution by the cash-out option, warrants, and a management incentive plan, for an estimated recovery of 2 to 15 percent on roughly $426 million of claims. Class 4, the Siris-held second lien, is marked "TBD," which is not an oversight and is addressed in the next section. Class 5 receives warrants for up to 5.94 percent of common equity struck against a $326 million equity value, with an estimated recovery of zero. Classes 6 and 10 recover nothing. A cash-out option lets first lien holders take cash rather than illiquid private equity if they prefer liquidity.

The point of the exercise is the deleveraging. If the plan is confirmed as proposed, the capital structure would shrink from roughly $1.1 billion to approximately $129 million.

The reorganized structure taken together with the warrant pricing implies an enterprise value in the neighborhood of $380 million, the $326 million equity value plus the $54 million exit term loan. That figure is consistent with the $175 million sale floor and with the thin first lien recovery. The business is worth well less than the debt it carries, which is exactly why the debt has to come off.

Every prior section points at the same unresolved issue. The sole equity holder, an affiliate of Siris Capital, also holds 100 percent of the $658 million second lien. That makes the controlling shareholder the largest single creditor in the case, and it makes the prior transactions that created this structure worth a hard look. A Special Committee of independent directors, established October 27, 2025 and advised by Katten Muchin Rosenman as independent counsel, is conducting exactly that review.

The investigation is understood to focus on three transactions, each of which touched the Siris affiliates and each of which shaped the current stack.

The investigation is not an academic exercise. Its conclusions feed directly into two of the plan's most consequential provisions. The first is the Debtor Release in Article VIII.C, which the plan expressly conditions on the committee's findings. If the committee identifies viable claims that the estate would otherwise release, the release can be narrowed or conditioned to preserve those causes of action against the Consenting Investor. The second is the treatment of Class 4. The "TBD" marking on the second lien is the tell. You do not leave a $658 million class blank by accident. You leave it blank when its treatment depends on whether the holder is a creditor to be paid or a defendant to be pursued.

The RSA imposes a schedule that leaves little slack. The confirmation order is due within 70 days of the petition date and the effective date within 80, with an automatic extension through December 31, 2026 if the only condition left standing is regulatory approval. That carve-out matters for a telecommunications company that needs FCC and state utility sign-offs on any change of control. The sale and confirmation tracks run in parallel and converge at a combined hearing.

All of the first-day motions were filed and the corresponding orders entered inside 24 to 48 hours, with the DIP and critical vendor relief granted on an interim basis pending the July 23 final hearings. A schedule this tight is only workable because the deal was built before the filing. The pre-negotiation is what buys the speed.

The recoveries follow the capital structure with almost no ambiguity, save for the one class where the investigation controls the answer. Reading down the stack shows how quickly the value runs out.

The general unsecured universe is small and concentrated in lease and trade claims. The top thirty unsecured claims total roughly $9.5 million, and the largest single claim, at about $4.88 million, belongs to a lease counterparty. Those claims will grow as rejection damages from the twenty-two contracts and leases the debtors moved to reject flow into the class, but the estimated recovery does not change. A larger pool of claims at a zero percent recovery still returns nothing. For employees and customers the position is different. The recurring-revenue model depends on both, so the first-day relief protecting wages, benefits, and customer programs functions as a going-concern measure, preserving the relationships the reorganization is built to retain.

Control sits with the Ad Hoc Group, which holds roughly 98 percent of the first lien claims and steers the restructuring through its consent rights over the sale-versus-reorganization election. When one group holds that much of the fulcrum security, the plan functions less as a negotiation among adverse parties than as the implementation of a course that group has already set.

For a case this heavily pre-negotiated, most of the outcome is already set. The risks that remain are worth naming precisely, because they are the places where the pre-negotiated result could still move.

The largest is the Special Committee investigation. Its findings could reshape the Debtor Release and settle the treatment of the second lien. If viable claims surface, the estate could pursue litigation against the Consenting Investor, and litigation against the party holding the fulcrum debt and the equity is precisely the kind of development that can strain an RSA. Next is sale viability, which the prepetition process has largely answered in the negative. A full marketing effort produced no actionable bid, so a qualified bid above $175 million on the postpetition clock is possible but not the base case. Third is DIP budget compliance. A projected cushion of roughly $519,000 over the minimum liquidity covenant leaves little room for a revenue miss or an unbudgeted cost, which turns budget discipline into a covenant issue rather than a housekeeping one.

The remaining three are more contained. Regulatory approval could push the effective date past the RSA milestones if a sale requires change-of-control consents, though the automatic extension to year-end is designed to absorb exactly that. The motion to reject twenty-two contracts and leases had not been ruled on as of the filings reviewed, and landlord objections could complicate it. And cramdown is effectively a certainty rather than a risk, since Classes 5, 6, 8, and 10 are expected to reject or recover nothing, which means the debtors will need to satisfy the fair and equitable and unfair discrimination standards of Section 1129(b) for at least some classes. None of these is likely to derail the deal on its own. Taken together, they are the short list of things worth watching as the case moves toward its September hearing.

Genesis Healthcare filed for Chapter 11 in July 2025 as the operator of roughly 175 senior living facilities across several states. After two rounds of marketing and bidding and a purchase price north of one billion dollars, an entity called 101 West State Street Holdings emerged as the buyer of substantially all of it. The Memorandum Opinion and Order entered on June 30, 2026, is not about the enterprise. It is about one 120-bed nursing home in a small town outside Washington, D.C., and a minority partner who wanted to pull that single facility out of the deal.

The minority partner is Madison Manor, an affiliate of the University of Maryland Medical System. Madison owns a quarter of a non-debtor partnership that owns the nursing home. The other three-quarters belongs to two Genesis debtors, whose partnership interests the buyer agreed to acquire as part of the whole-company sale. Madison's partnership agreement carries a right of first refusal, and Madison read that clause to mean the debtors had to peel off an allocated slice of the billion-dollar price, hand Madison the number, and let Madison match it to take full ownership of the facility.

The court disagreed. Judge Stacey G. Jernigan overruled every Madison objection. She held the agreements could be assumed and assigned because neither Maryland's personal-services doctrine nor its partnership statutes excused Madison; that the debtors substantially complied with the right of first refusal while Madison never exercised it; and, in the alternative, that the right of first refusal was unenforceable under Section 365(f) in any event. The result is a clear illustration of how a right of first refusal fares when it meets a large, multi-asset Section 363 sale, and a reminder that a preemptive right a holder never affirmatively exercises is a right it can lose. The order is a trial-court ruling, subject to appeal, and the overall sale closing remains targeted for later in the summer, pending numerous regulatory approvals.

Madison's Four Arguments and the Court's Rulings

Madison advanced four arguments for why the sale could not reach its partnership interests without honoring the right of first refusal on its terms. The court rejected each.

Bowie Center Limited Partnership owns and operates the Larkin Chase Skilled Nursing Facility, a 120-bed licensed nursing home in Bowie, Maryland, in Prince George's County. Bowie Center is not a debtor. Its three partners are Madison and two Genesis debtors, Maryland Harborside and Harborside Healthcare Limited Partnership, referred to together as the Bowie Debtors. Madison holds a 0.25% general partner interest and a 24.75% limited partner interest, 25% in all. The Bowie Debtors hold the remaining 75%.

Two contracts govern the relationship. The first is a 2015 Second Amended and Restated Agreement of Limited Partnership among Madison and the Bowie Debtors. The second is a Management Agreement dated April 7, 1993, under which Bowie Debtor #2 serves as manager of the facility. Madison is a party to the partnership agreement but not to the management agreement, which by its own terms has no third-party beneficiaries. Both contracts are governed by Maryland law.

The facility itself has a history worth noting. It closed for roughly three years starting in 2022 after an explosion in the kitchen forced extensive renovations, and it reopened in the spring of 2025, only months before the bankruptcy. The management agreement is now 33 years old. When it was signed in 1993, the facility went by a different name and a different corporate general partner signed for the manager. Personnel have come and gone across three decades. Those facts matter, as the analysis below shows, because Madison's central theory depended on treating these agreements as intensely personal arrangements that no substitute performer could step into.

The sale did not happen quickly or in a single pass. It ran through two full rounds of marketing, bidding, and auctions, each authorized by the court, and Madison's conduct across both rounds became central to the ruling.

The first round began with a sale procedures order in August 2025 and a stalking horse agreement. Madison received notice and filed its first objection in October, asking that any sale preserve its right of first refusal and complaining that the stalking horse's price was not allocated to the nursing home. The first auction convened in November. It entertained bids for the entire company, called WholeCo Bids, and bids for pieces of it, called Piecemeal Bids. Four piecemeal bids and two whole-company bids were qualified. Madison did not attend. It did not submit a bid of either kind, and it did not ask, as the bidding unfolded, for an allocation to the partnership interests it cared about.

The first auction produced a winner, but the court declined to approve that sale after the Official Committee of Unsecured Creditors raised fairness objections about the process and the possible exclusion of qualified bidders. A second round followed. Revised procedures named a replacement stalking horse in December, the court approved that agreement in January 2026, and a second auction convened on January 13. This one was presided over by the investment bankers for both the committee and the debtors, with an agreed monitor and mediator in the room and a representative of the U.S. Trustee in attendance. Three whole-company bids and six piecemeal bids came in. Madison, again, did not attend, did not bid, and did not ask in real time to match any offer under its right of first refusal.

The buyer won the second auction. Madison filed a third objection days later, and the court entered the sale order on January 26, 2026. The pattern across both auctions is the fact that anchors much of what follows. Madison filed three separate objections purporting to preserve its rights, and it submitted zero bids.

Procedural Chronology

Both agreements are executory contracts under the Countryman definition the Fifth Circuit applies: performance remains due on both sides, and a failure to perform by either party would be a material breach. No one seriously disputed that. The Fifth Circuit has assumed as much for a partnership agreement before, in In re O'Connor, and the parties here did not fight over the label.

The framework flows from there. Section 365 lets a debtor in possession assume an executory contract and, under subsection (f), assign it to a third party. Subsection (c) supplies the important limit. A debtor may not assume or assign an executory contract if applicable law would excuse the non-debtor counterparty from accepting performance from someone other than the debtor, and that counterparty does not consent. The classic example of such applicable law is a personal services contract, but the category is not limited to personal services.

So the first question is whether anything in Maryland law let Madison refuse to accept performance from the buyer without Madison's consent. If the answer were yes, the analysis would end there and Madison would win. The court worked through two candidates, personal services and the Maryland partnership statutes, and rejected both.

Madison's first theory was that a partnership agreement rests on the personal trust and confidence of the partners, which makes it the kind of personal arrangement Madison cannot be forced to continue with a stranger. Madison cited a handful of cases for the proposition. None of them interpreted Maryland law, and the court could find no Maryland decision treating a partnership agreement as a personal services contract. Madison offered nothing at all on the management agreement.

Maryland sets a high bar. Under the state's Macke decision, a contract is personal not merely because it is unique but because it calls for rare genius and extraordinary skill, the kind that cannot be transferred. The court quoted the illustration Maryland borrowed from California: not every painter works like Reynolds or Claude Lorraine, and not every writer produces drama like Shakespeare or fiction like Dickens. A federal court in Maryland has applied the same standard, requiring that choice of the specific performer have been part of the bargain.

Measured against that standard, the agreements fell short. There was no evidence, as the court put it, that the Bowie Debtors are the Shakespeare or Rembrandt of the nursing home world. Neither agreement named a single individual who had to perform any particular service. The buyer proved it was fully capable of performing the duties both agreements contemplate, and it intends to keep most of the debtors' existing employees. Running a licensed nursing home well is demanding and important work. It is not the sort of irreplaceable, personal performance that lets a counterparty veto a substitute.

Madison's second theory leaned on In re O'Connor, where the Fifth Circuit read a Louisiana statute to bar assumption of a partnership agreement because the non-debtor partner had not consented. Madison argued Maryland law works the same way. It does not.

The Louisiana statute in O'Connor required consent to make someone a member of the partnership, with no alternative route. Maryland's statutes are built differently. For limited partners, Section 10-703(a) of the Code of Maryland Corporations and Associations lets an assignee become a limited partner if the assignor grants that right in accordance with authority described in the partnership agreement, or if all other partners consent. The word that matters is or. For general partners, Section 10-401 admits additional general partners except as otherwise provided in the partnership agreement. Both provisions let the parties contract around consent.

The partnership agreement here did exactly that. Section 5.1 generally prohibits transfers, but it carries six exceptions, and the relevant one, Section 5.1(f), expressly allows the Bowie Debtors to transfer their entire general and limited partner interests to an unrelated third party, subject to the right of first refusal and the other restrictions in Section 5.2. Read as a whole, the agreement contemplates a nonconsensual transfer to an outside buyer so long as the seller honors the right of first refusal. Maryland law let the parties write that deal, and they wrote it. Applicable law did not excuse Madison from accepting the buyer. With that threshold cleared, the dispute turned back to the right of first refusal itself.

With applicable law out of the way, the case turned on the right of first refusal in Section 5.2, and on two related questions. What did the clause require, and did anyone satisfy it?

Maryland reads contracts objectively, asking what a reasonable person in the parties' position would have understood the language to mean, and construing the agreement as a whole so that every clause has effect. The right of first refusal has three operative parts. Under the Offering Notice provision, if the Bowie Debtors receive a bona fide written third-party offer for their interests, they must first tender Madison an offer to buy those interests at the same price and on the same terms. Under the Acceptance provision, Madison then has 30 days from receipt to elect in writing to accept or decline, and silence past 30 days counts as a decline. Under the third provision, once Madison declines or is deemed to decline, the debtors are free to sell to the third party on those same terms.

The court found the debtors substantially complied. Madison received written notice of each proposed sale transaction through the court-approved processes: the first stalking horse agreement and its terms, the replacement stalking horse agreement and its terms, and ultimately the winning bid, all noticed out to thousands of parties including Madison. The Offering Notice provision specifies no magic form. It requires written notice of the third-party offer and a chance to match, and Madison got both, twice.

What Madison never did was accept. Filing three objections to preserve its rights is not the same as electing, in writing and within 30 days, to match a specific offer. Maryland law is settled that exercising an option must be unequivocal and in exact accord with the option's terms. Objections that reserve a position are equivocal by design. They preserve the ability to decide later. They do not decide.

Madison's fallback was testimony that, after the second auction, it made an offer to the debtors for just the partnership interests. That did not help. No written offer was put into evidence. Based on counsel's own objections during the testimony, the offer appears to have surfaced in settlement discussions. It was not at the same price or on the same terms as the buyer's whole-company bid, and it came well after the 30-day window had run. An offer for only the carved-out interests, on terms different from the winning bid and delivered after the deadline, is not an exercise of the right of first refusal. It is a different proposal the debtors were free to decline. Separately, in its post-sale briefing Madison put forward its own unilateral calculation that $4.5 million of the buyer's price should be allocated to the interests, an allocation no bidder or sale process had produced. Under Section 5.2.4, Madison's failure to match within the window left the debtors free to sell to the buyer. The court also flagged Section 8.13's instruction that consents and approvals not be unreasonably delayed, adding that the delay here was concerning.

The court could have stopped after finding compliance. It went further and held that, even if the right of first refusal had been perfectly preserved, enforcing it the way Madison wanted would run into Section 365(f).

Section 365(f)(1) makes unenforceable any contract provision, or applicable law, that prohibits, restricts, or conditions the assignment of an executory contract. Those three verbs are written in the disjunctive, and a right of first refusal, while not a flat prohibition, plainly conditions an assignment by giving the holder a chance to take the interest from the proposed assignee. Two bankruptcy decisions, Mr. Grocer and Adelphia, have treated rights of first refusal as unenforceable restraints on assignment for exactly that reason. Both recognized the practical problem: a preemptive right can chill bidding, because a purchaser who does the work of formulating and submitting a bid may simply watch the holder match it without ever bettering it.

Neither decision applied a per se rule. Both asked, on the facts, whether the restriction hindered assignment enough to be unenforceable, and Adelphia flagged multi-asset bankruptcy sales as the setting where enforcing a right of first refusal on one piece can be most destructive to value. This case is that setting. Roughly 175 nursing homes were on the block. Most bidders wanted the whole enterprise and priced it that way, without allocating value to each facility, for tax and business reasons. The whole did not equal the sum of the parts.

The court found the process fair on its own terms. A complex capital structure, thousands of creditors, and an active creditors' committee produced a heavily safeguarded auction, including a monitor and mediator installed at the request of parties in interest. Piecemeal bids were expressly allowed at both auctions, so Madison had a clear path to participate and did not take it. Madison also keeps its annual purchase option, which the debtors and buyer agreed survives the sale. Weighing those facts, the court held that forcing the debtors to break out and offer the partnership interests to Madison would improperly restrict an assignment that had sound business justification and benefited the estate. The right of first refusal, applied as Madison urged, was an unenforceable restraint on assignment.

One piece of Madison's position did survive, and the court treated it as significant. Separate from the right of first refusal, the partnership agreement gives Madison an annual purchase option at Section 6.7, exercisable after a milestone date that has already passed, to buy the partnership interests under defined procedures. The debtors and the buyer agreed that this option remains intact and enforceable against the buyer after closing.

That agreement mattered to the fairness calculus. Madison did not lose its long-term ability to acquire the facility. It retained a standing, annual right to purchase the interests from the new owner on the option's terms. What it lost was the argument that the sale could not proceed without first routing an allocated price through the right of first refusal. The court noted, almost in passing, that the survival of the purchase option left it wondering why the parties kept fighting over the right of first refusal at all, and suspected an economic reason. The point frames the practical stakes for anyone holding a similar right.

Strip away the Maryland partnership statutes and the nursing-home specifics, and the opinion offers durable lessons for three sets of players.

If you hold a right of first refusal and a bankruptcy sale threatens the asset you care about, the message is direct: show up and act. Madison had the same information every bidder had. It knew the terms, it knew the timeline, and it knew both auctions would entertain piecemeal bids. It filed objections instead of bidding, and it treated those objections as if they preserved a right it could exercise later, on its own schedule and at its own price. An option is not a placeholder. Exercising it means matching the actual offer, unequivocally, inside the window the contract sets. If your right depends on an allocated price the seller has not provided, the place to demand that allocation is at the auction, in real time, on the record, not in post-sale briefing months later.

If you are debtor's counsel running a whole-company sale, the decision supports a familiar instinct: notice broadly, keep the process clean, and let the record show that every party with a preemptive right had a fair chance to participate. Substantial compliance with a contractual notice provision, delivered through a court-approved sale process and served on thousands of parties, can satisfy a right of first refusal even without a bespoke offer letter. A well-run auction with independent safeguards, a monitor or mediator, and an active committee is not just good practice. It becomes part of the factual record that makes a right of first refusal unenforceable under Section 365(f) when someone tries to use it to carve out a single asset.

If you are the buyer, the takeaway is that adequate assurance and continuity still carry weight. The court leaned on evidence that the buyer could perform both agreements and intended to retain the workforce. That evidence did double duty, defeating the personal services theory and supporting the finding that assignment was appropriate. Building that record early is worth the effort.

The larger point is about the tension the case sits on. Preemptive rights are contract entitlements that parties bargain for and expect to enforce. Section 363 sales exist to maximize value for the estate, and in a large, multi-asset case that value often lives in selling the enterprise whole rather than slicing it into pieces a series of preemptive-right holders can pick off. When those two forces meet, this opinion shows a bankruptcy court willing to protect the sale, provided the process was fair and the objecting party had a real opportunity it chose not to use.

On June 17, 2026, Judge Lisa G. Beckerman issued four memorandum opinions in the Chapter 11 case of The Great Atlantic & Pacific Tea Company. The opinions closed out three adversary proceedings the Official Committee of Unsecured Creditors filed in 2017 against McKesson Corporation and two of its subsidiaries, following a seven-day trial in July 2024. They resolve a fight that traces back to a petition filed in July 2015.

Start with the number that frames everything. The Committee sought to avoid $68,179,075.88 in transfers made to the three McKesson entities during the ninety-day preference period. After the defenses ran their course, the estate recovered roughly $3.3 million in net preferences. That is under five cents on the dollar of what the Committee pursued. The recovery itself is less informative than the distance between the two figures.

The reason the gap matters is that it was not produced by a single ruling. It was produced by the disciplined application of the Section 547(c) defenses across thirty payments to the parent and twenty more to the subsidiaries, with each defense turning on the specific facts of how each payment was made. Where the payment history was mechanical, the defense held. Where a creditor reached in and changed the terms, the defense failed. Read across the four opinions, that single distinction explains almost every dollar.

The opinions were issued June 17, 2026. Figures reflect the rulings as entered; any judgment remains subject to applicable appeal rights.

Before any defense was reached, the Committee had to satisfy each element of Section 547(b), and one of those elements decided itself the moment you looked at the balance sheet. This was A&P's second trip through Chapter 11. The company had emerged in 2012, filed again on July 19, 2015, and closed every store by November of that year. The schedules disclosed total assets of $601,441,108.28 against approximately $925 million in secured debt and approximately $1.2 billion in general unsecured claims.

Section 547(b)(5) asks whether the transfer let the creditor receive more than it would have received in a hypothetical Chapter 7 liquidation. With secured liens covering nearly all the assets, the Court found that McKesson would have collected nothing on its general unsecured claims in a liquidation. Any payment during the preference period therefore satisfied the element per se. There was no path to a fire-sale recovery that reached unsecured creditors, so every dollar paid in the window was, by definition, a dollar McKesson would not have seen in Chapter 7.

The administrative claims required more work. McKesson held a Section 503(b)(9) claim for goods delivered in the twenty days before filing, and those claims carry priority. So the Court built a hypothetical liquidation analysis. It set the administrative claims pool against the assets available to pay it and found a shortfall of roughly $20 million. The pool ran to approximately $50,559,927.96. The assets available came to approximately $34,295,011.75. Even a priority Section 503(b)(9) claim would not have been paid in full in Chapter 7, which meant payment during the preference period still satisfied 547(b)(5).

The same insolvency predicate carried across all four opinions without modification. The Court stated the asset and liability figures identically in each, applied the same analysis to the parent and to both subsidiaries, and never had to relitigate the point. For a Committee, that is favorable terrain. The threshold element is settled before the dispute even begins, and the entire contest shifts onto the defenses.

The Primary Proceeding against McKesson Corporation is where the bulk of the money was, and where the bulk of it stayed. The Committee challenged thirty payments totaling $67,752,943.44 made during the preference period. The Court sorted them into three groups, and only one payment in the entire set survived as avoidable.

The first group was twenty-five ACH transfers, the routine automated payments A&P had been making to its primary pharmaceutical wholesaler on scheduled due dates for three years. The second was a single category of four next-day payments totaling $4,249,724.88, made under modified credit terms in the final week before filing. The third was the May 22 wire transfer of $4,587,431.62, a payment made by a non-standard method at McKesson's demand. The first two groups were protected. The third was not.

The math tells the story plainly. The twenty-five ACH transfers accounted for roughly $58.9 million of the total, and the ordinary course defense preserved every one of them. The contemporaneous exchange defense preserved the next-day payments. What remained was a single wire transfer, and that one payment became the entire preference judgment against the parent before the offset analysis even began.

Contemporaneous Exchange: Credit Modification by Contract

The four next-day payments came in during the last week before filing, after the modified credit terms took effect on July 13, 2015. The Committee argued these were preferential. The Court held they were shielded by the contemporaneous exchange defense under Section 547(c)(1), and the reasoning is worth following because it cuts against intuition.

The defense requires new value, intent that the exchange be contemporaneous, and actual contemporaneity. New value was straightforward, because McKesson delivered roughly $4.25 million in fresh merchandise alongside the payments. Intent was the contested piece. The Committee argued that McKesson imposed the modified terms unilaterally, which should negate any genuine mutual intent for a contemporaneous exchange. The Court disagreed, and the reason it disagreed is the part worth noting for practice. The Supply Agreement itself, at Section 4.H.1, authorized McKesson to modify credit terms upon a material deterioration in A&P's financial condition. Because the contract contemplated exactly this move, McKesson's action was contractually authorized rather than coercive.

Actual contemporaneity survived a one-day gap between delivery and payment. That gap existed because McKesson's billing systems could not issue same-day invoices, and the Court treated a logistical delay of that kind as no barrier to the defense. The instant wire mechanism reinforced the finding, because paying by wire signals an intent to settle immediately rather than to extend credit.

Ordinary Course: The Machine-Like Payment History

The twenty-five ACH transfers were protected because they were unremarkable, and that is the point. Every one of them was made on its exact contractual due date throughout the preference period, consistent with the parties' three-year payment relationship. In the months before the preference window, there had been exactly one late payment, on February 27, 2015, and A&P cured it three days later by standard ACH. That is the kind of record the ordinary course defense was built to protect. Same method, same timing, no deviation, no creditor reaching in to change anything.

The single avoidable payment in the Primary Proceeding is instructive precisely because, on its face, it looks protected. The May 22 transfer was made on its due date. It was timely. If timing were the whole test, it would have survived alongside the twenty-five ACH transfers. It did not, and the reason it did not is method.

A&P attempted to delay its scheduled ACH. McKesson responded by demanding cancellation of the ACH and immediate payment by wire. The change from the standard payment method to a wire transfer, demanded by the creditor, is what defeated the defense. The Court drew a clean distinction that creditors should internalize: a payment can be perfectly timely and still fall outside the ordinary course if the creditor forces a change in how it is made.

This is the framework the opinions build for ordinary course, and it has two axes rather than one. Timing on the due date with the standard method is ordinary course. Timing on the due date with a non-standard method forced by the creditor is not. Variable timing layered on top of irregular invoicing and undisclosed data, which is what the subsidiaries presented, is not either. For a creditor trying to preserve its payments, maintaining the historical payment method turns out to be as important as maintaining the historical timing.

The subsequent new value defense under Section 547(c)(4) raised two contested questions, and the second one produced an evidentiary ruling that reached across two of the four opinions.

The first question was how to value the new merchandise. The Court held that the invoice price controls. Rebates and discounts did not reduce the value, because they were contingent on future events, namely A&P staying current on all its payment obligations. A contingent reduction that may never materialize cannot be netted against value delivered today.

The second question was the 355 Invoices, and this is where documentary rigor decided the outcome. McKesson included 355 invoices worth an aggregate $127,692.46 in its new value calculation, claiming deliveries within two weeks of the petition. The Court excluded all of them as facially unreliable, and the list of defects is the reason this ruling will be cited. Every invoice coded its shipping route as "DNS," with a proffered meaning of "do not ship." Each route stop was coded "000." At least two listed the receiving pharmacy as inactive. Across all 355, only two unique orders existed, repeated hundreds of times. No Pathmark reports reflected the deliveries. McKesson's own witness testified the merchandise shipped on dates that contradicted the invoice dates. A&P's witness searched the records and found no proof of delivery. And McKesson produced nothing beyond the invoices themselves.

There was a third wrinkle specific to the May 22 wire. The new value that followed it was later paid for by the ordinary-course-protected ACH transfers, which were themselves unavoidable. New value that has been paid for by an unavoidable payment cannot also shield an earlier preference. So the new value chain, which at its peak showed cumulative preference exposure of $10,163,197.17 net of new value, ultimately left the May 22 wire of $4,587,431.62 standing as the recoverable amount.

The preference analysis was not the only source of recovery. The Court also found willful automatic stay violations, and the largest of them centered on a rebate.

McKesson paid A&P a June Rebate of $562,833.91 on July 16, 2015, three days before the petition, covering generics purchased in April, May, and June. In November 2015, McKesson reversed course and deducted the full amount from an undisputed $1.8 million post-petition rebate it owed, claiming a right to recoupment or setoff. The Court held this was a willful violation of the automatic stay, and the analysis turned on the structure of the contract rather than on the size of the dollars.

The June Rebate was property of the estate. The reversal was contractually impermissible, because Section 21(M) of the Supply Agreement conditioned rebate entitlement only on A&P being current on its payment obligations as of the rebate date, not on payment for the specific underlying goods. A&P had in fact paid for at least a quarter of those goods. Nothing in the parties' history showed McKesson ever revoking a rebate in its entirety. Recoupment failed because the prepetition rebate and the post-petition rebate obligation were discrete and independent units, not parts of a single integrated transaction. Setoff failed because it tried to pit a prepetition debt against a post-petition obligation. And the Extension Agreement independently required McKesson to pay post-petition rebates without regard to Section 21(M).