Weekly Bankruptcy Alert May 6, 2025 (For the Week Ending May 4, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
ACCRX, Inc.(Newton, MA)
Health and Personal Care Stores
Boston(MA)
$100,001to$500,000
$1,000,001to$10 Million
4/28/25
ESG Clean Energy, LLC(West Springfield, MA)
Not Disclosed
Springfield(MA)
$10,000,001to$50 Million
$1,000,001to$10 Million
4/30/25
ESG-H2, LLC(West Springfield, MA)
Not Disclosed
Springfield(MA)
$10,000,001to$50 Million
$1,000,001to$10 Million
4/30/25
National Fence and Supply Co.(North Attleboro, MA)
Construction
Boston(MA)
$50,0001to$100,000
$500,001to$1 Million
5/1/25
Embassy of the Seas Limited(London, United Kingdom)
Amusement Parks and Arcades
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
5/4/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
J & B Food Services, LLC(Hanson, MA)
Not Disclosed
Boston(MA)
$0to$50,000
$50,001to$1000,000
4/28/25
Freight Farms, Inc.(Boston, MA)
Not Disclosed
Boston(MA)
$500,001to$1 Million
$1,000,001to$10 Million
4/30/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Rite-Aid Files a Chapter 22: Second Chapter 11 Bankruptcy Filing in Two Years
Rite Aid Corporation filed a Chapter 11 bankruptcy petition for the second time in two (2) years in the District of New Jersey Bankruptcy Court, docket #25-14731 (MBK) on May 5, 2025. A repeat filing like this is often referred to as a “Chapter 22” – two (2) Chapter 11 filings in a row.
The company issued a press release that noted it was pursuing a sale process, which it intends to conduct under section 363 of the U.S. Bankruptcy Code. The company also noted that it secured commitments from certain of its existing lenders to access $1.94 billion in new financing. This financing, along with cash from operations, is expected to provide sufficient funding during the sale and court-supervised process.
Rite Aid also noted that intends to divest or monetize any assets that are not sold through the court-supervised process.
If you are a landlord or trade creditor of Rite-Aid, it is important to know your rights now.
Weekly Bankruptcy Alert April 28, 2025 (For the Week Ending April 27, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
The Mark Real Estate Holdings, LLC(Cumberland, ME)
Activities Related to Real Estate
Portland(ME)
$10,000,001to$50 million
$10,000,00to$50 million
4/22/25
DanPower64 LLC(Salem, MA)
Unknown
Boston(MA)
$1,000,001to$10 million
$1,000,001to$10 million
4/21/25
River Fall 529 LLC(Fall River, MA)
Activities Related to Real Estate
Boston(MA)
$1,000,001to$10 million
$1,000,001to$10 million
4/23/25
Greystone Property Development LLC(Dorchester, MA)
Residential and Nonresidential Building Construction
Boston(MA)
$1,000,001to$10 million
$1,000,001to$10 million
4/24/25
NB 700 Logan, LLC(San Clemente, CA)
Single Asset Real Estate
Wilmington(DE)
$1,000,001to$10 million
$1,000,001to$10 million
4/21/25
NP Hampton Ridge, LLC(San Clemente, CA)
Single Asset Real Estate
Wilmington(DE)
$1,000,001to$10 million
$1,000,001to$10 million
4/21/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Sebago Lake Distillery LLC(Sebago, ME)
Beer, Wine, and Distilled Alcoholic Beverage Merchant Wholesalers
Portland(ME)
$100,001to$500,000
$500,001to$1 million
4/22/25
120 Willow Holdings LLC(Spring Valley, NY)
Activities Related to Real Estate
White Plains(NY)
$1,000,001to$10 million
$1,000,001to$10 million
4/22/25
Ultima, Limited(Waltham, MA)
Unknown
Boston(MA)
$0to$50,000
$0to$50,000
4/25/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Corporate Restructuring — Liability Management Transactions, Private Credit, and the Road Ahead
While corporate restructuring is a domain that business leaders and finance executives generally prefer to avoid, some recent developments in this area have underscored the need for better understanding it.
It may seem counterintuitive, but the reality is that management teams — both in highly leveraged or struggling companies and perfectly healthy ones — can operate more effectively and even shift the balance of power in negotiations by equipping themselves with a deep understanding of the complexities of corporate restructuring.
The utilization of liability management transactions (LMTs), sometimes also referred to as Liability Management Exercises, in particular, including the use of private credit in some recent restructurings, and the potential role of artificial intelligence could permanently change the game of negotiating credit agreements.
Liability Management Transactions
Some view an LMT as a cunning tactic for borrowing corporations to relieve their debt burdens by exploiting the loopholes of credit documentation. A borrower can often execute an LMT via parallel agreements (side deals) with certain lenders, much to the chagrin and expense of the other lenders.
The primary categories of LMTs are as follows:
‘The Double-Dip’
In a double-dip transaction, certain lenders end up having two claims in the event of a default on the same debt. This is functionally executed by:
The parent company (P) that is the principal borrower in a credit facility causes an unrestricted [i] subsidiary (US) to issue (e., sell) debt to a third party (Lender) that is guaranteed [i] by a restricted subsidiary (RS) [ii].
This guarantee serves as the first claim for Lender in a potential default/bankruptcy. In the event of P’s bankruptcy, and subsequent liquidation, this guarantee gives Lender a claim on the recovery proceeds
US then loans the proceeds of this debt to P (or other subsidiaries) in exchange for a receivable.
The receivable from P is pledged by US to the Lender, and serves as the second claim by Lender on the recovery proceeds if P liquidates.
If P later files for bankruptcy, US’s Lender will be protected by RS’s guarantee and US’s receivable from P. Practically, however, Lender’s recovery is usually capped at the par value of the debt due to a legal principle called the single satisfaction rule [iii].
The objective of a double-dip is for Lender to bolster its claim in a potential bankruptcy of the corporate enterprise. Without the transaction, and assuming such Lender pari passu with another senior lender, it would receive 50% of the collateral in a liquidation. By executing the double-dip, Lender would receive 2/3rd of the collateral proceeds due to two claims.
Dropdown
In a dropdown, existing lenders of the borrower become subordinated to senior debt issued by an unrestricted subsidiary. This is accomplished by the borrower/parent utilizing certain provisions within the credit agreement (e.g., investment, asset sale, or other restricted payment baskets) to transfer collateral from restricted subsidiaries to unrestricted subsidiaries not bound by the covenants of the existing credit agreement. This transferred collateral is then used to issue structurally senior debt at the unrestricted subsidiary, thereby allowing the borrower (the corporate enterprise, that is) to raise additional capital through its unrestricted subsidiary without encumbering additional assets.
Uptiering
An uptiering transaction enables a borrower to raise senior debt without actually transferring any collateral. This is generally executed by the borrower amending its leveraged loan agreement, most commonly the credit agreement which is usually broadly syndicated. Depending on the size of the loan, the number of lenders in the syndicate could range from a couple to 20+. Amending the credit agreement that governs such facilities usually requires consent from syndicate member lenders with aggregate commitments more than 50% of the principal amount of the loan. Moreover, in this type of LMT, a borrower negotiates consents with certain existing lenders to amend its credit agreement to permit raising senior debt and invites participating lenders to exchange their existing debt for this new senior debt. This, in turn, subordinates the non-participating existing lenders.
Prominent LMTs
J. Crew
One of the most notorious LMTs in recent years was a dropdown executed by J. Crew in 2017.
The apparel retailer transferred intellectual property from restricted subsidiaries to unrestricted subsidiaries to reduce its debt by $340 million without pledging any new collateral, having additional encumbrance on existing assets. J. Crew accomplished this by utilizing three investment baskets permitted in the credit agreement:
Investment in unrestricted subsidiaries up to the higher of $100 million or 3.25% of total assets,
Investment in certain restricted subsidiaries up to the higher of $150 million or 4% of total assets, and
Investments by certain restricted subsidiaries in unrestricted subsidiaries financed with proceeds of investments in these restricted subsidiaries.
J. Crew utilized baskets (i) and (ii) to transfer $250 million of intellectual property assets (which had already been pledged to the existing $1.5 billion term loan facility) to an unrestricted subsidiary. This unrestricted subsidiary licensed the use of intellectual property back to J. Crew, raised senior notes secured by these intellectual property assets, and exchanged them at a discount for the existing unsecured PIK notes with impending maturity. The lenders of the existing term loan facility lost their claim on $250 million of collateral, had to share their claims with lenders of the new senior notes issued by the unrestricted subsidiary in a potential liquidation, and let J. Crew use term loan proceeds to pay licensing fees for the use of intellectual property.
Revlon
Revlon attempted a similar drop-down transaction more recently but with a higher degree of panache.
In 2016, Revlon executed a $1.8 billion term loan facility that allowed for additional revolving loans and was secured partly by intellectual property. In 2019, as its financial performance declined, credit ratings suffered, and leverage piled up, Revlon approached the term loan lenders seeking to transfer intellectual property collateral to an unrestricted subsidiary in order to raise fresh capital outside the purview of the credit agreement.
Unsurprisingly, lenders with aggregate commitments exceeding 50% of the total facility rejected, but several others did consent. Revlon borrowed an additional $65 million in revolving loans from these consenting lenders which was the exact amount necessary to increase the aggregate holdings of the consenting lenders above 50%. Their votes were now enough to allow the transfer of intellectual property to the beauty brands subsidiary, which was unrestricted and raised a super senior facility funded by the consenting lenders with rolled-up commitments of the $1.8 billion term loan facility and $880 million of new money. Its existing lenders, who were thus subordinated to the super senior facility, challenged it in court, but the case was ultimately dismissed. (Case No. 22-10760 at United States Bankruptcy Court Southern District of New York)
Serta
An even more recent uptiering transaction with an unhealthy dose of twists and turns was executed by Serta. In 2020, Serta caused certain of its lenders to exchange $1.2 billion of existing loans (of a total facility of $1.95 billion) for $1.075 billion of new super-priority debt. This was accomplished by relying on the ‘open market purchases’ condition in its credit agreement.
The credit agreement contained customary provisions about the pro rata treatment of similarly situated lenders and prohibited amendments to the pro rata clause without the consent of all impacted lenders. One exception to the prohibition was for open market purchases. An open market purchase is where the borrower purchases loans from lenders who elect to sell their loans; this effectively enables participating lenders to receive consideration on a non-pro-rata basis.
The transaction was challenged in bankruptcy court by non-participating lenders, who argued violation of pro-rata distribution and good faith clauses in the credit documents. While the bankruptcy court ruled in favor of Serta, agreeing with it on the utilization of the open market purchases principle, the Fifth Circuit subsequently reversed the bankruptcy court’s ruling, providing some hope going forward for non-participating lenders on the short end of the LMT stick. (Case No. 23-20181(5th Dec.31, 2024) at the U.S. Court of Appeals for the Fifth Circuit).
In the last few years, lenders and management teams have been more cognizant of LMT related discord. As a result, credit documents in syndicated deals have tended to be much tighter, with less room for conflicting interpretations of covenants.
Private Credit
Going forward, a potential decline in LMTs could also be attributed to the contemporaneous blossoming of private credit. The largest segment of private credit is ‘direct lending’ which, as the name suggests, often involves a non-bank lender directly loaning capital to borrowers.
Since direct lending usually involves a single lender, the borrower cannot privately negotiate on a selective basis with other lenders, which is often the case in broadly syndicated loans. Moreover, non-bank lenders that make direct loans are often players who are not afraid of engaging in shareholder activism and other tactics that can incentivize a borrower to prefer to avoid conflict.
Lastly, direct loans are customized to the borrower’s circumstances, and an LMT might eventually place the borrower (especially if the borrowing entity’s operations are of significant size and scale, or if the loan amount is meaningful) in a worse-off situation from capital structure and cash flow standpoints, all things considered. These underlying attributes of direct lending suggest an organic mitigation of LMTs in the years to come.
In response to the 2008 financial crisis, as traditional banks had to cut back on lending due to increased regulatory scrutiny, risk aversion, and higher capital adequacy requirements, private credit sensed an opportunity to target underserved borrowers and expanded aggressively. According to a recent Bloomberg report, private credit had grown to $1.5 trillion globally (at the end of June 2024) – a meteoric rise for a sector in its infancy less than 20 years ago, with more than half of this volume in the form of direct lending and more than 2/3rds if we also include distressed debt. ( see Bloomberg article titled “Private Credit is the Hot New Thing on Wall Street. But What Is It?” published on February 19, 2025).
Most of the capital in private credit originates from financial institutions (pension funds, insurance companies, etc.) and affluent individuals with long-term investment horizons. Such lenders have the luxury of holding their loans through volatile periods until maturity (in stark contrast to broadly syndicated loans (BSLs) and being able to provide capital to borrowers with weaker credit. In exchange for paying slightly higher interest, borrowers not only have less onerous reporting obligations (since private debt does not trade), but they also receive customized solutions as well as more flexible terms.
The very nature of direct lending and the structure of private loans fits perfectly with the capital requirements of financially distressed companies that can focus on turning around operations instead of worrying about the entire loan syndicate and related haggling — a harbinger of liability management transactions. Private credit funds have been aggressively hiring professionals with bankruptcy and restructuring experience [iv] — further underscoring the ability of these funds to proficiently navigate and profit off any potential restructuring within and outside their portfolios.
The Road Ahead
As it pertains to corporate restructuring, no two negotiations or workouts are alike. The reorganization plan in every restructuring is often a solution that addresses most of the agenda items of every stakeholder. In order to get to such solution, debtor and its advisors have to constantly weigh the ever-evolving priorities of most critical constituents of the estate and strive to present a plan that satisfies most parties. In such dynamic environment of corporate restructuring, LMTs have muddied the waters by promoting yet another set of private negotiations. The gamesmanship, litigation, and everchanging value preservation tactics have already led to higher courts ruling in favor of non-participating lenders.
Since Wall Street wizards are nothing but creative, any decline in LMTs could very well yield other maneuvers to abruptly alter capital structures. It remains to be seen, for example, how artificial intelligence (AI) may play a role in all this, but borrowers have already been leveraging it to improve their forecasting processes. This could be extended to preemptively flag potential distressed situations, and sophisticated AI models could assist a company in restructuring to refine its plan of reorganization prior to a confirmation hearing by predicting product or service performance based on analyses of simulated data. AI could also assist in the restructuring process by using machine learning to replace manual labor associated with court filings, as well as to analyze comprehensive datasets to identify fraudulent activity. [v]
One additional ‘pulled from the headlines’ stumbling block to redefining capital structures is the eventual application of tariffs by trade partner nations. At the time of writing this article, a Chuck E. Cheese financial deal had been delayed due to market swings and tariff discussions. Hopefully the financing environment stabilizes in time for the company to replace the $660 million debt due in May 2026. Similarly, the retailer At Home is in the market to raise a loan to address declining cash reserves but needs a financing window to open up soon or otherwise faces a looming default. More than $50 billion of corporate debt is due in 2026 and $120 billion is due in 2027.
[Editors’ Note: We think you’ll also like “Uptier Transactions and Other Lender-on-Lender Violence: The Potential for More Litigation and Disputes on the Horizon.”]
This article was originally published on April 21, 2025.
©2025. DailyDACTM, LLC. This article is subject to the disclaimers found here.
Footnotes
[i] Assumes permissibility and capacity for such guarantees under relevant covenants including Permitted Debt, Permitted Liens, Investments, etc.
[ii] A ‘restricted’ subsidiary refers to one that is bound to requirements contained in the corporate enterprise’s existing credit agreement. A restricted subsidiary is also typically a guarantor of the obligations of the parent under the credit agreement. If lenders do their job correctly, most of the value of a corporate enterprise resides in the primary borrower and its restricted subsidiaries. The term ‘corporate enterprise’ is used to denote all of the legal entities that comprise a single business. Most publicly traded companies, for instance, are comprised of numerous legal entities.
[iii] A common law principle that a claimant should only recover once for a particular loss thereby preventing overcompensation for the same loss.
[iv] See The Wall Street Journal, “Private-Credit Firms Expand Restructuring Teams Amid Bankruptcy Surge,” March 12, 2025.
[v] See “A Story of Two Holy Grails: How Artificial Intelligence Will Change the Design and Use of Corporate Insolvency Law,” The University of Chicago Law Review: noting that experts are also exploring the possibility of utilizing AI to predict court decisions and make the contracting process more efficient.
Weekly Bankruptcy Alert April 21, 2025 (For the Week Ending April 20, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Francis Trust LLC(New Harbor, ME)
Lessors of Real Estate
Bangor(ME)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/15/25
Creativemass Holdings, Inc.(Melbourne, VIC)
Not Disclosed
Wilmington(DE)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/14/25
Viridos, Inc.(La Jolla, CA)
Electric Power Generation, Transmission and Distribution
Wilmington(DE)
$10,000,001to$50 Million
$1,000,000to$10 Million
4/14/25
Controladora Dolphin, S.A. de C.V.(Cancun, Mexico)
Amusement Parks and Arcades
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
4/16/25
Arch Therapeutics, Inc.(Framingham, MA)
Medical and Diagnostic Laboratories
Worcester(MA)
$1,000,001to$10 Million
$10,000,001to$50 Million
4/18/25
Arch Biosurgery, Inc.(Framingham, MA)
Medical and Diagnostic Laboratories
Worcester(MA)
$100,001to$500,000
$0to$50,000
4/18/25
Molecular Templates, Inc.(Foxboro, MA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$1,000,001to$10 Million
$10,000,001to$50 Million
4/20/25
Molecular Templates Opco, Inc.(Foxboro, MA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$1,000,001to$10 Million
$10,000,001to$50 Million
4/20/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
HS Exteriors LLC(Sutton, NH)
Not Disclosed
Concord(NH)
$0to$50,000
$50,001to$100,000
4/14/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Nevada Supreme Court: Chapter 7 Filing Dooms Shareholder Breach Of Fiduciary Claim
Globe Photos, Inc. owned a portfolio of millions of images of celebrities and musicians, including Marilyn Monroe, the Beatles, and Jimi Hendrix, some taken by famous photographers such as Frank Worth. Despite these assets, Globe didn’t make a go of it and its assets were used to pay off its secured creditors, leaving the shareholders and unsecured creditors with nothing. Some of the shareholders sued alleging that the directors breached their fiduciary duties.
The defendant directors unsuccessfully moved to dismiss on the basis that the plaintiffs lacked standing to sue them because the breach of fiduciary duty claim seeks to redress harm to Globe. Consequently, the claim belonged to Globe’s bankruptcy estate which the trustee controlled, and over which the bankruptcy court had exclusive jurisdiction. The plaintiffs countered by claiming that the breach of fiduciary duty claim hurt them specifically while benefiting another shareholder.
The Nevada Supreme Court reversed, finding that the plaintiffs’ claims were derivative, not direct, and the plaintiffs therefore lacked standing to bring the claim. Black v. Eighth Judicial Dist. Ct, 141 Nev. Adv. 11 (April 17, 2025). It should be noted that the Supreme Court applied Delaware, not Nevada, law because Globe was a Delaware corporation. Thus, it applied the two-part test enunciated in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) which asks:
who suffered the alleged harm (the corporation or the suing stockholders, individually); and
who would receive the benefit of any recovery or other remedy (the corporation or thestockholders, individually)?
The Nevada Supreme Court’s original decision issued as an unpublished order. The Court subsequently granted the petitioners’ (defendants below) request to publish the order as an opinion. The opinion was signed by all seven justices.
What Are the Key Takeaways for Managing HMRC In a UK Restructuring Plan (Rps) and Beyond?
Much will depend on the specifics of a company’s financial position, but there are some themes from the OutsideClinic and Enzen judgments that are helpful – and arguably so even beyond the context of RPs for a company’s managing its relationship with HMRC.
Is HMRC in or out of the money?
In OutsideClinic HMRC had reservations about the valuation evidence put forward by the plan company in support of its position that administration was the relevant alternative. Under the RP HMRC stood to recover 5p in the £ but nil in the relevant alternative – HMRC was therefore out of the money.
The valuation evidence was based on certain assumptions in respect of the recoverability of book debts which if those turned out to be inaccurate would have entitled HMRC to a distribution in the alternative – meaning it would have been in the money. It was acknowledged by the plan company that it would only take a “relatively small shift” in the assumptions for this to be the case.
Recognising the likelihood of HMRC being an in the money creditor on a contested application the parties negotiated an improved outcome for HMRC – funded by the plan investors – which would not impact the returns to other creditors.
Take Away
HMRC is different to other creditors given its secondary preferential status, and its voice as a creditor that is potentially in the money, where there is a prospect (even small) of it being paid in the relevant alternative should be listened to. This voice may in fact be louder now, following the Court of Appeal confirming in Thames Water that the views and treatment of out of the money creditors can be relevant when considering whether a plan is fair – particularly so given the elevated status that HMRC has on insolvency.
Recognising HMRC’s role
HMRC has preferential status on an insolvency such that its claims for certain tax liabilities rank ahead of other claims as preferential claims. That status does not exist on an RP where a plan company is free to ignore the statutory order of priorities (provided it can be justified).
Not only that, but HMRC’s as a creditor is also different to other creditors. It has not chosen to trade with the company but is an “involuntary creditor” that continues regardless of whether HMRC is paid or not. HMRC cannot “opt” out of that relationship like other creditors might do.
The judge in Enzen observed that HMRC’s treatment under the Enzen plans (of which there were two) reflected:
the standing of HMRC as preferential creditor;
the commercial leverage that it is able to exert in consequence of Naysmyth and the Great Annual Savings Company; and
the inevitability of an ongoing relationship as trading continues.
Take Away
What we have seen as a consequence of these particular RPs (and those before) is judicial acknowledgement of HMRCs status as a “prominent” creditor which could be translated to – treat them differently and better than unsecured creditors.
That is all well and good, but we think it is probably fair comment to say that HMRC’s role in supporting a failing business can sometimes be seen as lacking or at least taken to be unsupportive. But perhaps now is the time for both practitioners and HMRC to reflect on their historic views.
What HMRC did demonstrate in both cases is that it was willing to engage, something that Mr Justice Norris said in Enzen was a “welcome development”. This signals a positive change, not only, we hope for RPs but also more generally.
On the flip side, if a company is prepared to recognise at an earlier point that HMRC is an involuntary and ongoing creditor in its business then surely that would help manage that relationship in a positive way (whether in the context of an RP or otherwise).
To pay or not to pay HMRC, that is the question?
What we can gauge from OutsideClinic is that although certain HMRC liabilities were unpaid for three months in 2024, its remaining 2024 liabilities were paid in full and continued to be paid during 2025.
In Enzen too, there were historic arrears but from June 2024 tax liabilities were being paid as they fell due, and current liabilities were excluded from the plan – in other words the companies did not seek to compromise those.
Take Away
Although there is no comment in the judgments about whether paying current liabilities influenced HMRC’s attitude, HMRC’s guidance makes it clear that it will consider whether other creditors are being paid when HMRC is not, and whether the company will make future payments in full, and on time, when deciding whether to support a plan,
Paying HMRC current liabilities is likely to encourage engagement and willingness to re-schedule or compromise historic liabilities. Falling further into a black hole with tax debts, not paying HMRC and trading at its expense is likely to do the opposite.
Arguably the starting point for any company requiring HMRC’s support (whether that be for an RP or a time to pay agreement) is to be able to demonstrate that at least it will be able to meet future liabilities.
Concluding Comments
We have seen a positive change in HMRC’s approach in these cases which is very encouraging, but do we as practitioners need to do the same when it comes to managing relationships with HMRC generally? That may depend on whether HMRC’s change in attitude extends beyond RPs.
If there is more of a willingness to recognise HMRC’s role as an involuntary preferential creditor in negotiations, then perhaps we will see that reciprocated by HMRC showing a greater willingness to compromise in return. However, given that the thorny relationship runs quite deep, we expect practitioners will first want to see HMRC engage more regularly in a positive manner outside of RPs, and that would be a “welcome development”.
Weekly Bankruptcy Alert April 14, 2025 (For the Week Ending April 13, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Best Choice Trucking, LLC(Dedham, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/7/25
Tallulah’s Taqueria, LLC(Providence, RI)
Restaurants and Other Eating Places
Providence(RI)
$50,001to$100,000
$1,000,001to$10 Million
4/7/25
Solid Financial Technologies, Inc.(Palo Alto, CA)
Not Disclosed
Wilmington(DE)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/7/25
40 Starr Lane LLC(Warren, RI)
Not Disclosed
Providence(RI)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/8/25
Royal Interco, LLC(Phoenix, AZ
Converted Paper Product Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
4/8/25
Sun Paper Company, LLC(Duncan, SC)
Converted Paper Product Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
4/8/25
Royal Paper Converting, LLC(Phoenix, AZ)
Converted Paper Product Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
4/8/25
Doubletree Paper Mills, LLC(Gila Bend, AZ)
Converted Paper Product Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
4/8/25
Publishers Clearing House LLC(New York, NY)
Other Professional, Scientific and Technical Services
Manhattan(NY)
$1,000,001to$10 Million
$50,000,001to$100 Million
4/9/25
Colonial Mills, Inc.(Rumford, RI)
Textile Furnishings Mills
Providence(RI)
$0to$50,000
$100,001to$500,000
4/9/25
Annalee Dolls, LLC(Meredith, NH)
Not Disclosed
Concord(NH)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/11/25
Deqser LLC(Kearny, NJ)
Management of Companies and Enterprises
Wilmington(DE)
$1,000,001to$10 Million
$1,000,001to$10 Million
4/10/25
KNY 26671 LLC(Kearny, NJ)
Drycleaning and Laundry Services
Wilmington(DE)
$10,000,001to$50 Million
$10,000,001to$50 Million
4/10/25
180 La Pata 2020, LLC(San Clemente, CA)
Not Disclosed
Wilmington(DE)
$1,000,001to$10 Million
$50,000,001to$100 Million
4/11/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Bancroft Holding LLC(Lancaster, MA)
Not Disclosed
Worcester(MA)
$50,001to$100,000
$1,000,001to$10 Million
4/7/25
Innovation Studio, Inc.(Roxbury, MA)
Other Schools and Instruction
Boston(MA)
$0to$50,000
$500,001to$1 Million
4/8/25
Martell Diagnostic Laboratories, Inc.(Natick, MA)
Scientific Research and Development Services
Boston(MA)
$0to$50,000
$1,000,001to$10 Million
4/8/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
Navigating Ethical and Legal Complexities in Insider Lease Agreements in the Context of Bankruptcy
Insider lease agreements, where a property owner leases assets to a related entity, are prevalent in real estate-based businesses. While these arrangements can offer tax advantages and liability protections, they also present intricate ethical and legal challenges, particularly in bankruptcy scenarios. This article delves into the nuances of insider lease agreements in the context of bankruptcy exploring ethical considerations, and providing best practices for attorneys and business owners.
Definition of ‘Insider’
Bankruptcy Code Section 101(31) defines an ‘insider’ to include relatives, general partners, and directors or officers of the debtor. Understanding this designation is critical, as insider transactions face heightened scrutiny and potential challenges from creditors and trustees.
David Levy, managing director at Keen-Summit Capital Partners, points out that courts apply various non-statutory tests to determine whether a party is an ‘insider’ in a lease agreement. He explains that factors like control, closeness of relationships, and financial influence are key indicators that could lead to heightened scrutiny in bankruptcy cases.
Understanding Insider Lease Agreements
An insider lease agreement occurs when a business owner leases property to a related entity, such as a subsidiary or an entity under common ownership. This structure can be advantageous, allowing for tax deductions and asset protection.
However, it can also create conflicts of interest, especially if the lease terms are not established at fair market value or if the arrangement favors insiders over creditors. Matt Christensen, Managing Partner at Johnson May, notes that insider lease agreements can significantly impact bankruptcy avoidance actions.
True Lease vs. Disguised Financing
It’s crucial to distinguish between a ‘true lease’ and a ‘disguised financing arrangement.’ A true lease involves the lessor retaining ownership of the asset, with the lessee having the right to use it for a specified period. In contrast, a disguised financing arrangement, though labeled as a lease, functions as a secured transaction where the lessee effectively owns the asset and the ‘lease’ serves as collateral for a loan.
Courts scrutinize the substance over form to determine the true nature of the agreement. For instance, a court might recharacterize lease agreements as security agreements based on factors like the lessee’s lack of termination rights and nominal purchase options.
Jonathan Aberman, partner at Troutman Pepper Locke, stresses that courts review insider transactions more rigorously in bankruptcy cases. He advises that ensuring fair market value and independent oversight in lease agreements is crucial to avoiding claims of self-dealing.
Fair Market Value (FMV) vs. Residual Value
Fair Market Value refers to the price at which an asset would change hands between a willing buyer and seller, neither under compulsion and where both have reasonable knowledge of relevant facts. Ensuring that lease terms reflect FMV is vital to prevent allegations of preferential treatment or fraudulent conveyance, especially in insider transactions.
Residual value is the estimated worth of a leased asset at the end of the lease term. Lessees may have options to purchase the asset at this value. Accurate estimation is essential to avoid disputes and ensure compliance with tax regulations.
Lease Provisions
Most leases have certain provisions in place to ensure that the lessor is protected in the event of bankruptcy or other unforeseen circumstances. Below are some common provisions and clauses included in leases:
Hell-or-High-Water Clauses: This clause stipulates that the lessee’s obligation to make payments is absolute and unconditional, regardless of any difficulties encountered. Such provisions are common in equipment leases to protect the lessor’s revenue stream.
Force Majeure Clauses: A Force Majeure Clause excuses parties from performance obligations due to extraordinary events beyond their control, such as natural disasters or government actions. The applicability of this clause depends on its specific wording and the unforeseen nature of the event. For example, during the COVID-19 pandemic, courts examined whether government-imposed restrictions triggered force majeure clauses in lease agreements.
Purchase Options: A Purchase Option grants the lessee the right to buy the leased asset at the end of the lease term, often at FMV or a predetermined price. The specifics of this option can influence the lease’s classification for accounting and tax purposes.
Maintenance and Return Conditions: Lease agreements typically require the lessee to maintain the asset in good condition and specify the state in which it must be returned. These terms protect the lessor’s residual interest and ensure the asset’s value is preserved.
Indemnity Provisions: Indemnity clauses obligate one party to compensate the other for certain losses or damages. In leases, lessees often indemnify lessors against liabilities arising from the asset’s use, mitigating the lessor’s risk exposure.
Ethical Considerations
Insider lease agreements raise myriad ethical considerations for the parties involved.
Conflicts of Interest
Insider lease agreements inherently risk conflicts of interest. Attorneys must ensure that such arrangements are transparent and that all parties provide informed consent. ABA Model Rule 1.7 addresses conflicts of interest, emphasizing the necessity for clear client relationships and the avoidance of representing parties with opposing interests within the same transaction.
Duty of Candor
Attorneys also have an ethical obligation to be truthful in dealings with tribunals and opposing parties. This duty is paramount when presenting insider lease agreements in legal proceedings, ensuring that all material facts are disclosed. ABA Model Rules 3.3 and 3.4 outline these responsibilities.
Transparency and Fair Dealing
Full disclosure of insider relationships and lease terms is essential to prevent legal disputes and uphold ethical standards. This transparency ensures that all parties, including creditors, are aware of potential conflicts and can assess the fairness of the transaction.
Samantha Ruben of Dentons’ Restructuring Insolvency and Bankruptcy practice points out that ethical considerations in insider leases can arise when fiduciaries prioritize personal interests over the business entity. She explains that in a distressed situation, these transactions may face higher levels of scrutiny and disclosure from the get-go can be key.
Conclusion
Insider lease agreements, while beneficial in certain circumstances, must be handled with care to avoid ethical and legal pitfalls. By adhering to best practices, ensuring transparency, and complying with legal standards, attorneys and business professionals can mitigate risks and uphold ethical integrity in real estate transactions.
To learn more about this topic view Ethical Issues In Real Estate-Based Bankruptcies / Insider Lease Agreements. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about real estate-focused bankruptcy cases.
This article was originally published on here.
©2025. DailyDACTM. This article is subject to the disclaimers found here.
Buying Assets in Bankruptcy: Opportunities, Risks, and Strategies
Introduction
Acquiring assets from a bankrupt company presents unique opportunities for investors, business owners, and legal professionals. Understanding the intricacies of a Section 363 sale process, the role of a stalking horse bidder, and the dynamics of bankruptcy sales is crucial for navigating these complex transactions successfully.
What Makes Bankruptcy Asset Sales Unique?
Section 363 of the US Bankruptcy Code allows a debtor (the company or person in bankruptcy) to sell assets outside the ordinary course of business, typically through a court-approved auction process. This mechanism enables the sale of assets “free and clear” of existing liens, claims, and encumbrances, providing buyers with a clean title.
The section 363 sale process is a public auction. The debtor must market the assets and sell them through a court-approved auction process.
This process benefits buyers by offering:
Expedited Transactions: Bankruptcy courts often prioritize swift asset sales to maximize value and reduce administrative expenses.
Transparency: The auction process’s public nature ensures that all interested parties have access to information, promoting fair competition.
Legal Protections: Court approval of the sale minimizes the risk of future disputes over asset ownership.
However, potential buyers must conduct thorough due diligence to understand the specific terms and any possible exceptions that might affect the sale.
Benefits of Buying Assets in Bankruptcy
Purchasing assets through a bankruptcy sale can offer several advantages:
Discounted Asset Prices: Assets are often sold at reduced prices due to the distressed nature of the sale.
Acquisition Free of Liens: Buyers can acquire assets free and clear of most prior claims. James Sullivan, partner at Seyfarth Shaw, notes that assets bought out of bankruptcy are often priced lower than when purchased through a typical M&A transaction and are acquired free and clear of virtually all liens, claims, and interests burdening the assets.
Court-Supervised Process: The involvement of the bankruptcy court provides a structured environment, reducing the risk of undisclosed liabilities.
Opportunity for Strategic Expansion: Buyers can acquire valuable assets, intellectual property, or business units that align with their strategic goals.
The Role of the Stalking Horse Bidder
A stalking horse bidder is an initial bidder chosen by the debtor to set the baseline bid for the assets. This arrangement establishes a minimum price, encouraging other potential buyers to participate in the auction. The stalking horse bidder often negotiates certain protections, such as break-up fees, to compensate for the risks associated with being the initial bidder.
Often in section 363 sales, there will be an initial ‘stalking horse’ bidder that will perform the initial due diligence on the assets to be sold and enter into an asset purchase agreement with the debtor for the sale of the property, subject to the possibility of higher and better offers being accepted at the auction.
Break-up fees are payments made to the stalking horse bidder if another bidder wins the auction. These fees compensate the initial bidder for the time and resources invested in setting the floor price. The debtor and the stalking horse bidder negotiate these bid procedures and may seek and receive input from others, including secured creditors. Richard Corbi of Corbi Law notes that a bidder might not win the assets despite all their upfront effort if the auction gets competitive.
The Auction Process & Competitive Bidding
The auction process in a bankruptcy sale is designed to maximize the value of the debtor’s assets. Key steps include:
Bid Procedures Approval: The debtor proposes bidding procedures, which must be approved by the bankruptcy court. These procedures outline the requirements for potential bidders and the rules governing the auction.
Marketing the Assets: The debtor markets the assets to attract potential buyers, providing necessary information to facilitate due diligence.
Submission of Qualified Bids: Interested parties submit bids that comply with the approved procedures by a specified deadline.
Auction Conducted: If multiple qualified bids are received, an auction is held where bidders can increase their offers competitively.
Selection of Winning Bid: The debtor, in consultation with creditors and subject to court approval, selects the highest and best offer, considering factors beyond just the purchase price.
Court Approval: A sale hearing is conducted where the court reviews the process and approves the sale to the winning bidder.
Closing the Sale: Following court approval, the transaction is finalized, and the assets are transferred to the buyer.
It’s important to note that the ‘highest and best’ offer isn’t solely determined by the monetary value. Cliff Katz explains that other considerations include the ability to close promptly, contingencies, and the impact on stakeholders.
Risks and Challenges of Bankruptcy Sales
While bankruptcy asset purchases offer attractive opportunities, they come with inherent risks:
Due Diligence Constraints: The expedited nature of bankruptcy sales can limit the time available for thorough due diligence.
Potential for Overbidding: Competitive auctions may drive prices higher than anticipated, potentially reducing the expected value proposition.
Regulatory Approvals: Certain transactions may require approvals from regulatory bodies, which can introduce delays or complications.
Successor Liability Concerns: Although assets are sold free and clear, certain liabilities, such as environmental obligations or union contracts, may transfer to the buyer under specific circumstances.
Financing Challenges: Securing financing for distressed assets can be more complex, requiring lenders to be familiar with bankruptcy processes.
Jonathan Friedland explains that potential buyers of distressed companies often have the ability to influence whether the target company files bankruptcy at all, “Bankruptcy is just one tool among many that are available to a financially distressed company, and many transactions happen in the context of an Article 9 sale, a receivership sale, or an assignment for the benefit of creditors.” Friedland notes that “these other venues each have their relative pros and cons as compared to purchase through bankruptcy.” Editors’ Note: for more information on business bankruptcy alternatives, read Buying Operating Assets from a Distressed Seller and Dealing with Corporate Distress 18: Buying & Selling Distressed Businesses.
Private Sales in Bankruptcy
Not all bankruptcy asset sales involve public auctions. In some cases, a debtor may pursue a private sale, negotiating directly with a buyer without a competitive bidding process. This approach can be advantageous when:
Time Is of the Essence: Private sales can be faster, avoiding the time-consuming auction process.
Limited Market Interest: If the pool of potential buyers is small, a private sale may be more practical.
Confidentiality Concerns: Private negotiations can keep sensitive information out of the public domain.
However, private sales still require court approval, and the debtor must demonstrate that the sale serves the best interests of the estate and its creditors.
Special Considerations for Foreign Buyers
Foreign investors interested in acquiring US assets through bankruptcy should be aware of additional considerations:
Regulatory Compliance: Transactions may be subject to review by the Committee on Foreign Investment in the United States (CFIUS), especially if they involve sensitive industries.
Currency Exchange Risks: Fluctuations in exchange rates can impact the overall cost of the investment.
Legal Representation: Engaging US-based legal counsel is essential to navigate the complexities of the US bankruptcy system.
Tax Implications: Understanding the tax consequences in both the US and the investor’s home country is crucial for effective planning.
Conclusion: Is a Bankruptcy Purchase Right for You?
Acquiring assets through bankruptcy can be a strategic move, offering access to valuable assets at potentially discounted prices. However, it’s essential to approach such opportunities with a clear understanding of the process, associated risks, and legal implications. Engaging experienced legal and financial advisors is crucial to navigating the complexities of bankruptcy.
To learn more about this topic, view Advanced Bankruptcy Transactions / Purchasing Assets in Bankruptcy. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested in reading other articles about purchasing distressed assets.
This article was originally published here.
©2025. DailyDACTM, LLC. This article is subject to the disclaimers found here.
Federal Equity Receiverships: Key Concepts and Strategies
Federal equity receiverships are crucial mechanisms for addressing insolvency, fraud, and mismanagement in businesses. Because of their significance, many professionals in the legal and financial sectors should endeavor to understand the complexities and advantages of this remedy.
Understanding Federal Equity Receiverships
A federal equity receivership is a legal process wherein a court appoints a receiver to take control of a company’s assets and operations. This measure is typically employed in cases involving fraud, insolvency, or significant internal disputes. The receiver acts as a neutral fiduciary, managing the entity’s affairs under the court’s supervision to preserve assets and protect stakeholders’ interests.
Historically, receiverships have their roots in English common law and have evolved to address complex financial disputes and corporate misconduct. In the United States, federal equity receiverships are distinct from state court receiverships, primarily due to their broader jurisdictional reach. As Kelly Crawford, a partner at Scheef & Stone, highlights, a state court receiver is generally limited to the boundaries of that state, but a federal receiver can exercise control over assets nationwide.
Types of Federal Equity Receiverships
Federal equity receiverships can be divided into two categories based on their initiation:
Regulatory Receiverships: These receiverships address violations like securities fraud or Ponzi schemes and are initiated by government agencies such as the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC).
Private Litigation Receiverships: Arising from disputes among private parties — such as creditors, business partners, or shareholders — these receiverships aim to resolve issues like mismanagement or internal conflicts.
Melanie Damian of Damian, Valori, & Culmo notes that private receiverships are becoming increasingly prevalent. Lenders and business owners are using receiverships to secure assets in disputes — think business divorce.
The Role and Powers of a Receiver
Once appointed, a receiver assumes comprehensive control over the entity’s assets and operations. Their responsibilities include managing daily business activities, safeguarding assets, investigating fraudulent transfers, and, if necessary, liquidating assets to satisfy creditors.
The scope of a receiver’s authority is defined by the court order appointing them. This order delineates the receiver’s duties, powers, and the extent of their control. Given the lack of extensive statutory guidelines for federal equity receivers, the appointing order becomes the primary source of their authority.
Greg Hays of Hays Financial Consulting, a member of the National Association of Federal Equity Receivers, emphasizes that receivers’ powers can be extremely broad. They can issue subpoenas, take over management, and even initiate lawsuits on behalf of the receivership estate.
The Legal Process for Appointing a Receiver
The appointment of a receiver requires a legal proceeding in which the moving party (often a creditor, regulatory agency, or minority shareholder) petitions the court. The process typically involves the following steps:
Filing a Complaint – The party seeking a receivership must file a complaint that establishes the basis for court intervention. This may include evidence of fraud, insolvency, mismanagement, or the need to preserve assets pending litigation.
Filing a Motion for Appointment – A motion is then submitted, requesting that the court appoint a receiver. This motion is often accompanied by affidavits, financial statements, and other documentation supporting the need for receivership.
Court Hearing – In many cases, courts hold a hearing where the judge considers arguments from all parties involved. However, in emergency situations, the court may appoint a receiver ex parte, meaning without prior notice to the opposing party.
Issuance of a Court Order – If the court grants the motion, it issues an Order Appointing Receiver. This order serves as the governing document that defines the receiver’s duties, powers, and limitations.
Filing Under 28 U.S.C. § 754 – If the receivership involves assets across multiple states, the receiver must comply with 28 U.S.C. § 754, which allows the court’s jurisdiction to extend nationwide. The receiver is required to file copies of the appointment order in federal districts where assets are located within 10 days to maintain jurisdiction.
Implementation of Receivership – Once appointed, the receiver assumes control over assets, manages operations (if necessary), and carries out their duties as dictated by the court order.
Kathy Bazoian Phelps, partner at Raines Feldman LLP, explains that receivers are often appointed in various disputes, such as investor fraud cases, shareholder disputes, and commercial real estate foreclosures.
Advantages of Federal Equity Receiverships
Opting for a federal equity receivership offers several benefits over other remedies like bankruptcy, including:
Immediate Intervention: Receiverships can be granted ex parte — without prior notice — allowing for swift action to control and preserve assets.
Asset Protection: The receiver can promptly freeze bank accounts, secure records, and prevent further dissipation or misappropriation of assets.
Flexibility: Unlike bankruptcy, which operates under a rigid statutory framework, receiverships are equitable remedies tailored to the specific circumstances of each case.
Cost Efficiency: Bankruptcy proceedings often entail significant administrative expenses and involve multiple professionals. Receiverships tend to be more streamlined, potentially reducing costs.
Confidentiality: Receiverships generally attract less public attention than bankruptcy filings, helping to protect the entity’s reputation.
A receivership can immediately eliminate bad management by placing the company under the supervision of the Court.
Challenges and Limitations of Receiverships
While receiverships offer a powerful tool for asset management and recovery, they are not without challenges, including:
Limited Statutory Guidance – Unlike bankruptcy, which has a detailed legal framework under the US Bankruptcy Code, receiverships rely primarily on judicial discretion. This can lead to inconsistencies in how cases are handled.
Potential for Court Challenges – Affected parties, such as business owners or defendants, may challenge the receivership appointment, arguing that it is unnecessary or excessive.
Receiver Compensation – Receivers and their legal teams must be compensated from the assets under administration. If assets are insufficient, creditors may have to cover these costs, reducing their ultimate recovery.
Overlap with Bankruptcy Proceedings – If a bankruptcy petition is filed, the receivership may be overridden by the automatic stay under 11 U.S.C. § 362, disrupting the receiver’s control.
Federal Equity Receivership vs. Bankruptcy
While both receiverships and bankruptcy address financial distress, they differ in several key aspects, as outlined in the following table:
Aspect
Receivership
Bankruptcy
Initiation
Typically initiated by creditors or regulatory agencies through a court-appointed process.
Initiated by the debtor filing a petition for relief under the Bankruptcy Code.
Management Control
A court-appointed receiver takes over management, displacing existing leadership.
Existing management often remains in control as a ‘debtor-in-possession,’ especially in Chapter 11 cases.
Legal Framework
Governed by equitable principles and tailored court orders, offering flexibility.
Governed by the Bankruptcy Code, which provides a structured and uniform process.
Scope of Authority
Receiver’s powers are defined by the appointing court and can be broad, including asset liquidation and litigation.
Bankruptcy trustees have defined statutory powers, with actions subject to court approval.
Duration and Cost
Potentially quicker and more cost-effective due to streamlined procedures.
Can be lengthy and expensive, involving extensive court proceedings and professional fees.
Kelly Crawford notes that bankruptcy makes sense in complex reorganizations, but in cases where creditors want quick action, a receivership is often the better choice.
However, it’s essential to consider that the appointment of a receiver does not preclude bankruptcy proceedings. If a bankruptcy case is filed after the appointment of a receiver, the bankruptcy filing generally supersedes the receivership. Secured creditors should note that if a bankruptcy case is filed after the appointment of a receiver, then the filing will trump the receiver’s appointment.
Final Thoughts
Federal equity receiverships provide a flexible and effective solution for managing financially distressed businesses, preserving assets, and combatting fraud. They can serve as a powerful alternative to bankruptcy when swift intervention is required.
Receiverships allow for quick action, independent oversight, and equitable distribution of assets — often making them the best choice when bankruptcy is impractical. Whether used as a proactive measure or a recovery tool, these court-appointed roles play an essential part in ensuring fair financial resolutions.
To learn more about this topic, view the webinar Federal Equity Receiverships / Key Concepts and Strategies in Federal Receiverships. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested in reading other articles about receiverships.
This article was originally published here.
©2025. DailyDACTM, LLC. This article is subject to the disclaimers found here.
New Ruling Reinforces Limits on Automatic Stay Waivers
A recent decision by Bankruptcy Judge Laura Grandy in In re DJK Enterprises LLC, 24-60126 (Bankr. S.D. Ill. Feb. 13, 2025) further limits the enforceability of prepetition waivers of the automatic stay, reinforcing the trend that courts will scrutinize such waivers under bankruptcy law principles and public policy considerations. The enforcement of a prepetition waiver of the automatic stay is not automatic and requires approval from the bankruptcy court.[1] Even if deemed valid, the waiver alone does not allow the secured creditor to enforce its lien without first obtaining relief from the stay through the court.[2] This decision builds upon prior case law and highlights for lenders the risk they face when relying on pre-bankruptcy agreements to bypass the automatic stay.
Background and Key Events in In re DJK Enterprises LLC
DJK Enterprises LLC (“DJK”) is the owner and operator of a hotel and restaurant encumbered by a $10.5 million mortgage, with Effingham Asset Funding (the “Lender”) holding liens and mortgages on all of DJK’s real and personal property.[3] In addition to the liens granted in favor of the Lender, DJK is indebted to (a) the Small Business Administration (SBA) in the amount of approximately $500,000, which loan is secured with a lien against DJK’s personal property,[4] (b) Effingham County for property taxes in the amount of $243,494 secured by DJK’s real property[5] and (c) Royal Banks of Missouri (“Royal Banks”) in the amount of $13,486,879.80 secured by a lien on all DJK’s assets.[6] Although DJK did not repay the Lender in full upon maturity, it continued making payments.[7]
Prior to the bankruptcy, DJK and the Lender executed the forbearance agreement, granting DJK 75 days to pay off the mortgage.[8] As part of the forbearance agreement, DJK executed a deed in lieu of foreclosure, which was to be held in escrow.[9] If DJK failed to repay the mortgage before the termination of the forbearance period, the Lender had the right to record the deed.[10] Additionally, the agreement prohibited DJK from filing for bankruptcy before the termination of the forbearance period or within 91 days after the deed’s recording.[11] In the event DJK did file for bankruptcy and the property was deemed part of the estate, the forbearance agreement included a waiver by DJK of the protections of the automatic stay and further required DJK to consent to a modification of the automatic stay.[12]
Before the termination of the forbearance period, DJK filed for Chapter 11 bankruptcy.[13] In response, the Lender moved to enforce the forbearance agreement and sought relief from the automatic stay, arguing that DJK’s prepetition waiver should be upheld.[14]
Summary of the Court’s Decision in In re DJK Enterprises LLC
Waivers of the Automatic Stay Remain UnreliableJudge Grandy ruled that the provisions of the forbearance agreement containing a waiver of the automatic stay were per se unenforceable, emphasizing that this approach “best protects the rights and interests of the debtor-in-possession and all creditors under the Bankruptcy Code—not just those of the creditor asserting the waiver.”[15]
Public Policy Continues to Favor the Bankruptcy ProcessWhile some courts have enforced stay waivers in bad-faith filings or single-asset real estate cases,[16] Judge Grandy recognized that the “trending position” among courts is to “treat the waiver as just one of several factors to be considered in determining whether ‘cause’ exists to lift the automatic stay.”[17] She rejected the Lender’s attempt to enforce the waiver solely for its own benefit, ruling that courts must consider the broader bankruptcy framework, public policy and interests of all creditors.[18]
No Cause to Lift the StayThe court emphasized that lifting the stay must be based on statutory grounds, such as the debtor lacking equity in the property and the property not being necessary for an effective reorganization (§ 362(d)(2)), or for “cause,” including the creditor lacking adequate protection (§ 362(d)(1)).[19] In this case, the Lender failed to demonstrate that DJK’s financial condition, asset values or restructuring prospects warranted stay relief.[20] Ultimately, the court found no other independent grounds to modify the automatic stay and denied the Lender’s motion.[21]
How This Decision Builds on Prior Precedent
Courts generally approach prepetition waivers of the automatic stay in three ways: Uphold the stay waiver in broad terms, reject the stay waiver as against public policy, and, the more modern approach which is to make a determination on a case-by-case basis.[22] The In re DJK Enterprises ruling adds further weight to the anti-waiver position, suggesting that lenders should not expect automatic enforcement of such provisions, and that the automatic stay is an indispensable feature of bankruptcy law.
Some courts have upheld waivers under certain conditions, particularly when they are part of a court-approved agreement, such as a prior bankruptcy plan or stipulated order.[23] Enforcing waivers may also be justified when it aligns with public policy by promoting out-of-court settlements and loan workouts.[24] Additionally, courts are more likely to uphold a waiver if the debtor’s bankruptcy filing appears to be in bad faith, suggesting an attempt to abuse the bankruptcy process.[25]
Several courts, including the Illinois Bankruptcy Court in In re DJK Enterprises, reject prepetition waivers, arguing that they conflict with the public policy behind the automatic stay, which is designed to protect debtors and ensure equitable treatment of creditors.[26] They also contend that such waivers violate the debtor’s fiduciary duty to creditors once a bankruptcy is filed, as the debtor-in-possession must act in the best interests of all creditors, not just select lenders.[27] Additionally, courts have expressed concern that enforcing these waivers could encourage predatory lending practices by allowing creditors to bypass bankruptcy protections and gain an unfair advantage over other creditors.[28]
The final approach taken by courts, as is the modern trend acknowledged in In re DJK Enterprises,[29] neither automatically enforce nor reject waivers but instead weigh them alongside other factors in stay relief motions.[30] Common factors include, but are not limited to:
the sophistication of the debtor;
the consideration received;
the effect on other creditors;
the feasibility of reorganization;
evidence of fraud, coercion or mutual mistake;
furthering public policy; and
whether there was compelling change in circumstances between the date of the waiver and the date of the bankruptcy filing.[31]
In In re DJK Enterprises, the court ruled that prepetition waivers of the automatic stay are per se unenforceable, aligning with the reasoning in Pease, 195 B.R. 43, and In re Jeff Benfield Nursery, Inc., 565 B.R. 603 (Bankr. W.D.N.C. 2017).[32] In Pease, the court held that such waivers are unenforceable, citing three bases for invalidating the waiver: (1) the debtors did not have the capacity to act on behalf of the debtor-in-possession; (2) the waiver would limit the effectiveness of certain bankruptcy provisions such as §§ 363, 365 and 541; and (3) the Bankruptcy Code extinguishes the private right to freedom to contract around its essential provisions.[33] In Jeff Benfield Nursery, the court declined to enforce a prepetition waiver as matter of public policy, explaining that upholding these waivers deprives debtors of the “breathing spell” of the automatic stay intended by the bankruptcy code.[34]
The In re DJK Enterprises court emphasized that a prepetition debtor and a post-petition debtor-in-possession are distinct entities, and a debtor cannot waive rights that arise only after filing for bankruptcy.[35] Additionally, the court noted that enforcing the waiver would harm other creditors who were not parties to the agreement.[36] For example, in this case, DJK’s largest creditor, Royal Banks, had agreed to settle its $13 million claim for $300,000—a settlement that significantly benefited not only DJK, but other creditors. Enforcing the waiver in favor of the primary Lender, EAF, would effectively end the case, leaving Royal Banks and other creditors with nothing.[37] The court reiterated that the automatic stay exists to protect both debtors and creditors, and enforcing the waiver would unfairly benefit only EAF at the expense of all other stakeholders.[38]
The ruling in In re DJK Enterprises LLC further solidifies the trend in bankruptcy law toward rejecting or at least limiting the enforceability of prepetition waivers of the automatic stay. It also refines the case-by-by case analysis, emphasizing that waivers will not be enforced if they primarily benefit a single creditor while harming the debtor-in-possession and broader creditor pool. Overall, In re DJK Enterprises LLC weakens the enforceability of prepetition waivers, adding to the judicial skepticism toward automatic stay waivers and making it even more difficult for lenders to rely on them as a mechanism for bypassing the bankruptcy process.
Implications for Lenders and Borrowers
Lenders should not rely on prepetition waivers of the automatic stay as a guaranteed method to expedite foreclosure or debt recovery in bankruptcy. While waivers generally cannot hurt or disadvantage the lender, courts will continue to scrutinize such provisions and may refuse to enforce them altogether. To improve enforceability, waivers should be clearly drafted with explicit consideration provided, include factual stipulations about the debtor’s financial status, and avoid overreach that courts may find unconscionable.
Forbearance agreements and deeds in lieu of foreclosure should be structured carefully, taking into account applicable state law and equitable mortgage doctrines, which could preserve a debtor’s rights despite contractual language.
Lenders should seek alternative protections, such as court-approved stipulations or structuring agreements to demonstrate independent grounds for a court to grant relief from the stay.
If you have any questions about how this ruling may affect your lending practices or bankruptcy litigation strategies, please contact our office for further guidance.
[1] In re Lopez-Granadino, No. 08-30707-H3-13, 2008 Bankr. LEXIS 686, *5 (Bankr. S.D. Tex. Mar. 12, 2008).
[2] Id.
[3] Id. at 2.
[4] Id. at 5.
[5] Id. at 13.
[6] Id.
[7] Id.
[8] Id. at 3.
[9] Id. at 3-4.
[10] Id.
[11] Id. at 4. While prohibitions on filing for bankruptcy are beyond the scope of this alert, such provisions are generally unenforceable for public policy reasons. See e.g., In re Shields, 524 B.R. 769 (Bankr. E.D. Tenn. 2015); In re Bay Club Partners-472, LLC, No. 14-30394-rld11, 2014 Bankr. LEXIS 2051 (Bankr. D. Or. May 6, 2014); In re Melbourne Beach, LLC, No. 6: 17-bk-07975-KSJ, 2019 Bankr. LEXIS 4113 (Bankr. M.D. Fla. Aug. 6, 2019).
[12] Id. at 4-5.
[13] Id. at 5.
[14] Id.
[15] Id. at 12.
[16] Id. at 8.
[17] Id. at 9.
[18] Id. at 13.
[19] Id. at 14, 29.
[20] Id. at 19.
[21] Id. at 28-29.
[22] Prepetition Waivers of the Automatic Stay: Lender Satisfaction Not Guaranteed: By Gregory G. Hesse and Jesse T. Moore. 2013.
[23] In re Philadelphia Athletic Club, Inc., 17 B.R. 345 (Bankr. E.D. Pa. 1982); In re Cheeks, 167 B.R. 817 (Bankr. D.S.C. 1994); In re Excelsior Henderson Motorcycle Mfg. Co., 273 B.R. 920 (Bankr. S.D. Fla. 2002).
[24] Id.
[25] Id.
[26] In re Pease, U.S. Bankr. Ct, District of Connecticut Case No. 93-53692, Adv. Pro. No. 94-2126 (Bankr. E.D. Tenn. Mar. 21, 1996); Farm Credit of Central Florida, ACA v. Polk, 160 B.R. 870 (M.D. Fla. 1993); In re DB Capital Holdings, LLC, Civil Action No. 10-cv-03031-PAB (D. Colo. Jul. 28, 2011); In re DJK Enterprises LLC, 24-60126 at 12 (Bankr. S.D. Ill. Feb. 13, 2025).
[27] Id.
[28] Id.
[29] Id. at 10.
[30] Hesse & Moore, Prepetition Waivers, 2013; In re Powers, 170 B.R. 480 (Bankr. D. Mass. 1994); In re Desai, 282 B.R. 527 (Bankr. M.D. Ga. 2002); In re Frye, Case No. 05-10004 (Bankr. D. Vt. May. 27, 2005); In re Bryan Road, LLC, 389 B.R. 297 (Bankr. S.D. Fla. 2008).
[31] Id.
[32] In re DJK Enterprises LLC, 24-60126 at 11-12 (Bankr. S.D. Ill. Feb. 13, 2025).
[33] Pease, 195 B.R. at 433-434.
[34] Jeff Benfield Nursery, Inc., 565 B.R. at 608-609.
[35] In re DJK Enterprises LLC, 24-60126 at 12-13 (Bankr. S.D. Ill. Feb. 13, 2025).
[36] Id.
[37] Id.
[38] Id.