Alert
Alert
09.18.25
In the midst of a liquidity crisis, National Resilience determined that it had only two choices to successfully restructure—file the entire enterprise for chapter 11 or shed non-operational and/or underutilized facilities. It chose the latter. Accordingly, Bedmar LLC was formed in June 2025 through a divisional merger under the Delaware LLC Act and allocated burdensome leasehold interests and approximately $41.4 million in cash and receivables. The cash was estimated to exceed ~$33 million in capped lease-rejection claims under Bankruptcy Code § 502(b)(6). (See our previous client alert for a discussion of how this section caps landlord damage claims in bankruptcy cases.) The entity had no employees, no revenue, no creditors other than the landlords and no operational purpose other than to pursue a bankruptcy filing.
Within six days of its formation, Bedmar commenced a chapter 11 case, moved to reject all of the leases allocated to it in the divisional merger, and filed a plan of reorganization. The plan proposed to pay landlords’ capped rejection claims in full from cash on hand. If successful, the landlords’ $372 million in contractual lease liabilities would be reduced to about $33 million under Bankruptcy Code § 502(b)(6). The U.S. Trustee and several landlords moved to dismiss, arguing the case was a bad faith filing under Bankruptcy Code § 1112(b) because its only purpose was shedding lease liabilities while preserving the broader enterprise for shareholders; the case was nothing more than a litigation tactic designed to take advantage of the cap on lease rejection damages. They also noted the leases were current and no prepetition actions were pending; thus, any “distress” was created by the divisional merger.
Delaware Bankruptcy Judge Stickles agreed. Relying on the Third Circuit decision dismissing the LTL Management case for lack of financial distress, she found Bedmar, similarly, was not in genuine financial distress, a “predicate to good faith.” In re Bedmar, LLC, 2025 Bankr. LEXIS 2135 *20-21, 2025 WL 2496260 (Bankr. D. Del. Aug. 29, 2025) (citing LTL Mgmt., LLC v. Those Parties Listed on Appendix A to Complaint (In re LTL Mgmt., LLC), 64 F.4th 84, 100 (3d Cir. 2023)). The court highlighted that Bedmar’s assets exceeded its capped liabilities, Bedmar was created solely to isolate damages for breach of these burdensome leases from the rest of the National Resilience enterprise, and the chapter 11 neither preserved a going concern nor maximized value for creditors. The court held that: “The obstacles (i.e., the allocation of assets and liabilities) imposed on the newly-formed Debtor as a result of the Corporate transactions, created financial circumstances that were a fiction—purportedly the financial distress necessary to justify chapter 11 relief. In other words, the financial distress was concocted with an end-goal of ridding the Enterprise of its Lease liabilities for the benefit of its shareholders; not to maximize the value for the Debtor’s creditors.”
Why It Matters
This ruling rejects an attempt to pair a Delaware divisional merger with a chapter 11 filing and underscores that entity engineering cannot substitute for good faith when seeking bankruptcy relief. It builds on the LTL Management decision and narrows the Third Circuit’s 2003 decision of In re PPI Enters. (U.S.), Inc., which upheld the validity of a chapter 11 filing, the primary purpose of which was to take advantage of § 502(b)(6)’s cap on lease-rejection damage claims. Although insolvent debtors may avail themselves of § 502(b)(6), solvent or manufactured-distress entities cannot file solely to invoke the Bankruptcy Code’s distributional mechanisms, such as a cap on lease rejection claims.
The court further emphasized that although the Bankruptcy Code contains redistributive mechanisms (like § 502(b)(6)), redistribution is not its purpose; chapter 11 exists to preserve going concerns and maximize estate value. This opinion signals continued heightened scrutiny of divisional merger tactics and lease-liability engineering; indeed, it seems to throw into question using chapter 11 solely as a liability management tool. For landlords, it provides a roadmap to challenge debtors that file bankruptcy primarily to cap rejection claims. For sponsors and investors, it highlights the risk that courts may unwind carefully structured strategies if they lack a valid bankruptcy purpose.
Conclusion
The Bedmar decision reinforces a growing judicial theme: chapter 11 is not a mechanism to create artificial distress or engineer balance sheets for shareholder advantage. More and more courts are requiring bona fide financial hardship and a reorganization-related purpose before permitting access to the Bankruptcy Code’s powerful tools and distributional mechanisms. Parties considering divisional mergers, lease shedding or liability segregation should anticipate close scrutiny and the possibility of dismissal where distress is perceived as “manufactured.”