In re Boxed, Inc., No. 23-10397 (Bankr. D. Del.)

  • New York based e-commerce and software company, Boxed, Inc., filed for bankruptcy after failing to generate needed capital in a 2021 SPAC.
  • Boxed, Inc. tried to sell its e-commerce retail business and its software and service business either together or separately in 2022, but despite an extensive process could not find a buyer.
  • Boxed, Inc. now hopes to sell its software company via a private sale in bankruptcy and wind down the e-commerce business. At the first day hearing, the bankruptcy court explained that approval will depend on the stance of a yet-to-be-appointed official committee of unsecured creditors.

The Filing: Boxed, Inc. and its subsidiaries (“Boxed”), recently filed for bankruptcy in the District of Delaware. Boxed operates two businesses: (1) an e-commerce retail service business providing bulk pantry consumables to businesses and household customers through orders placed over the Boxed website and app and (2) a software and services business (“Spresso”) which licenses Boxed’s e-commerce enabling software, data, and other technology. Boxed’s Chief Financial Officer submitted a first day declaration explaining the reasons for the Chapter 11 filing.

Why it Happened: According to the declaration, since inception in 2013 Boxed was able to improve its business but was always operating on a loss. Thus, the company relied on outside capital, both equity and debt, to fund itself. In 2022, Boxed began to face an unanticipated capital crunch in part due to a December 2021 SPAC transaction. that generated only a fraction of the capital Boxed was expecting ($85 million versus an anticipated $334 million). Boxed faced further headwinds after a combination of rising interest rates, persistent inflation, depressed customer retail spending, supply chain disruption, and increased competition left it unable to obtain needed capital.

Finding itself in breach of certain loan covenants, Boxed attempted amendments to its secured debt agreements while simultaneously seeking to raise additional capital from other potential third-party lenders. These initial efforts were not successful which led Boxed to begin a bidding process to sell its assets and business lines. Unfortunately for Boxed, despite contact with 170 potential buyers, it received no offers to purchase their e-commerce retail service and only one indication of interest for Spresso.

The Plan: Boxed intends to wind down its e-commerce business and sell Spresso via a private sale to a designee of its secured lenders. With its first day filings, Boxed also sought court approval for the private sale. If approved, a to-be-named entity owned and designated by Boxed’s prepetition first lien secured lenders (the “Purchaser”) would take ownership of Spresso after a credit bid of $26.25 million.

Boxed is convinced a private sale of Spresso to the Purchaser is the only viable option given their inability to find a buyer in 2022. Also, as the first day declaration argues, Boxed’s continuing operational losses and extensive cash burn means time is of the essence and a full-fledged auction of the business could drain the company of all available cash. The secured lenders also conditioned their consent to the use of cash collateral on the sale of Spresso being done by private sale. At the first day hearing, despite concerns that Boxed was asking for a “rapid timeline for significant relief,” the bankruptcy court nevertheless scheduled the sale hearing for April 26, 2023.

The WARN Act Class Action Adversary: Three days after Boxed filed for bankruptcy, a former employee brought a class action adversary proceeding against one of Boxed’s subsidiaries, Boxed, LLC, for violations of the federal and New York Worker Adjustment, Retraining and Notification Act, that Boxed failed to give its employees proper notice before terminating them. Without further court order, Boxed, LLC will respond to the Complaint by May 5, 2023.

Business Implications: An interested bidder for Spresso has until April 19, 2023 to object to the private sale, but given Boxed’s extensive pre-petition marketing, an alternative bidder is unlikely to emerge. If the private sale is approved, Boxed will then focus on liquidating its e-commerce assets. Since alternative buyers are somewhat unlikely, approval of the sale will depend on the stance of a yet-to-be-appointed official committee of unsecured creditors.

Compared to their traditional retailer competitors, e-commerce firms have fewer hard assets to liquidate. And based on Boxed’s failure to generate even a single bid for the retail business, it will likely have to sell off its pieces individually which may be of interest to bargain hunters in the retail space.

Ultra Petroleum Corporation et al. v. Ad Hoc Committee of OpCo Unsecured Creditors,
No. 21-20008 (5th Cir. 2022)

  • Make-whole provisions—common provisions in credit agreements providing for lump sum payments to compensate a lender for unpaid interest if a borrower prepays—have been the subject of litigation concerning whether a claim for a make-whole payment is disallowed under the Bankruptcy Code.
  • In the recent Fifth Circuit decision, Ultra Petroleum Corp. v. Ad Hoc Committee of OpCo Unsecured Creditors,[1] the Court addressed the consequential question against enforceability, holding that make-whole payments are equivalent to impermissible unmatured interest.
  • The Ultra Petroleum decision was the first circuit court case to directly answer the question of whether make-whole payments are generally allowable, and it broke with lower court decisions allowing claims for make-whole payments.

Make-Whole Payments

Make-whole provisions are common terms in debt contracts providing a lump sum or fee payment to the lender if a borrower pays off its debt early. They are generally meant to provide a creditor with the present value of the interest it would have received if the borrower had paid according to its normal terms. Because make-whole payments may be substantial, whether they are allowable in bankruptcy has an impact on recovery by junior creditors and equity holders.

The Fifth Circuit Finds that Make-Whole Payments Are Disallowed Under Section 502(b)(2)

Under Section 502(b)(2) of the Bankruptcy Code, unmatured interest claims are specifically disallowed. 11 U.S.C. § 502(b)(2). In Ultra Petroleum the Fifth Circuit first found that make-whole payments, in general, are the economic equivalent of unmatured interest because (i) the payments were “expressly designed to liquidate fixed-rate lenders’ damages flowing from debtor default while market interest rates are lower than their contractual rates” and (ii) the lenders’ damages from the debtors’ failure to pay the make-whole payments equaled “the present value of all their future interest.” As “nothing more than a lender’s unmatured interest, rendered in today’s dollars,” the make-whole payments at issue were disallowed under Section 502(b)(2).

In rejecting the claimant creditors’ argument that the make-whole payment is not interest, the Court explained that when a payment compensates for “use or forbearance” of principle it is the same as interest economically. A contractual substitute for interest is only an attempt to end-run the Code’s explicit disallowance. According to the Court, the claimant creditor’s attempt to reframe the make-whole payment as anything other than “unmatured interest” renders the term vacuous.[2]

Outside the Fifth Circuit, Courts Are More Likely to Allow Make-Whole Payments

The Ultra Petroleum decision contrasts with lower court decisions allowing make-whole payment claims under the theory that they are analogous to liquidated damages or that the make-whole payments fully mature upon a bankruptcy filing.[3] In cases addressing accelerated payment provisions like those at issue in Ultra Petroleum, the courts were reluctant to deprive the lender of the terms negotiated in the credit agreement by treating a contractual right as interest. As the Court in In re Skyler Ridge noted: “If secured lenders and borrowers want to contract to protect a secured lender’s interest rate through the payment of reasonably calculated liquidated damages, there is no bankruptcy policy to prohibit the enforcement of such a provision.”[4]

Other circuit courts have not directly decided general allowability (yet), but the Second and Third Circuits have addressed specific make-whole payments in recent decisions.

In Matter of MPM Silicones, LLC, the Second Circuit held that noteholders were not entitled to contractual make-whole premiums that were automatically accelerated upon the debtor’s bankruptcy filing when the debtor issued replacement notes under its Chapter 11 plan.[5] And in In re Energy Future Holdings Corp., the Third Circuit enforced make-whole payments in notes when the debtor refinanced the notes during bankruptcy.[6] In their analyses, both the Second and Third Circuit focused on the particular terms of the contractual make-whole provisions, rather than whether make-whole provisions are generally disallowed under the Code.


Ultra Petroleum offered compelling precedent to junior creditors and equity holders seeking to maximize their recoveries in bankruptcy. Traditional make-whole provisions, like the one in Ultra Petroleum, are very common in credit agreements. In future fights between stakeholders, the burden may have flipped to senior creditors who now have to convince courts to (i) reject the reasoning of Ultra Petroleum, (ii) distinguish the provisions meaningfully, or (iii) fashion a modification to the economics of the matter (like in MPM Silicones or Energy Future Holdings).

At least one court has had the opportunity to apply Ultra Petroleum to the question of allowability, highlighting the new burden for lenders in keeping the provisions allowable. In Wells Fargo Bank, N.A. v. Hertz Corp.,[7] the Delaware Bankruptcy Court disallowed a “redemption premium” that operated as a make-whole payment on summary judgment. The Hertz Corp. court held that styling the payment as compensation for reinvestment costs (liquidated damages), did not change the economic reality of the provision: “Most courts agree that fees or penalties that are the economic equivalent of interest are disallowed regardless of their name.”

The Ultra Petroleum decision is particularly difficult for senior creditors because of its sweeping reasoning. Rather than analyzing a particular provision, the Court found that make-whole payments are economically equivalent to unmatured interest and are disallowable. An economic equivalence test will be a tall burden for any lender seeking to enforce a traditional make-whole provision in the teeth of this Decision. However, it remains unclear whether make-whole provisions in secured debt contracts should be treated differently than those in unsecured debt contracts. It may be only a matter of time before bankruptcy courts nationwide have the opportunity to reconsider the allowability of make-whole payments.

[1] The opinion is available to read here.

[2] Despite the Court’s finding that the make-whole payment is disallowed under Section 502(b)(2), the Fifth Circuit nevertheless allowed the claim under the traditional “solvent-debtor” exception: a long-standing equitable exception to applying traditional bankruptcy rules when a bankruptcy debtor is solvent. As a solvent debtor, Ultra Petroleum Corp. and its subsidiary debtor, Ultra Resources, Inc., can fully pay their debts, on their contractual terms, to all creditors. Therefore, despite the Fifth Circuit’s holding, the claimant creditor was nevertheless entitled to the make-whole payment in this case.

[3] See In re Skyler Ridge, 80 B.R. 500 (Bankr. C.D. Cal. 1987); In re Trico Marine Servs., Inc., 450 B.R. 474 (Bankr. D. Del. 2011); In re Calpine Corp., 365 B.R. 392 (Bankr. S.D.N.Y. 2007).

[4] 80 B.R. at 508.

[5] 874 F.3d 787 (2d Cir. 2017).

[6] In re Energy Future Holdings Corp., 842 F.3d 247 (3d Cir. 2016).

[7] 2022 Bankr. LEXIS 3358 (Bankr. D. Del. Nov. 21, 2022).

Herrick’s Work on Behalf of Well-Renowned Bankruptcy Professors Supported Dismissal

In October 2021, LTL Management LLC (“LTL”), an entity created by Johnson & Johnson (“J&J”) to hold its liabilities to cancer victims exposed to talc in J&J’s products, filed for Chapter 11 bankruptcy protection. The Herrick team filed amicus briefs on behalf of a group of well-renowned bankruptcy professors in support of the Official Committee of Talc Claimants’ motion to dismiss LTL’s chapter 11 case.

The matter was originally heard before the Bankruptcy Court, where the court denied a motion seeking to dismiss LTL’s Chapter 11 case on the basis that it was brought in bad faith. The appeal from that decision was then heard directly by the Third Circuit Court of Appeals. We are pleased to share that the Third Circuit reversed the Bankruptcy Court’s decision and dismissed the LTL Chapter 11 case.

Herrick’s amicus briefs argued that J&J created LTL with the sole intention of protecting J&J’s assets from its talc victims. While this was not the first time a company has sought bankruptcy relief to address its mass tort litigation exposure, the briefs emphasized that the strategy in this case—namely, J&J’s use of a divisive merger mechanism referred to as the “Texas Two-Step” to funnel all of its talc liabilities into a non-operating entity only for that entity to file for bankruptcy—was an egregious misuse of the bankruptcy system.

The Third Circuit stated in its opinion, “We start, and stay, with good faith. Good intentions—such as to protect J&J brand or comprehensively resolve litigation—do not suffice alone. What counts to access the Bankruptcy Code’s safe harbor is to meet its intended purposes. Only a putative debtor in financial distress can do so. LTL was not. Thus we dismiss its petition.”

The Herrick team included Sean E. O’DonnellStephen B. SelbstSteven B. Smith and Silvia Stockman.

A copy of the Third Circuit opinion is available here.

In re Compute North Holdings, Inc., No. 22-90273 (Bankr. S.D. Tex.)

  • The bankruptcy court approved a portion of proposed bid procedures for the sale of Compute North.
  • Debtors sought an expedited sale timeline, with bids due by October 27, 2022, but the Compute North UCC objected. The parties agreed the sale timeline would be addressed at an October 21 hearing. 
  • Compute North contractual counterparties objected, seeking favorable carveouts and clarifications in the approved sale procedure, which were also pushed to the October 21 hearing. 
  • Other provisions of the sale procedure were approved including bid protections for a stalking horse and contract assumption notice procedures. 

Continue Reading Sale Procedures for 363 Sale of Compute North Partially Approved With Timing of Sale to Be Addressed at Supplemental Hearing

In re Compute North Holdings, Inc., No. 22-90273 (Bankr. S.D. Tex.)

  • Compute North Holdings, Inc., a large data center with a focus on cryptocurrency mining, files for Chapter 11 protection amidst an atrocious business environment for all things crypto.
  • Compute North was pushed into bankruptcy after its relationship with one of its primary lenders broke down.
  • Debtors’ plan to sell all its assets quickly may be a challenge for unsecured creditors.

Continue Reading Cryptocurrency Mining Data Center Files for Chapter 11 Amid Crypto-Recession

Bankrupt cryptocurrency lender Celsius Network LLC recently sought permission to sell some of its “stablecoin” for U.S. dollars to continue operations through its Chapter 11. Celsius requires court approval for the sale pursuant to an earlier order requiring court authorization to convert its cryptocurrency to cash. According to Celsius, the sale of its stablecoins would pose no risk to creditors due to the relative stability provided by stablecoins versus traditional cryptocurrencies. Stablecoins are fiat-pegged cryptocurrency meant to track government issued currencies, usually the U.S. dollar. By pegging its value, stablecoins seek to reduce volatility and offer a stable crypto option not subject to market fluctuation. This allows investors to trade digital assets potentially free of the big swings inherent in assets like Bitcoin and Ethereum which are both down over 70% since last November. Continue Reading Bankrupt Cryptocurrency Debtor Seeks Sale of Stablecoins

On September 8, 2022, the Second Circuit held that lenders to Revlon, Inc., a global cosmetics company, must return approximately $500 million to Citibank N.A., which Citibank had inadvertently paid on Revlon’s behalf. The decision vacated a lower court’s ruling from 2021 that the lenders could retain the funds.

On August 11, 2020, Citibank, as agent under a term loan agreement, intended to process a $7.8 million interest payment by Revlon to its lenders. Instead, Citibank mistakenly wired the entire principal loan balance of nearly $1 billion from Citibank’s own account, giving the lenders a “huge windfall,” per the Second Circuit’s decision.

The next day, after realizing its error, Citibank began sending recall notices to the lenders notifying them of the mistake. Some lenders returned funds, but the defendants did not. Continue Reading Revlon Lenders Must Return $500 Million Mistaken Wire Transfer to Citibank, N.A.

In a recent Delaware Supreme Court decision, the Court held that there is no “insolvency exception” to the requirement in Section 271 of the DGCL that a transfer of all or substantially all of a corporation’s assets foreclosure transfer be approved by the corporation’s shareholders.

The Delaware Supreme Court overruled a decision by the Delaware Chancery Court that used Section 271—which requires a shareholder vote when a corporation sells all or substantially all of its assets—to interpret a Class Vote Provision in Stream TV Networks, Inc.’s charter. The Chancery Court also read a Delaware common law board-only insolvency exception into Section 271 while doing so. Continue Reading There’s No Insolvency Exception to a Shareholder Vote Requirement to Transfer a Corporation’s Assets in Delaware

Restructuring and Finance Litigation partner Steven B. Smith recently met with Phil Neuffer, the Managing Editor of ABF Journal, to discuss the recent United States Supreme Court decision Siegel v. Fitzgerald, No. 21-441, in which the Court unanimously held that a significant quarterly  fee increase applicable to debtors in the United States Trustee judicial districts and not to debtors in the Bankruptcy Administrator judicial districts located in North Carolina and Alabama violated the uniformity requirement of the Constitution’s Bankruptcy Clause. The ABF Journal interview will be featured in a series of podcast episodes and will focus on the history of the dual United States Trustee and Bankruptcy Administrator programs which led to North Carolina’s and Alabama’s different, non-uniform, treatment, enactment of the Bankruptcy Judgeship Act of 2017 and the Bankruptcy Administration Improvement Act of 2020, and various court decisions over the years addressing the constitutionality of having two different funding sources to operate the program. Steven also discusses the parties’ arguments to the Supreme Court and their differing interpretations of the Bankruptcy Clause’s grant of power to Congress to establish “uniform laws on the subject of Bankruptcies throughout the United States.”

The first (episode 66) and second (episode 67) of the three-part series can be found here:  The ABF Journal Podcast.

Last November, Judge John Dorsey of the Delaware Bankruptcy Court held in the Mallinckrodt chapter 11 case that the debtors did not have to pay a $94 million “make-whole” premium that was provided for in an indenture governing first lien notes. The indenture provides for automatic acceleration following an Event of Default, which includes a bankruptcy filing. Acceleration makes “the principal of, premium, if any, and interest on all the Notes . . . immediately due and payable . . . .”

A “make-whole” premium is a loan provision to compensate a lender if a borrower repays the debt before maturity for the loss of the lender’s anticipated yield, and can also be called “yield maintenance,” or a “redemption” or “prepayment” premium. The make-whole amount is typically the net present value of the interest payments that the lender would have received if the debt was paid at maturity. While make-whole premiums are generally enforceable under state law outside of bankruptcy, courts have rendered conflicting decisions on their enforceability in chapter 11. Economics drives the continuing bankruptcy court litigation over make-whole payments. For large bond issues, the make-whole amounts can often exceed nine figures. Continue Reading Landmark Delaware Bankruptcy Court Ruling that Debtors Did Not Have to Pay Make-Whole Premium Was in Error, First Lien Lenders’ Argue on Appeal