## Facts

- The Krystal Company (Krystal), a restaurant operator, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Georgia.
- Krystal’s largest creditors were a lending group that included Wells Fargo Bank, N.A. (collectively, Wells Fargo), which was owed about $51 million.
- Wells Fargo’s debt was secured by substantially all of Krystal’s assets.
- Krystal, Wells Fargo, and the Official Committee of Unsecured Creditors agreed that selling Krystal’s assets as a going concern was the best available course for creditors.
- Krystal solicited bids to purchase substantially all assets; one bidder offered $1 million plus the assumption of certain Krystal liabilities.
- DB KRST Investors, LLC (KRST), acting as a subagent for Wells Fargo and for Wells Fargo’s benefit, submitted a higher or otherwise superior offer.
- Under the KRST transaction, KRST purchased Krystal’s assets as a going concern in exchange for, among other things, a reduction of Wells Fargo’s secured debt to $27 million (leaving roughly $24 million of the secured debt unpaid) and KRST’s assumption of certain postpetition debts and certain lease and other contractual obligations.
- The bankruptcy court approved the sale, finding it provided the maximum possible recovery for creditors under the circumstances.
- The court also found liquidation would likely yield less value and would result in closure of remaining restaurants, with resulting job losses and increased vacancies in retail properties.
- After the sale closed, Krystal was left with no operating business and owned no assets.
- Krystal’s equity owners lost their investments as a result of the sale.
- With no remaining property to administer and no operating business to reorganize, Krystal moved to dismiss the Chapter 11 case.
- Several unsecured creditors objected to dismissal because they would receive no distribution on their prepetition claims and described severe personal and business hardship if the case ended without payment (including unpaid invoices, uncompensated injuries, and an unperformed settlement obligation).

## Issues

1. Whether, after a court-approved going-concern sale left the debtor with no assets and no business, there was cause under 11 U.S.C. § 1112(b) to dismiss the Chapter 11 case over unsecured creditors’ objections.
2. Whether dismissal, rather than conversion to Chapter 7 or continued Chapter 11 administration, was in the best interests of creditors and the estate when general unsecured creditors would receive no distribution in any scenario.

## Decision

- The court granted Krystal’s motion and dismissed the Chapter 11 case.
- The court found that, post-sale, Krystal had no assets and no business to administer, and there was no realistic possibility of a meaningful distribution to general unsecured creditors.
- The court concluded that conversion to Chapter 7 would not improve the outcome for unsecured creditors because there were no remaining assets for a trustee to liquidate and no identified source of recoveries that would justify the extra cost of a Chapter 7 case.
- The court overruled the unsecured creditors’ objections, recognizing their hardships but determining that those hardships did not supply a legal basis to keep a bankruptcy case open when there was nothing left to administer and no benefit to creditors from continued proceedings.

## Legal Principles

- Under 11 U.S.C. § 1112(b), once “cause” exists, the bankruptcy court must determine whether dismissal, conversion, or another remedy best serves creditors and the estate.
- A Chapter 11 case may be dismissed when, after a sale of substantially all assets, the debtor has no remaining property or operations and further administration would serve no bankruptcy purpose.
- In evaluating dismissal versus conversion, the court considers whether a Chapter 7 trustee could reasonably be expected to generate a net benefit for creditors, taking into account the added administrative expenses of conversion.
- The fact that general unsecured creditors will receive no distribution does not, by itself, require conversion or continued administration when there is no realistic path to create value for them.
- Bankruptcy courts may acknowledge the hardships faced by unpaid creditors, but they cannot create value or reorder statutory payment priorities where the estate’s value has been exhausted.

## Conclusion

In *In re Krystal Co.*, the bankruptcy court dismissed the Chapter 11 case after approving a going-concern sale that maximized value but left the debtor with no assets and no business, with postpetition obligations addressed through the sale structure and no realistic prospect of any recovery for general unsecured prepetition creditors, making further administration or conversion to Chapter 7 only a source of additional costs without creditor benefit.


In re Krystal Co., 2020 Bankr. LEXIS 3202 (2020)