A bankruptcy judge has ruled that a debtor can satisfy the Bankruptcy Code’s rehabilitation standard by selling its assets as a going concern and thereby avoid conversion from chapter 11 to chapter 7. In the same decision, the court denied a motion seeking the appointment of what the movants called an “examiner with expanded powers.” In re Deqser, LLC, Case No. 25-10687, 2026 Bankr. LEXIS 1004 (Bankr. D. Del. Apr. 22, 2026).

The debtors operated a laundry business that serviced hotels located in New York City. The business suffered a downturn following an electrical fire at its facility as well as problems with its software. The debtors filed chapter 11 in early 2025.

During their case, the debtors lost about $200,000 a month or $2 million in total during their first year in bankruptcy. The debtors also struggled to pay their administrative expense claims. Professionals who were owed approximately $350,000 agreed to defer payment.

These and other challenges the debtors faced prompted the U.S. Trustee to file a motion seeking to convert the case to chapter 7. Separately, certain creditors filed a motion seeking the appointment of an “examiner with expanded powers,” an examiner that would be tasked with marketing and selling the debtors’ business.

After the U.S. Trustee filed its motion, the debtors filed a chapter 11 plan of reorganization. Under the plan, most of the debtors’ equity would be paid to its DIP lender. The court said the plan as proposed “would face serious obstacles to confirmation.” 2026 Bankr. LEXIS 1004, at *3.

At an evidentiary hearing on the two motions, the debtors told the court they would file an amended plan. This new version would include a “toggle” that, if the first plan could not be confirmed, would enable the debtors to sell their assets as a going concern. The sale proceeds would be distributed to the debtors’ creditors.

In light of this development, the court denied the motion to convert the case. The court concluded that the proposed sale of assets would satisfy the “rehabilitation” standard under Bankruptcy Code section 1112(b)(4)(A).

Under section 1112(b), “on a request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate.”

The Bankruptcy Code also provides that if “cause” is shown to convert or dismiss a case, the court also has the option of appointing a trustee or an examiner under section 1104(a).

Under section 1112(b)(4), “cause” includes a “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” In Deqser, the parties agreed that the debtors suffered from continuing financial losses.

At issue was whether there was also a reasonable likelihood of rehabilitation. The court observed that rehabilitation means “‘to put back in good condition; re-establish on a firm, sound basis.’” In addition, the term “‘involves establishing a cash flow from which current obligations can be met.’” 2026 Bankr. LEXIS 1004, at *11 (quoting In re Kanterman, 88 B.R. 26, 29 (S.D.N.Y. 1988)).

Of course, a debtor can use chapter 11 to conduct free-and-clear sales of assets. “A successful going concern sale operates to ‘rehabilitate’ the debtor’s business in a way that is similar to a traditional reorganization. In both cases, the business emerges free of pre-bankruptcy indebtedness, such that an otherwise profitable business whose problem is that it [is] saddled with too much indebtedness can succeed without the old debt. In a traditional reorganization, the owners of the new business are typically the prior creditors. In a sale case, the owner is typically whomever is willing to pay the most at an auction to acquire the assets. But as an economic matter, both operate to ‘rehabilitate’ the business in essentially the same way.” Id. at *13.

In light of this analysis and conclusion, the court denied the U.S. Trustee’s motion to convert the case to chapter 7. But the court added that it appreciated “the work done by the U.S. Trustee in bringing this motion and thus advancing these cases forward.”  Id. at *18.

The court also denied certain creditors’ motion to appoint an examiner to market and sell the debtors’ assets. At the outset of this analysis, the court noted that it had “doubts about the wisdom of appointing an independent third party to conduct a sale while the debtor that is opposed to such a sale remains in possession and continues to operate the business.” Id.

And, significantly, the court stated that the request for an “examiner with expanded powers” was contrary to language of the Bankruptcy Code and the law in the Third Circuit.

Bankruptcy Code section 1104(c) authorizes a court to appoint an examiner “to conduct such as examination of the debtor as is appropriate.” The role of an examiner is to “conduct an examination.” Id. at *19.

The Third Circuit has concluded that the words “as is appropriate refers to the nature of the investigation, not the appointment of the examiner.” In re FTX Trading Ltd., 91 F.4th 148, 154 (3d Cir. 2024).

The court in Deqser concluded, “[t]he ‘as is appropriate’ language gives the bankruptcy court wide discretion to set the parameters of the investigation. But there is no getting around the fact that an examination and an asset sale are different things. Nothing in [section] 1104 authorizes the bankruptcy court to appoint an investment banker disguised as an examiner.” Id. at *20.