Restaurant Franchise Bankruptcies Could Leave Insurers Holding the Bag

Sailormen, Inc.’s Bankruptcy Filing Highlights Trend in Fast-Food Industry

At the time of its bankruptcy filing in January 2026, Sailormen, Inc. owned $47,346 worth of shortening. That may seem like a lot of shortening, but on the petition date, Sailormen operated 136 Popeyes Chicken franchise locations. Sailormen fries a lot of chicken. Sailormen’s Chapter 11 filing is just one of several fast-food franchisees seeking relief under the Bankruptcy Code as they deal with rising costs and consumer cutbacks.

Although Sailormen initially suggested it would restructure and continue operating a more streamlined portfolio, the company has changed course, receiving bankruptcy court approval to sell 97 restaurant locations for approximately $16.6 million. Sailormen has also requested court approval to reject the leases and franchise agreements related to the remaining locations it could not sell. The sale and rejection of leases suggest Sailormen will end its operations. The $16.6 million in sale proceeds is insufficient to pay Sailormen’s reported $145 million in liabilities. As a result, Sailormen will likely propose a plan of liquidation or convert the Chapter 11 case to a Chapter 7 proceeding. The current deadline to file a Chapter 11 plan is September 12, 2026.

Sailormen’s bankruptcy filing also has implications for its liability insurers. To date, five personal-injury plaintiffs have filed motions for relief from the automatic stay to pursue and liquidate claims against Sailormen solely to pursue insurance proceeds. These motions generally involve premises-liability and slip-and-fall claims.

To the extent the Bankruptcy Court grants the claimants relief from the automatic stay to liquidate pre-bankruptcy claims, it is unlikely that Sailormen will take any action to defend the claims. Likewise, bankruptcy case law generally provides that Sailormen will not be obligated to fund its self-insured retention obligations in actual dollars. Accordingly, Sailormen’s bankruptcy filing places its insurance carriers in an unenviable position.

Sailormen is not the only franchisee to seek bankruptcy protection in the face of slumping sales. Consolidated Burger Holdings LLC sought Chapter 11 protection in April 2025. After selling or rejecting leases for 57 restaurant locations, Consolidated Burger Holdings dismissed its Chapter 11 case in July 2026.

These cases highlight an important issue for liability insurers: a franchisee’s bankruptcy may stay litigation against the insured, but it does not necessarily eliminate the underlying liability claims. Instead, the bankruptcy can create additional challenges for insurers that may ultimately be left to defend and administer claims involving an insured that is no longer able—or willing—to participate in the process.

Court Denies Confirmation of First Brands’ Plan

Speculative Litigation Proceeds Doesn’t Make a Plan Feasible

Southern District of Texas Bankruptcy Court denies confirmation of First Brands chapter 11 plan of reorganization in case 25-90399.

First Brands manufactured and sold aftermarket automotive parts. Plagued by a lack of capital, allegedly resulting in part from insider malfeasance, First Brands sought relief under chapter 11 of the Bankruptcy Code. During the case, the debtors incurred substantial post-petition debt, including debtor-in-possession (DIP) financing, to fund the administration of the bankruptcy cases. Under the Bankruptcy Code, administrative expenses such as these must generally be paid in full under a chapter 11 plan unless the holder agrees to different treatment.

The debtors attempted to sell their operating assets to fund the bankruptcy and liquidation process. Those sales, however, did not generate sufficient proceeds to satisfy the estate’s administrative and other priority obligations. As a result, First Brands proposed an alternative method of funding its plan.

The proposed plan established a litigation trust to pursue and monetize the debtors’ principal remaining assets: billions of dollars in potential litigation claims against insiders and other parties. Plans frequently contemplate post-confirmation litigation as a source of distributions to creditors. First Brands presented a more unusual structure because the litigation claims were effectively the sole source of funding for the plan. The plan contemplated that DIP lenders would provide $50 million of new money to fund the litigation trust and, in return, could acquire litigation assets through a credit bid—that is, by using the value of their administrative claims rather than cash as consideration.

The Bankruptcy Court denied confirmation for three principal reasons.

First, the proposed sale of the litigation claims could not be authorized under 11 U.S.C. § 363(k). The court concluded that the proposed purchasers could not credit bid claims that were not secured by the assets being sold. Section 363(k) permits a secured creditor to credit bid its secured claim in a sale of property securing that claim. The court distinguished between liens on proceeds that might ultimately be generated by litigation and liens on the underlying causes of action themselves. Because the litigation claims were not collateral securing the lenders’ claims, 11 U.S.C. § 363(k) did not authorize the proposed credit bid.

Second, the plan failed the feasibility requirement of 11 U.S.C. § 1129(a)(11). The court held that the feasibility requirement applies to a liquidating Chapter 11 plan as well as to a plan of reorganization. Because the proposed plan depended entirely on recoveries from future litigation, the debtors were required to demonstrate a reasonable basis for concluding that those litigation claims could generate sufficient recoveries. The court found the evidence insufficient to establish that the plan was likely to produce the required recoveries and therefore found the plan infeasible.

Third, the plan improperly treated the DIP lenders administrative expense claims as a voting class of impaired claims. Although the holders of the DIP lenders agreed to receive treatment different from the treatment otherwise required by 11 U.S.C. § 1129(a)(9), their agreement did not change the statutory character of those claims for classification and voting purposes. The plan, therefore, could not rely on those claims to create the impaired accepting class required by 11 U.S.C. § 1129(a)(10). Without a properly classified impaired class accepting the plan, the debtors could not satisfy the confirmation requirements.

In its oral ruling on the record, the bankruptcy court denied confirmation and ordered conversion of the case to chapter 7, where the ligation claims could be administered by a chapter 7 trustee.

First Brands illustrates the limits of using post-petition financing, negotiated administrative-claim treatment, and contingent litigation recoveries to fund a liquidating Chapter 11 plan. The decision also highlights important distinctions between secured collateral and litigation causes of action, the scope of 11 U.S.C. § 363(k) credit bidding, and the separate requirements governing administrative claims, feasibility, and impaired-class acceptance under chapter 11.

The oral ruling may be heard here.