Deqser - Chapter 11 Case Summary
Deqser LLC has filed for Chapter 11 bankruptcy following a failed out-of-court sale process amid operational setbacks and a disputed business interruption claim, seeking to preserve value backed by DIP financing from an insider-led special purpose vehicle.
Business Description
Headquartered in Kearny, NJ, KNY 26671 LLC ("KNY" or the "Company"), along with its Debtor⁽¹⁾ parent Deqser LLC ("Deqser" and collectively, the "Debtors"), operates a commercial laundry facility serving the hospitality industry, specifically hotels and restaurants located within hotels.
- Corporate Structure: Deqser serves solely as a holding company and is the Manager of KNY. KNY is the operating entity, owning or leasing substantially all assets and employing the workforce.
- Ownership:
- Deqser is owned by the Debtors' founders: Benjamin Gerut (60%) and Sang Cho (40%).
- KNY is owned 51% by Deqser and 49% by Kuzari Investor 26671 LLC.
The Company was established with the objective of building one of the most technologically advanced commercial laundries in North America. Its facility was designed to feature the first complete assembly line of equipment from Herbert Kannegiesser GmbH ("Kannegiesser") in the United States.
Corporate History
Founded in 2018 by Benjamin Gerut and Sang Cho, the Debtors commenced operations in the fourth quarter of 2018. The business initially experienced rapid success, reaching full capacity by the summer of 2019.
Expansion and Capital Raise
- To capitalize on early success, the Company raised $7.5 million in equity and debt in the summer of 2019 to increase its operational footprint by 50%.
- The expanded facilities came online in February 2020, with expectations of full utilization.
Strategic Vision
The founders originally envisioned a "roll-up" strategy where multiple commercial laundries would be consolidated under Deqser; however, this strategy did not materialize, leaving KNY as the sole operating business.
Operations Overview
The Company operates a single commercial laundry facility in Kearny, NJ. KNY’s operations are supported by a workforce of approximately 180 individuals employed through a Professional Employer Organization (PEO), comprising 140 non-clerical and 40 clerical workers. The weekly payroll for these workers is approximately $160,000.
Operational Dependencies
- Critical Vendors: The Debtors have identified four critical vendors essential to the commercial laundry process, noting that replacing these suppliers would be inefficient and costly.
- Utilities: The Company relies on three utility providers for services critical to the conduct of its business.
- Insurance: KNY maintains various insurance programs, including policies with Travelers, Starr Indemnity & Liability Co., Lloyd's of London, and others. Certain policies, including umbrella coverage, are required by the Company's lenders.
Prepetition Obligations
As of the Petition Date, KNY reported approximately $17 million in secured debt and $15 million in consolidated unsecured debt. Deqser’s secured debt obligations consist primarily of guarantees on KNY’s debt.
Secured Debt
The Company’s larger secured claims include:
- Eastern Funding: $5,326,140
- Deutsche Leasing USA, Inc. (Kannegiesser): $3,757,759
- Merchant Financial Corporation: $3,250,000
- Irazuk LLC: $1,974,000
- Feenix Venture Partners: $1,672,260
Unsecured Debt
The Debtors’ largest unsecured claims include:
- Kuzari Asset Management LLC: $1,900,000
- Sang Cho (Co-Founder): $1,100,000
- MCA Servicing Company: $631,907
- KPIP Urban Renewal 1 LLC: $625,223
Tax Obligations
- Internal Revenue Service: KNY owes approximately $312,000 resulting from over-drawn Employee Retention Credits (ERC).
- State of New Jersey: The Company owes approximately $250,000 on account of unremitted sales tax.
Events Leading to Bankruptcy
Macroeconomic Shocks and Volatility
The Company’s financial distress began immediately following its February 2020 expansion, coinciding with the onset of the COVID-19 pandemic. As the hospitality industry shut down, daily laundry volume plummeted from 120,000 pounds to less than 20,000 pounds per week. For the subsequent three and a half years, business volume remained volatile, with recovery efforts frequently stalled by new virus variants.
Operational Failures and Equipment Issues
By the summer of 2023, volumes had begun returning to pre-pandemic levels. However, the Company suffered two significant operational setbacks:
- Software Glitch (August 2023): An improperly updated line of code by Kannegiesser caused a facility-wide failure of the dryers, halting operations for several days. This resulted in the permanent loss of customers and significant reputational damage.
- Electrical Fire (March 2024): A fire in the Company’s primary ironer caused extensive smoke damage, forcing another operational shutdown. The Company lost approximately one-third of its customer base in the aftermath. A replacement ironer was not delivered until December 2024, causing the Company to miss its peak holiday season.
Insurance Disputes and Liquidity Crisis
Following the fire, the Company filed claims for property damage and business interruption. While property claims were eventually paid, the $5 million business interruption claim remains unpaid.
- The Debtors allege that Kannegiesser interfered with the claim process by asserting rights to the insurance proceeds and making disparaging remarks to the insurer, Ascot Insurance, prompting an extended investigation.
- To generate immediate cash, the Debtors sold the proceeds of the business interruption claim for $1 million, but this provided only temporary relief.
Failed Sale Process and Chapter 11 Filing
Facing a lease termination notice effective April 11, 2025, and defending against multiple lawsuits from lenders, the Debtors attempted an out-of-court sale. Negotiations with two potential buyers ultimately collapsed, in part due to Kannegiesser’s refusal to release its liens.
- With no other options to preserve value, the Debtors filed for Chapter 11 protection on April 10, 2025.
- Unable to secure third-party financing due to extensive existing liens, the Debtors secured a DIP financing facility from a Special Purpose Vehicle (SPV) formed by industry leaders and insiders to fund the administration of the cases and necessary equipment repairs.