Hallmark Financial Services - Chapter 11 Plan Terms

Plan / RSA Terms

Overview

• Hallmark Financial Services, Inc. (the “Debtor” or “Company”), as debtor and debtor in possession, proposes a Chapter 11 Plan of Reorganization pursuant to section 1121(a) of the Bankruptcy Code.
• The Plan is premised on a Restructuring Support and Forbearance Agreement (the “RSA”), dated as of April 3, 2026, by and among the Debtor and Hildene, including all exhibits and attachments thereto, as may be amended, restated, and supplemented from time to time in accordance with its terms.
• Hildene means Hildene Capital Management, LLC, Hildene Collateral Management Company, LLC, and certain of its affiliates, funds, and accounts managed by it that were expressly listed and disclosed to the Debtor in writing before the Petition Date in compliance with the RSA, and subsequently disclosed to the Court pursuant to a verified statement under Bankruptcy Rule 2019.
• The Restructuring Transaction means the transactions contemplated in the RSA, more fully detailed in Article VI.C of the Plan, between the Debtor and Hildene. The Reorganized Debtor means Hallmark Financial Services, Inc., or any successor or assign thereto, on and after the Effective Date.
• HHH means Hildene Hallmark Holdings, LLC, a Delaware limited liability company:
  • Established for the purpose of owning up to 100% of the New Common Equity of the Reorganized Debtor in the event of a Restructuring Transaction;
  • The non-voting membership interests of which are owned 100% by Holders of Allowed Junior Subordinated Debt Securities Claims managed by or affiliated with Hildene, pursuant to Article IV.E.2 of the Plan; and
  • Solely managed by Brett Jefferson, who will not hold any direct equity interest in HHH and is not receiving any consideration under the Plan.

Classification and Treatment of Claims and Equity Interests

• Claims and Equity Interests are classified as: Class 1 – Other Secured Claims (Unimpaired; deemed to accept); Class 2 – Priority Non-Tax Claims (Unimpaired; deemed to accept); Class 3 – Senior Unsecured Notes Claims (Impaired; entitled to vote); Class 4 – General Unsecured Claims (Unimpaired; deemed to accept); Class 5 – Junior Subordinated Debt Securities Claims (Impaired; entitled to vote); Class 6 – Intercompany Claims (Impaired; deemed to reject); and Class 7 – Equity Interests (Impaired; deemed to reject). Only Classes 3 and 5 are entitled to vote.
• Class 1 – Other Secured Claims: each Holder shall receive, at the election of the Debtor or Reorganized Debtor (with Hildene’s consent), (i) payment in full in Cash (or, if not then due, payment in the ordinary course per the applicable agreement), (ii) Reinstatement, or (iii) such other treatment as renders the Claim Unimpaired.
• Class 2 – Priority Non-Tax Claims: each Holder shall receive Cash or other treatment consistent with section 1129(a)(9) of the Bankruptcy Code.
• Class 4 – General Unsecured Claims: each Holder shall receive payment in Cash of the unpaid portion of such Claim (without interest, premium, or penalty) on or about the Effective Date; Claims not Allowed as of the Effective Date shall be paid by the Reorganized Debtor as directed by a Final Order allowing such Claim.
• Class 6 – Intercompany Claims: discharged, with Holders receiving nothing on account of such Claims.
• Class 7 – Equity Interests: all existing Equity Interests shall be cancelled, terminated, and of no further force or effect, and Holders shall receive nothing on account of such Equity Interests.
• A Class of impaired Claims accepts the Plan if Holders of at least two-thirds (2/3) in amount and more than one-half (1/2) in number of the Claims voting in that Class vote to accept; the Debtor reserves cramdown under section 1129(b).

Toggle Structure and Bidding Procedures

• The Plan is structured as a toggle between the Hildene Restructuring Transaction and an Alternative Restructuring Transaction. Article VI.C governs implementation where the Successful Bidder is Hildene. If the Debtor pursues approval of an Alternative Restructuring Transaction, the terms of Article VI.C shall not apply, and all distributions under the Plan shall be made from the Debtor’s Cash or the Cash proceeds from the Alternative Restructuring Transaction.
• An Alternative Restructuring Transaction means any transaction other than the Restructuring Transaction involving the Debtor’s Insurance Subsidiaries and other non-cash Assets for cash in an amount in excess of the Initial Plan Value, in accordance with the RSA and resulting from the Bidding Procedures approved pursuant to the Bidding Procedures Order.
• The Bidding Procedures Order authorizes the Debtor to market its non-cash Assets, including its Insurance Subsidiaries, for an Alternative Restructuring Transaction with a minimum purchase price of no less than the Initial Plan Value, payable solely in cash.
  • The Debtor shall designate a Successful Bidder prior to the Confirmation Date, subject to Court approval.
  • The Debtor shall not designate a Successful Bidder under an Alternative Restructuring Transaction if the cash portion of the bid does not exceed the Initial Plan Value.
• Initial Plan Value means (i) the amount of Senior Unsecured Notes Claims, including accrued interest, plus (ii) 10% of Junior Subordinated Debt Securities Claims, including accrued interest, plus (iii) the estimated amount of unpaid Professional Fee Claims and Hildene Professional Fees and other Administrative Claims as of the Plan Effective Date, plus (iv) to the extent applicable, any obligations to repay debtor-in-possession financing approved by a Final Order of the Bankruptcy Court, plus (v) the amount of GUCs, less (vi) the estimated amount of the Debtor’s Cash, cash equivalents, and investment balances (to the extent such investments are marketable securities or other cash equivalents) as of the Effective Date.

Regulatory Approval

• The Successful Bidder shall obtain Regulatory Approval for the Restructuring Transaction or Alternative Restructuring Transaction contained in the Plan.
• The Regulatory Approval Deadline is the deadline to obtain all necessary Regulatory Approvals required for the Effective Date to occur, which shall be:
  • Ninety (90) days after the Petition Date, if the Successful Bidder is Hildene; or
  • One hundred fifty (150) days after the Auction, if the Successful Bidder is not Hildene.
• Such deadline shall be subject to: (a) one 30-day extension if Regulatory Approval remains pending and there is no indication of denial as of the date of such extension; and (b) one additional 30-day extension if (x) Regulatory Approval remains pending and there is no indication of denial as of the date of such additional extension, and (y) the Debtor, in its reasonable discretion, agrees in writing to such additional extension.
• If the Successful Bidder does not obtain Regulatory Approval by the applicable Regulatory Approval Deadline, the Debtor may file a notice with the Bankruptcy Court that it will proceed to consummate the Restructuring Transaction or Alternative Restructuring Transaction, as applicable, with the Backup Bidder as the replacement Successful Bidder.

DIP Financing

• In the event the Debtor has obtained financing from Hildene pursuant to a Final Order of the Bankruptcy Court under sections 363 or 364 of the Bankruptcy Code:
  • Upon consummation of a Restructuring Transaction, it is Hildene’s intent to cause any and all obligations arising from such financing to be discharged on the Effective Date in exchange for issuance of New Convertible Preferred Equity in the Reorganized Debtor to Hildene, having the same terms as the New Convertible Preferred Shares issued on account of the portion of Allowed Senior Unsecured Notes Claims held by Hildene and its affiliates.
  • Upon consummation of an Alternative Restructuring Transaction, any DIP financing provided by Hildene shall be paid in full in Cash on the Effective Date.

Senior Unsecured Notes Claims Treatment

• Senior Unsecured Notes Claims shall be deemed Allowed in the principal amount of $50,000,000.00, plus accrued and unpaid interest as of the Petition Date to the fullest extent permitted under the Senior Unsecured Notes Indenture and applicable law.
• Under the Restructuring Transaction (i.e., where the Bankruptcy Court does not approve an Alternative Restructuring Transaction), on the Plan Effective Date, or as soon as reasonably practicable thereafter, in full and final satisfaction of each Allowed Senior Unsecured Notes Claim:
  • Each Allowed Senior Unsecured Noteholder that is Hildene shall receive New Convertible Preferred Equity of the Reorganized Debtor having an initial liquidation preference equal to 100% of such Allowed Senior Unsecured Notes Claim.
  • Each other Allowed Senior Unsecured Noteholder shall receive New Senior Unsecured Notes of the Reorganized Debtor in an original principal amount equal to 100% of such Holder’s Allowed Senior Unsecured Notes Claim.
• Under an Alternative Restructuring Transaction, on the Plan Effective Date, or as soon as reasonably practicable thereafter, the Debtor shall make pro rata distributions to the Allowed Senior Unsecured Noteholders of the net proceeds from such Alternative Restructuring Transaction (after full payment of Allowed Administrative Claims, Allowed Priority Tax Claims, and other Allowed Priority Non-Tax Claims), up to the aggregate amount of the Allowed Senior Unsecured Notes Claims, including any Indenture Trustee fees and expenses reimbursable under the Senior Unsecured Notes Indenture.

Junior Subordinated Debt Securities Claims Treatment

• The 2035 Junior Subordinated Debt Securities Claims shall be deemed Allowed in the principal amount of $30,928,000.00, and the 2037 Junior Subordinated Debt Securities Claims shall be deemed Allowed in the principal amount of $25,774,000.00, in each case plus accrued and unpaid interest as of the Petition Date to the fullest extent permitted under the applicable Indenture and applicable law.
• Under the Restructuring Transaction (i.e., where the Bankruptcy Court does not approve an Alternative Restructuring Transaction), on the Plan Effective Date, or as soon as reasonably practicable thereafter, in full and final satisfaction of each Allowed Junior Subordinated Debt Securities Claim, each Holder shall receive 10% of the amount of such Claim in cash.
  • Notwithstanding the foregoing, Holders of Allowed Junior Subordinated Debt Securities Claims managed by or affiliated with Hildene agree to less favorable treatment such that, on the Effective Date, the Reorganized Debtor shall issue 100% of the New Common Equity to HHH, and such Holders shall receive their Pro Rata share of the non-voting membership interests issued by HHH in lieu of any Cash distribution.
• Under an Alternative Restructuring Transaction, on the Plan Effective Date, or as soon as reasonably practicable thereafter, the Debtor shall make Pro Rata distributions of the net proceeds from such Alternative Restructuring Transaction (after full payment of Allowed Administrative Claims, Allowed Priority Tax Claims or other Allowed Priority Non-Tax Claims, Allowed Senior Unsecured Notes Claims, and Allowed General Unsecured Claims), up to the aggregate amount of the Allowed Junior Subordinated Debt Securities Claims.

New Convertible Preferred Equity

• On the Effective Date, in the event of the Restructuring Transaction, the New Organizational Documents shall provide for the Reorganized Debtor to issue New Convertible Preferred Equity to Holders of Senior Unsecured Notes Claims managed by or affiliated with Hildene, or a Hildene affiliate entity designated by such Holders, with the following principal terms:
  • Issuer: The Reorganized Debtor.
  • Quantum: The aggregate amount of liquidation preference shall be determined based on the portion of Allowed Senior Unsecured Notes Claims held by Hildene and its affiliates.
  • Dividend Rate: 10% per annum, payable in kind by automatic accretion to the liquidation preference, compounded quarterly.
  • Priority: Senior to all common equity and junior to all debt securities (including the New Senior Unsecured Notes), except as otherwise provided in the Plan.
  • Maturity: Perpetual, subject to conversion, redemption, or other exit events, payable on the sale of the Reorganized Debtor or all or substantially all of its assets.
  • Conversion Rights: Convertible at the option of the Holder at any time into common equity of the Reorganized Debtor at a valuation equal to the Initial Plan Value, plus (i) the amount of the Debtor’s cash, cash equivalents, and investments balance as of the Plan Effective Date, reflected on a pro forma basis for the amount of cash paid out to the Junior Subordinated Debt Claims pursuant to the Restructuring Transactions, less (ii) the estimated amount of unpaid professional fees and other administrative claims as of the Plan Effective Date, less (iii) the amount of New Senior Unsecured Notes issued as part of the Restructuring Transactions, subject to customary anti-dilution adjustments for stock splits, combinations, reclassifications, and similar events.

New Senior Unsecured Notes

• On the Effective Date, in the event of the Restructuring Transaction, the Reorganized Debtor shall issue New Senior Unsecured Notes to Holders of Senior Unsecured Notes Claims other than Hildene and its affiliates, with the following principal terms:
  • Issuer: The Reorganized Debtor.
  • Quantum: The aggregate principal amount shall be based on the portion of Allowed Senior Unsecured Notes Claims not held by Hildene, not to exceed approximately $14,000,000, plus accrued and unpaid interest.
  • Interest Rate: Six and one-quarter percent (6.25%) per annum, payable semi-annually in arrears on February 15 and August 15 of each year.
  • Priority: Pari passu with all other unsecured obligations of the Reorganized Debtor.
  • Maturity: December 31, 2032.
  • Optional Redemption: The source sets out a call/optional redemption provision for the New Senior Unsecured Notes; the specific terms are illegible in the filed copy and should be confirmed against a clean copy.
  • Other Terms: The New Senior Unsecured Notes shall contain affirmative covenants, negative covenants, and all other provisions substantially identical in all material respects to those set forth in the Senior Unsecured Notes Indenture, including covenants relating to limitations on liens, incurrence of indebtedness, restricted payments, maintenance of the Insurance Subsidiaries, and reporting requirements.

New Common Equity

• New Common Equity means the common stock, limited liability company membership units, or functional equivalent thereof of the Reorganized Debtor to be issued on the Effective Date.
• The New Common Equity shall be subject to dilution by (i) the New Convertible Preferred Equity or any securities issued in respect thereof, and (ii) New Common Equity issuable or reserved under the MIP and any other common equity issuances by the Reorganized Debtor pursuant to the Plan with Hildene’s consent, or otherwise issued after the Effective Date.

Management Incentive Plan

• On or as soon as practicable after the Effective Date, in the event of the Restructuring Transaction, the New Board shall adopt a Management Incentive Plan (“MIP”) providing for the issuance of equity and/or equity-based awards (“MIP Awards”) to officers, employees, directors, managers, and other key service providers of the Reorganized Debtor from time to time.
• The MIP shall reserve for issuance MIP Awards in respect of such aggregate amount of New Common Equity as may be determined by the New Board in its discretion (the “MIP Pool”), provided that the MIP Pool shall at all times comprise no less than five percent (5%) of the Reorganized Debtor’s New Common Equity on a fully diluted basis (including the dilution from the New Convertible Preferred Equity).
• The terms and conditions of the MIP, including the size of the MIP Pool, eligibility, individual participation levels, timing and forms of awards, and vesting and performance criteria, shall be determined by the New Board in its discretion, in a manner consistent with the Plan, the RSA, and all other Plan Supplements.

New Board

• On the Effective Date, the New Board shall consist of:
  • One (1) director designated by the Debtor, whose initial designee shall be Chris Kenney, or any other designee that may be approved by Hildene in its reasonable discretion;
  • Three (3) directors selected by Hildene; and
  • One (1) independent director selected by Hildene.
• Corporate governance and additional governance terms of the Reorganized Debtor shall be determined as set forth in the Plan Supplement.

Sources of Consideration

• The Reorganized Debtor shall fund distributions under the Plan, as applicable, with: (1) the Reorganized Debtor’s Cash on hand or the Cash proceeds from any Alternative Restructuring Transaction; (2) the New Convertible Preferred Equity; (3) the New Common Equity; and (4) the New Senior Unsecured Notes.

Hildene Professional Fees

• Pursuant to the terms of the RSA, the Debtor shall pay all reasonable, budgeted, and documented fees and expenses, including reasonable fees and expenses incurred prior to the Effective Date (the “Hildene Professional Fees”), of Fox Rothschild, LLP, Wollmuth Maher & Deutsch LLP, Maynard Nexsen, P.C., Ryan Specialty Holdings, Ducera Partners, LLC, and any other professionals and/or consultants determined necessary by Hildene (collectively, the “Hildene Advisors”).
  • The Debtor shall not be responsible for, and shall have no obligation to pay, any fees incurred by the Hildene Advisors to investigate, prepare for, or pursue litigation or other claims against the Debtor, its officers, directors, employees, advisors, or consultants.
  • Any accrued Hildene Professional Fees not billed or paid as of the Effective Date shall be paid on, or as soon as reasonably practicable following, the Effective Date.
• Indenture Trustee fees and expenses are subject to an Indenture Trustee Fee and Expense Cap, which in the aggregate shall not exceed $50,000 for each Indenture Trustee accrued from and after the Petition Date; provided that this cap shall serve as an aggregate cap for any Indenture Trustee serving as the trustee for multiple indentures.

Releases

• The “Released Parties” collectively include (a) the Company Released Parties; (b) the Committee and its members (if appointed); and (c) the Hildene Released Parties. The “Releasing Parties” collectively include (a) the Company Releasing Parties; (b) the Committee (if appointed); (c) Consenting Parties; and (d) the Hildene Releasing Parties.
  • The Company Released Parties include the Debtor, its predecessors, successors and assigns, Insurance Subsidiaries, affiliates, and managed accounts, funds, or investment vehicles, together with each of such Person’s respective current officers, directors, principals, shareholders, members, partners, employees, agents, advisory board members, financial advisors, attorneys, accountants, investment bankers, consultants, representatives, management companies, fund advisors, and other professionals, and the current officers and directors of the Debtor and its Insurance Subsidiaries, in each case in their capacity as such.
  • Notwithstanding the foregoing, neither the Company Released Parties nor any releases set forth in Article X.C of the Plan or otherwise shall be construed to include the following individuals: Naveen Anand, Kenneth Krissinger, Jeffrey Passmore, and Charles Stauber.
  • The Hildene Released Parties include Hildene, its predecessors, successors and assigns, subsidiaries, affiliates, and managed accounts or funds, together with each of such entities’ respective current and former officers, directors, principals, shareholders, members, partners, employees, agents, advisory board members, financial advisors, attorneys, accountants, investment bankers, consultants, representatives, management companies, fund advisors, and other professionals, in their respective capacities as such.
• Consenting Parties means all Persons who affirmatively consent to the Third-Party Releases by either: (1) submitting a Ballot to the Solicitation Agent without having checked the appropriate box to opt out of the Third-Party Releases; or (2) returning an Opt In Form to the Solicitation Agent having checked the appropriate box to opt into the Third-Party Releases.
• Debtor Releases: On the Effective Date, the Company Releasing Parties expressly and generally release, acquit, and discharge the Hildene Released Parties and the Company Released Parties from any and all claims, obligations, rights, suits, damages, causes of action, remedies, and liabilities whatsoever, including any derivative claims, whether known or unknown, based on or relating to, or arising from, in whole or in part, Hildene or the Debtor or the negotiation, formulation, or preparation of the Restructuring Transactions, arising on or before the Effective Date.
  • Nothing in such releases shall be construed as a release of (i) any obligations owed under the Plan, or (ii) any claims or causes of action against Naveen Anand, Kenneth Krissinger, Jeffrey Passmore, and Charles Stauber.
• Hildene Releases: On the Plan Effective Date, the Hildene Releasing Parties expressly and generally release, acquit, and discharge the Company Released Parties from any and all claims, obligations, rights, suits, damages, causes of action, remedies, and liabilities whatsoever, including any derivative claims, whether known or unknown, based on or relating to, or arising from, in whole or in part, the Debtor or the negotiation, formulation, or preparation of the Restructuring Transactions, arising on or before the Effective Date.
  • Nothing in the Plan or any other document filed in the Chapter 11 Case shall constitute a release or waiver by the Hildene Releasing Parties of (x) any of the obligations of any of the Company Released Parties or any other Person to consummate the transactions to be executed pursuant to the Plan, (y) the obligation to fully and timely perform all actions to be performed under or pursuant to the Plan or any implementing document, or (z) the rights of Holders of Allowed Claims and Equity Interests to receive distributions under the Plan.
• Third-Party Releases: On the Plan Effective Date, to the extent permitted by law, all Consenting Parties shall be deemed to release, acquit, and discharge the Hildene Released Parties and the Company Released Parties from any and all claims, obligations, rights, suits, damages, causes of action, remedies, and liabilities whatsoever (except any Claim against or Equity Interest in the Debtor that is dealt with under the Plan), including any derivative claims, whether known or unknown, based on or relating to, or arising from, in whole or in part, Hildene or the Debtor or the negotiation, formulation, or preparation of the Restructuring Transactions, arising on or before the Effective Date.
  • Nothing in such releases shall be construed as a release of any obligations owed under the Plan.

Exculpation

• The Exculpated Parties are, in each case solely in their capacity as such, the Debtor and the members of the Committee, as applicable.
• Upon the Effective Date, to the fullest extent permissible under applicable law, no Exculpated Party shall have or incur, and each Exculpated Party is released and exculpated from, any liability to any Holder of a Claim or Equity Interest, or any other party in interest, for any claim or cause of action arising on and after the Petition Date from, relating to, or connected with the administration of the Chapter 11 Case, the Disclosure Statement, the preparation of the Plan, the solicitation of acceptances of the Plan, the pursuit of confirmation of the Plan, the occurrence of the Effective Date, or the administration of the Plan or property to be distributed under the Plan, except for claims related to any act or omission determined in a Final Order of a court of competent jurisdiction to have constituted actual fraud, willful misconduct, or gross negligence.

Conditions Precedent

• Conditions to Confirmation include:
  • Entry of an order finding that the Disclosure Statement contains adequate information pursuant to section 1125 of the Bankruptcy Code and ratifying the prepetition solicitation conducted pursuant to the RSA, in a form and substance reasonably satisfactory to Hildene; and
  • The Confirmation Order shall be in a form and substance reasonably satisfactory to the Debtor and Hildene, substantially consistent with the terms of the RSA.
• Conditions to the Effective Date include, among others:
  • The Successful Bidder and/or, in the event of an Alternative Restructuring Transaction, the Debtor, shall have obtained necessary Regulatory Approvals with respect to all Insurance Subsidiaries, and all such Regulatory Approvals shall be in full force and effect and not subject to any stay, injunction, or appeal with a reasonable likelihood of reversal or material modification;
  • The final versions of all Plan Supplements and related schedules, documents, and exhibits shall be (i) consistent with the RSA and otherwise approved by the parties thereto consistent with their respective consent and approval rights set forth in the RSA, and (ii) adopted on terms consistent with the RSA and the Plan;
  • Pursuant to the RSA and Article VI.O of the Plan, all billed Hildene Professional Fees have been paid in full, and any accrued but not yet billed amounts estimated by Hildene prior to the Effective Date have been reserved in a separate professional fee escrow account for payment in full after the Effective Date; and
  • There shall not be in effect any law or order by any Insurance Regulatory Authority restraining, enjoining, materially conditioning, or otherwise prohibiting the consummation of the Restructuring Transaction, the Alternative Restructuring Transaction, or the effectiveness of any Regulatory Approval.
• Any of the foregoing conditions (with the exception of the conditions set forth in Articles IX.A and IX.B(iii)–(vi)) may be waived by agreement of the Debtor, Hildene, and the Successful Bidder (if not Hildene) without notice to or order of the Bankruptcy Court.

Discharge, Injunction, and Gate Keeping

• Pursuant to section 1141(d), and except (i) with respect to a liquidation of the Debtor resulting from an Alternative Restructuring Transaction or (ii) as otherwise specifically provided in the Plan, the distributions, rights, and treatment under the Plan are in complete satisfaction, discharge, and release of all Claims, Equity Interests, and Causes of Action against the Debtor arising before the Effective Date.
• Upon the Effective Date, and subject to the Reorganized Debtor’s full and timely performance, all Persons holding Claims or Equity Interests are permanently enjoined from commencing or continuing any action, enforcing judgments, creating or enforcing liens, asserting setoff/subrogation/recoupment, or (as to Releasing Parties) pursuing any released or exculpated claim against the Debtor, its Estate, or the Reorganized Debtor.
• A gatekeeping provision bars any Person from pursuing claims against an Exculpated Party that relate to matters subject to the release/exculpation/injunction provisions without the Bankruptcy Court first determining, after notice and a hearing on a motion attaching the proposed complaint, that the claim is a direct (non-derivative) claim that has not been discharged, released, or exculpated.