Hallmark Financial Services - Chapter 11 Plan Terms

Plan / RSA Terms

Overview

• The court confirmed Hallmark Financial Services' Chapter 11 plan of reorganization on Aug. 25, 2026, implementing the restructuring support and forbearance agreement the debtor signed with Hildene on April 3, 2026, which turns the company over to its noteholders: Hildene exchanges its senior unsecured notes for new convertible preferred equity, non-Hildene senior noteholders take back new notes, and 100% of the new common equity goes to a Hildene vehicle.
• Hildene, for these purposes, means Hildene Capital Management, LLC, Hildene Collateral Management Company, LLC, and the affiliates, funds, and accounts identified to the debtor in writing before the petition date under the RSA and later disclosed to the court by Rule 2019 statement.
• Hallmark, whose direct and indirect subsidiaries operate regulated insurance businesses, filed on June 15, 2026 in the Northern District of Texas. No creditors' committee was appointed.
• The plan carries a toggle: the "Alternative Restructuring Transaction" — any sale of the insurance subsidiaries and other non-cash assets for cash exceeding the Initial Plan Value under court-approved bidding procedures — would have displaced the Hildene deal and funded distributions in cash. That toggle is now dead.
  • Initial Plan Value is the sum of the senior unsecured notes claims with accrued interest, 10% of the junior subordinated debt securities claims with accrued interest, estimated unpaid professional fee claims, Hildene professional fees and other administrative claims at the effective date, any court-approved DIP repayment obligations, and general unsecured claims, less the debtor's estimated cash, cash equivalents, and marketable investment balances at the effective date.

Marketing Process and Bid Outcome

• No qualified bid arrived by the bid deadline, so no alternative transaction is possible and the debtor will execute the Hildene restructuring transaction, which the court found to be the highest and best offer and in creditors' best interests.
• Raymond James, the debtor's investment banker, ran the marketing under the RSA and the bidding procedures order both before and after the petition date, contacting over 180 potential counterparties on an aggregate, non-duplicative basis across two separate processes.
• The bidding procedures order set a floor: no bid could be designated successful unless its cash portion exceeded the Initial Plan Value, payable solely in cash.
• The plan preserves a backup-bidder substitution: if the successful bidder misses the regulatory approval deadline, the debtor may file a notice electing to consummate with the backup bidder as the replacement successful bidder. That substitution presupposes a competing qualified bid, and none was received.

Claim and Interest Treatment

• Hildene agreed to worse treatment than similarly situated creditors under the RSA, taking preferred equity where other senior noteholders take debt, and equity in a holding vehicle where other junior holders take cash.
• Class 3, senior unsecured notes claims (impaired, voted to accept): Hildene receives new convertible preferred equity of the reorganized debtor with an initial liquidation preference equal to 100% of its allowed claim; every other holder receives new senior unsecured notes in an original principal amount equal to 100% of its allowed claim.
  • The class is allowed in the amount stated in the proof of claim filed by the senior notes indenture trustee on July 20, 2026, claim number 17.
  • Under the alternative transaction, the class would instead have taken pro rata net sale proceeds, after payment of administrative, priority tax, and priority non-tax claims, up to the allowed claim amount, including indenture trustee fees and expenses reimbursable under the indenture.
• Class 5, junior subordinated debt securities claims (impaired, voted to accept): holders receive 10% of their allowed claim in cash.
  • Holders managed by or affiliated with Hildene take less favorable treatment, receiving their pro rata share of non-voting membership interests in Hildene Hallmark Holdings, LLC in lieu of any cash distribution, with HHH taking 100% of the reorganized debtor's new common equity.
  • The 2035 and 2037 claims are allowed in the amounts stated in the proofs of claim filed by the junior subordinated indenture trustee on July 30, 2026, claim numbers 34 and 35.
  • Under the alternative transaction, the class would have taken pro rata net proceeds after administrative, priority tax, priority non-tax, senior notes, and general unsecured claims were paid in full, up to the allowed claim amount.
• Class 1, other secured claims (unimpaired): payment in full in cash of the unpaid portion, or payment in the ordinary course if not yet due, reinstatement, or other unimpairing treatment, at the debtor's or reorganized debtor's election with Hildene's consent.
• Class 2, priority non-tax claims (unimpaired): cash or other treatment consistent with section 1129(a)(9).
• Class 4, general unsecured claims (unimpaired): payment in cash of the unpaid portion, without interest, premium, or penalty, on or about the effective date; claims not allowed by then are paid as directed by a final order of the bankruptcy court or another court of competent jurisdiction, or by agreement with the reorganized debtor.
• Class 6, intercompany claims (impaired, deemed to reject): discharged, no recovery.
• Class 7, equity interests (impaired, deemed to reject): cancelled, released, and extinguished, no recovery.
• The debtor sought and obtained confirmation over Classes 6 and 7 under section 1129(b); the court found no junior holder retains property and no senior holder receives more than 100%.

New Convertible Preferred Equity

• Issued by the reorganized debtor to the Hildene-managed or affiliated senior noteholders, or a Hildene affiliate they designate, on these terms:
  • Size: aggregate liquidation preference set by reference to the portion of allowed senior unsecured notes claims held by Hildene and its affiliates.
  • Dividend rate: 10% per annum, paid in kind by automatic accretion to the liquidation preference, compounded quarterly.
  • Priority: senior to all common equity, junior to all debt securities including the new senior unsecured notes, except as the plan otherwise provides.
  • Maturity: perpetual, subject to conversion, redemption, or other exit events, and payable on a sale of the reorganized debtor or of all or substantially all of its assets.
  • Conversion: at the holder's option at any time into common equity at a valuation equal to Initial Plan Value, plus the debtor's cash, cash equivalents, and investments balance at the effective date shown pro forma for the cash paid to the junior subordinated claims, less estimated unpaid professional fees and other administrative claims at the effective date, less the amount of new senior unsecured notes issued, with customary anti-dilution adjustments for stock splits, combinations, and reclassifications.

New Senior Unsecured Notes

• Take-back notes issued by the reorganized debtor to senior noteholders other than Hildene and its affiliates:
  • Quantum: sized to the portion of allowed senior unsecured notes claims not held by Hildene, capped at approximately $14 million in aggregate principal plus accrued and unpaid interest. That cap is also a condition to the effective date.
  • Interest: 6.25% per annum, payable semi-annually in arrears on Feb. 15 and Aug. 15, matching the rate on the existing senior notes issued Aug. 19, 2019.
  • Maturity: Dec. 31, 2032, extended from the Aug. 19, 2029 maturity of the existing notes.
  • Priority: pari passu with all other unsecured obligations of the reorganized debtor.
  • Call protection: redeemable in whole or in part at the reorganized debtor's option at par plus accrued and unpaid interest.
  • Covenants: substantially identical in all material respects to the existing senior unsecured notes indenture, including limitations on liens, incurrence of indebtedness, restricted payments, maintenance of the insurance subsidiaries, and reporting.
• To receive a note, a beneficial holder must deliver a completed joinder in substantially the form annexed to the senior notes agreement filed with the plan supplement and provide know-your-customer and anti-money-laundering documentation reasonably satisfactory to the reorganized debtor; the distribution agent will notice holders of the issuance through DTC. A holder that fails to return a requested Form W-9 or W-8 within 90 days of the initial request may be paid net of withholding or have its distribution reserved, reverted to the reorganized debtor, and its claim waived and barred.

New Common Equity and HHH

• The reorganized debtor issues 100% of its new common equity to Hildene Hallmark Holdings, LLC, a Delaware limited liability company formed to hold up to 100% of that equity, whose non-voting membership interests are owned entirely by the Hildene-managed or affiliated holders of allowed junior subordinated debt securities claims.
• HHH is managed solely by Brett Jefferson, who holds no direct equity interest in HHH and receives no consideration under the plan.
• The new common equity is subject to dilution by the new convertible preferred equity or securities issued in respect of it, and by common equity issuable or reserved under the management incentive plan or otherwise issued after the effective date with Hildene's consent.
• Neither the preferred nor the common will be registered on any exchange as of the effective date. The plan states the offering and distribution of both are exempt under section 1145 from Securities Act registration, but the confirmation order overrides that as to the common: notwithstanding contrary language in the disclosure statement, plan, or order, neither the reorganized debtor nor HHH nor any other person receiving new common equity may rely on section 1145, though they may rely on any other available exemption. Accepting either security is deemed agreement to the new organizational documents.

Governance

• The new board has five members: one designated by the debtor, initially Chris Kenney, or another designee approved by Hildene in its reasonable discretion; three selected by Hildene; and one independent director also selected by Hildene. Director identities and compensation are in the plan supplement.
• All current directors are deemed to have resigned as of the effective date, replaced by the plan supplement slate.
• The new organizational documents prohibit the issuance of non-voting equity securities and address dividend payment and director election as between the preferred and the common in the event of a dividend payment default.
• Indemnification, defense, and reimbursement obligations to existing, future, and new board members under the debtor's certificate of incorporation survive the effective date and are carried into the new organizational documents; nothing in the plan or order disallows a claim for indemnity, advancement, exculpation, defense costs, or expense reimbursement arising from the pre-effective-date organizational documents, expressly including as to the Anand and Krissinger claims.
• The management incentive plan, adopted by the new board on or as soon as practicable after emergence, reserves a pool of at least 5% of the reorganized debtor's new common equity on a fully diluted basis, including dilution from the preferred; the board sets pool size, eligibility, participation levels, award timing and form, and vesting and performance criteria consistent with the plan and RSA.

Regulatory Approvals

• The successful bidder must obtain every regulatory approval required for the transaction, including change-of-control and Form A approvals from the authorities with jurisdiction over the insurance subsidiaries.
• The deadline runs 90 days after the petition date where Hildene is the successful bidder, the branch the plan puts in play, and 150 days after an auction where it is not, subject to one 30-day extension if approval remains pending with no indication of denial and a second 30-day extension on the same condition plus the debtor's written agreement in its reasonable discretion.

Conditions to Confirmation and Effectiveness

• Confirmation required an order finding the disclosure statement contained adequate information and ratifying the prepetition solicitation conducted under the RSA, in form and substance reasonably satisfactory to Hildene, and a confirmation order reasonably satisfactory to the debtor and Hildene and substantially consistent with the RSA. The court found those conditions satisfied or waived.
• The effective date turns on: the RSA remaining in full force and not terminated; the confirmation order having become a final order, unreversed, unstayed, unmodified, and unvacated on appeal; the new senior unsecured notes not exceeding approximately $14 million plus accrued and unpaid interest; all regulatory approvals for the insurance subsidiaries being obtained and effective, free of any stay, injunction, or appeal with a reasonable likelihood of reversal or material modification; final plan supplements consistent with the RSA and adopted per the parties' consent rights; execution and delivery of the new organizational documents, new notes, and other RSA-described supplements; payment in full of all billed Hildene professional fees with accrued-but-unbilled estimates reserved in a separate escrow; payment or reserve of all professional fee claims; execution of all remaining implementation documents; and the absence of any law or insurance-regulatory order restraining, enjoining, materially conditioning, or prohibiting consummation or the effectiveness of any regulatory approval.
  • The condition on execution of the organizational documents and new notes remains bracketed in the modified plan as "[duly executed or deemed executed or filed in the appropriate government or regulatory agency or office]."
• Conditions may be waived by agreement of the debtor, Hildene, and any non-Hildene successful bidder without notice to or order of the court, except the confirmation conditions and the notes-cap, regulatory-approval, plan-supplement, and document-execution conditions, which are not waivable; the requirement that the confirmation order first become a final order sits outside that carve-out and is therefore waivable by the same agreement. Failure of a condition may be asserted regardless of the circumstances causing it, including the debtor's own action or inaction, and non-exercise is not a waiver.
• The debtor must file notice of the effective date within two business days of its occurrence.

Releases

• The plan releases run both ways between the debtor and Hildene, and are given for consideration provided by the released parties including contributions to the reorganization. On the effective date the company releasing parties release the Hildene released parties and the company released parties from all claims, known or unknown, including derivative claims, relating to Hildene or the debtor, any securities or debt transaction, or the negotiation, formulation, or preparation of the restructuring transactions, arising on or before the effective date. The Hildene releasing parties give a mirror release to the company released parties keyed to the debtor rather than to Hildene, preserving the released parties' obligations to consummate and perform under the plan and its implementing documents and holders' rights to plan distributions.
• Four individuals are carved out of every release: Naveen Anand, Kenneth Krissinger, Jeffrey Passmore, and Charles Stauber. No claims by or against them are released, and the Anand and Krissinger parties are excluded from the definitions of company releasing party and consenting party, so they neither grant nor receive releases.
• The company released parties are the debtor, its predecessors, successors, assigns, insurance subsidiaries, affiliates, managed accounts, funds and investment vehicles, and their current officers, directors, principals, shareholders, members, partners, employees, agents, advisory board members, and professionals, plus the current officers and directors of the debtor and its insurance subsidiaries. The company releasing parties definition reaches the same entities but includes former as well as current officers and directors.
• The Hildene released parties are Hildene, its predecessors, successors, assigns, subsidiaries, affiliates, managed accounts and funds, and their current and former officers, directors, principals, shareholders, members, partners, employees, agents, advisory board members, and professionals.
• Released parties collectively comprise the company released parties, the Hildene released parties, and the committee and its members if one had been appointed; releasing parties comprise the company releasing parties, the committee if appointed, the consenting parties, and the Hildene releasing parties.
• The third-party releases are opt-out for the voting classes and opt-in for everyone else: holders in Classes 3 and 5 could opt out on their ballots, and holders in non-voting classes could opt in by returning an opt-in form. Those who did not opt out, or who affirmatively opted in, are "Consenting Parties" and are bound.
  • Consenting parties release the Hildene released parties and the company released parties on the terms above, excluding obligations owed under the plan; in exchange, the Hildene released parties release each consenting party from all claims arising from or connected with the debtor, the Chapter 11 case, estate property, or the plan and its implementation, through the effective date.
  • Neither side's release reaches obligations under the plan or implementing documents, or the right of holders of allowed claims and interests to receive distributions.
  • Consenting parties knowingly grant the release as to facts they may later discover and waive any statute or common-law principle limiting a release of unknown claims, comparable to California Civil Code section 1542.
  • The State of Texas and its agencies, including the Texas Department of Insurance, opted out of all releases under the plan.

Exculpation, Injunction, and Gatekeeping

• Exculpation runs only to the debtor and the members of the committee, in their capacities as such, and covers claims arising on and after the petition date relating to administration of the case, the disclosure statement, plan preparation, solicitation, confirmation, occurrence of the effective date, and plan administration, carving out acts or omissions determined by final order to constitute actual fraud, willful misconduct, or gross negligence. Exculpated parties may reasonably rely on advice of counsel and are entitled to section 1125(e) protection.
• The plan permanently enjoins holders of claims and interests from commencing or continuing actions, enforcing judgments, creating or enforcing encumbrances, or asserting setoff, subrogation, or recoupment against the debtor, its estate, or the reorganized debtor, and enjoins releasing parties from pursuing released or exculpated claims. The injunction is subject to and conditioned upon the reorganized debtor's full and timely performance of its plan obligations. The reorganized debtor, released parties, and exculpated parties may seek contempt sanctions for violations.
• The gatekeeping provision bars any suit against an exculpated party relating to matters subject to the exculpation, release, and injunction articles, including derivative, alter ego, successor liability, and lack-of-separation theories, unless the bankruptcy court first determines, on a motion attaching the proposed complaint and after notice and a hearing, that the claim is direct rather than derivative and has not been discharged, released, or exculpated. Amending an authorized complaint to add claims requires fresh authorization.
• Anand and Krissinger are exempt from both the injunction and the gatekeeper: after the effective date each may prosecute his claims against the debtor or reorganized debtor and defend the claims asserted against him in Anand v. Hallmark Financial Services, Inc., No. 24-cv-03181-B (N.D. Tex.), and Hallmark Financial Services, Inc. v. Krissinger, No. 26-cv-00040-B (N.D. Tex.), and any related appeals, without seeking court approval.

Anand and Krissinger Litigation

• The debtor and the Krissinger parties announced a settlement at the confirmation hearing resolving their mutual claims, to be presented by motion and proposed "Subsequent Settlement Order." Where such an order is entered, its releases control over those in the plan and confirmation order.
• Unless the bankruptcy court or the district court orders otherwise, both district court actions remain abated for all purposes until the effective date, with the debtor, the Krissinger parties, and the Anand parties to submit stipulations or agreed orders to the district court. During the abatement, the debtor, Hildene, and the Anand and Krissinger parties must negotiate in good faith to resolve the claims, expressly including entitlement to advancement of fees and expenses and a procedure for submitting, reviewing, and paying advancement; any further abatement stipulation must carry those obligations.
• The reorganized debtor retains and may enforce all causes of action arising before or after the petition date, including claims against Anand, Krissinger, Passmore, and Stauber. No party may rely on the absence of a specific reference to a cause of action as an indication it will not be pursued.

Professional Fees and Trustee Expenses

• Hildene's professional fees, covering Fox Rothschild LLP, Wollmuth Maher & Deutsch LLP, Maynard Nexsen, P.C., Ryan Specialty Holdings Inc., Ducera Partners LLC, and any other professionals or consultants Hildene deems necessary, are paid in full in cash without any fee application or further court approval, limited to reasonable, budgeted, and documented amounts, and expressly excluding any fees incurred to investigate, prepare for, or pursue litigation or claims against the debtor or its officers, directors, employees, advisors, or consultants. Accrued fees unbilled or unpaid at emergence are paid on or as soon as practicable after the effective date.
• Estate professionals provide estimates to the debtor and Hildene between confirmation and the effective date, and the debtor funds a professional fee reserve in the aggregate estimated amount from available cash. Final fee applications are due within 45 days after the effective date under the confirmation order; the plan states a 30-day deadline for final applications in Article II.B.
• Indenture trustee fees and expenses, before and after the petition date, are paid without fee applications, subject to a cap of $50,000 for each trustee accrued from and after the petition date, which operates as a single aggregate cap for a trustee serving multiple indentures.
  • Notwithstanding that cap, on or immediately before the effective date the reorganized debtor pays the junior subordinated indenture trustee $120,000 and the senior notes indenture trustee $70,000 in full and final satisfaction of all fees and expenses through the effective date, after which the debtor and the Hildene releasing parties release the trustees and their professionals, and the trustees are discharged from further duties under their indentures.
  • The confirmation order identifies the indenture trustees as Bank of New York Mellon Trust Company, N.A. and Wilmington Trust; the plan names Wilmington Savings Fund Society, FSB as the junior subordinated indenture trustee.
• Beyond professional fee claims, Hildene professional fees, and capped indenture trustee fees, the debtor pays no attorneys' or professional fees on account of any claim or interest, unless ordered by a final order of the bankruptcy court, directed by a final order of another court of competent jurisdiction over the Anand and Krissinger claims, or agreed with the holder.

Implementation and Vesting

• The plan is implemented through the restructuring transaction, issuance of the three new securities, creation of HHH, appointment of the new board, adoption of the management incentive plan, vesting of estate property in the reorganized debtor, cancellation of existing notes, instruments, and equity interests, and execution of the documents needed to effect all of it.
• Distributions are funded from the reorganized debtor's cash, the new convertible preferred equity, the new common equity, and the new senior unsecured notes.
• All estate property, including causes of action and property acquired under the plan, vests in the reorganized debtor free and clear of claims, liens, encumbrances, charges, and other interests, except as the plan or confirmation order provides and except for liens securing any reinstated other secured claims; after emergence the reorganized debtor may operate its business and use, acquire, or dispose of property and compromise claims, interests, and causes of action without court supervision.
• Distributions on the proofs of claim filed by the indenture trustees go directly to beneficial holders or their nominees rather than to the trustees or their counsel, and the trustees make no distributions of cash, new notes, preferred, or common equity except where the reorganized debtor expressly asks a trustee to do so. The distribution record date is the confirmation date.

Cancellation of Existing Securities

• The senior unsecured notes, the 2035 and 2037 junior subordinated debt securities, their indentures, and all equity interests in the debtor are cancelled at emergence, whether or not surrendered, with the debtor's obligations discharged and deemed satisfied in full.
  • The existing senior notes were issued Aug. 19, 2019 at 6.25% per annum maturing Aug. 19, 2029. The 2035 junior subordinated securities carry $30.9 million in principal due June 15, 2035, at a fixed 7.725% for the first ten years and thereafter three-month SOFR plus CSA plus 3.25%, quarterly, deferrable at the debtor's option for up to 20 consecutive quarters under certain conditions. The 2037 securities carry $25.8 million in principal due Sept. 15, 2037, at a fixed 8.28% for the first ten years and thereafter three-month SOFR plus CSA plus 2.90%, on the same quarterly and deferral terms.
  • Credit documents survive solely to allow allowed claim holders to receive distributions and to preserve enforcement rights against persons other than released parties, and to let the trustees make distributions at the reorganized debtor's request, discharge their duties, and preserve their charging liens and fee rights subject to the expense cap.
  • Once final distributions to Classes 3 and 5 are made, the instruments are deemed null, void, and worthless and DTC takes down the relevant positions at the debtor's or reorganized debtor's request. No transfer of a Class 3 or 5 claim is effective after the effective date.

Contracts, Insurance, and Pension

• All executory contracts and unexpired leases are deemed assumed by the reorganized debtor at emergence, other than those previously assumed or rejected by court order, expired or terminated by their own terms, subject to a pending rejection motion, or listed on the rejected contract schedule in the plan supplement. All insurance policies are deemed assumed. Monetary defaults are cured under section 365(b)(1) at the cure amount fixed under the solicitation procedures order.
• The reorganized debtor continues to honor employee and retiree benefit obligations, including the Retirement Plan for Employees of the Millers Insurance Group, which it will administer under the plan document, ERISA, and the Internal Revenue Code, vested with all rights and remedies thereunder.
  • Nothing in the plan, the confirmation order, or section 1141 discharges or relieves the reorganized debtor or its successor of liabilities or requirements arising after the effective date with respect to the pension plan or the PBGC; the PBGC and the reorganized debtor agreed that all PBGC proofs of claim are deemed withdrawn with prejudice as of the effective date.

Solicitation and Voting

• Classes 3 and 5 voted to accept by the requisite majorities in number and amount. Hildene's votes were solicited in good faith under the RSA.
• Solicitation ran in two stages: prepetition solicitation commenced May 7, 2026, with a June 4, 2026 voting deadline; postpetition notice followed under the solicitation procedures order, with an Aug. 17, 2026 voting deadline.
• Classes 1, 2, and 4 were unimpaired and presumed to accept; Classes 6 and 7 were impaired and deemed to reject.
• The court declined to grant time beyond Aug. 17, 2026 to modify votes, notwithstanding section 1127(d).

Key Dates

• April 3, 2026: RSA signed between the debtor and Hildene.
• May 7, 2026: prepetition solicitation commenced; prepetition voting deadline June 4, 2026.
• June 15, 2026: petition date; plan filed the same day.
• July 20, 2026: senior notes indenture trustee files claim 17. July 30, 2026: junior subordinated indenture trustee files claims 34 and 35.
• Aug. 6, 2026: plan supplement filed. Aug. 17, 2026: postpetition voting deadline. Aug. 21, 2026: first modified plan dated. Aug. 25, 2026: confirmation hearing held and confirmation order signed; entered Aug. 26, 2026.
• Regulatory approval deadline: 90 days after the petition date where Hildene is the successful bidder, subject to two 30-day extensions.
• Post-emergence: effective date notice due within two business days; administrative claim requests due 30 days after the effective date; rejection damage claims due 30 days after the effective date of rejection; final fee applications due 45 days after the effective date; claim objections due 90 days after the effective date absent a court-ordered extension.