Meritage Hospitality Group - Chapter 11 Case Summary

Meritage Hospitality Group filed for Chapter 11 bankruptcy following record beef prices, an 8.3% same-store sales decline and a $23.1 million first-half net loss, expired lender and franchisor forbearances, and franchisor Quality Is Our Recipe's Sept. 16 notice purporting to terminate its franchise rights, pursuing continued portfolio optimization, strategic market sales, and a balance sheet recapitalization backed by proposed access to cash collateral from City National Bank, Old National Bank, and Union Bank.

Business Description

Meritage Hospitality Group Inc., a Michigan corporation headquartered in Grand Rapids, together with its debtor affiliates (collectively, the "Company"), operates 320 quick-service and casual dining restaurants across 15 states. The Company is one of the largest Wendy's franchisees in the United States, having acquired 295 Wendy's restaurants through 28 separate transactions since 2009.

Of the 320 locations, 314 are Wendy's quick-service restaurants operated under franchise agreements (the "Franchise Agreements") with Quality Is Our Recipe, LLC ("QIOR"), a subsidiary of The Wendy's Company (collectively with QIOR, the "Franchisor"); one is a Bojangles quick-service restaurant operated under a franchise agreement with Bojangles Opco, LLC; and five are independent-concept restaurants in Michigan operating under the Morning Belle (breakfast/brunch) and Blue Porch Bar & Grill (casual dining) banners. The Company employs approximately 8,850 people as of the Petition Date.

The footprint spans Arkansas (8), Connecticut (29), Florida (44), Georgia (44), Indiana (13), Massachusetts (13), Michigan (54), Mississippi (7), Missouri (4), North Carolina (16), Ohio (12), Oklahoma (23), Tennessee (24), Texas (11), and Virginia (12). Those state counts total 314, against the 320 restaurants the Declaration reports.

Corporate History

Meritage Hospitality Group Inc. was incorporated in Michigan in August 1986 and was originally founded as a hotel operating platform. It sold its hotel portfolio and entered the quick-service restaurant industry in 1998 by purchasing 28 Wendy's restaurants in Michigan. In 2007, the Company completed a going-private transaction and began trading on the OTCQX.

The Acquisition Program

Beginning in 2009, the Company completed the first of 28 acquisitions by purchasing 20 Wendy's restaurants in Florida and set a goal of reaching 150 restaurants by 2015. It exceeded that goal by year-end 2015, when it operated 166 restaurants. From 2011 through 2018, the Company acquired 234 additional restaurants, bringing its total to 317. Across the portfolio, the Company has deployed nearly $400 million of capital, including the development of approximately 100 new restaurants and the refreshing of older, underperforming locations.

Brand Portfolio Changes

The Company previously operated seven Taco John's quick-service restaurants, all of which were permanently closed in September 2024, and it exited the Taco John's franchise system effective November 2024. Effective July 2025, the Company entered into a Development Agreement with Bojangles Opco, LLC to build 15 new Bojangles restaurants by April 2031; the first opened in Michigan in February 2026.

Equity

The Company has been publicly traded for over 30 years. Its common stock trades on the OTC Markets under the symbol "MHGU," and its Series B Preferred Stock is quoted on the OTC Markets under the symbol "MHGUP."

Operations Overview

The principal source of revenue for the Company's business is payments from its retail customers, and the business depends on the efficient collection, transfer, and disbursement of funds. The Company uses its cash management system to collect and disburse cash generated by the business, pay financial obligations, centrally control and monitor corporate funds and available cash, comply with the requirements of its financing agreements, obtain accurate account balances and other financial data, forecast financial performance, and ensure cash availability and liquidity. The Company maintains daily oversight over the system and implements controls for entering, processing, and releasing funds. Intercompany transactions are an integral part of the cash management system and essential to continued operations.

Franchise Dependency

The Declaration describes continued access to the Wendy's franchise system as indispensable to any viable restructuring.

Recurring Operating Costs

Prepetition Obligations

As of summer 2026, the Company reported total assets of approximately $725.9 million, total liabilities of approximately $651.2 million, and total equity of approximately $74.6 million. Substantially all of the Company's property and equipment is pledged as collateral to secure the obligations under the credit facilities.

Funded Debt

Franchisor Claim

QIOR asserts the Company owes $27.4 million in past-due royalties and fees and $119.5 million in Continuous Operations Fees, for a total claimed amount of approximately $146.9 million.

Leases and Other Obligations

Operating lease obligations total approximately $390.8 million, with a weighted average remaining lease term of approximately 13 years. At the Petition Date, approximately $980,000 was outstanding on account of prepetition utility services, with no utility company holding a deposit, and approximately $1.4 million of prepetition obligations related to customer programs, including accrued gift cards, loyalty awards, and other similar programs owing to customers; the majority of the customer-program obligations do not entail the expenditure of cash. The Company does not believe there are accrued but unpaid insurance amounts, but seeks authority to continue paying the insurance policies out of an abundance of caution.

Events Leading to Bankruptcy

Margin Compression and the Wendy's Brand

Beginning in 2024 and accelerating through fiscal 2025, a convergence of external factors severely compressed the Company's operating margins. Wendy's U.S. same-store sales fell 11.3% in the fourth quarter of fiscal 2025. The Declaration attributes the compression principally to reduced frequency and effectiveness of Wendy's brand marketing under prior franchisor management; record U.S. beef prices, driven by historically low herd levels, a shutdown of Mexican border beef imports due to disease, and tariffs on importation of beef from South America, which produced an 18.9% increase in the Company's average cost of beef for the three months ended June 28, 2026 against the prior-year period; unusual winter weather associated with a La Niña cycle in the southern United States, which created highly disruptive impacts on sales; and deep discounting and national promotional strategies at the brand level.

Declining Revenue and Profitability

Total revenue for fiscal year 2025 was $617.7 million, a decrease of 7.6% from $668.8 million in fiscal year 2024. Revenue for the six months ended June 28, 2026 was $273.6 million, down 14.0% from $318.1 million for the corresponding period in 2025. Same-store sales decreased 7.2% in fiscal 2025 and 8.3% for the six months ended June 28, 2026 against the prior-year periods. The Company reported a net loss of $31.5 million for fiscal 2025, compared to net income of $8.0 million in fiscal 2024, and a further net loss of $23.1 million for the six months ended June 28, 2026.

Defaults and Forbearance

In the fourth quarter of fiscal 2025, the Company received notices of events of default from City National Bank, as administrative agent for the lenders under the Primary Credit Facility (the "Lenders"), and from QIOR. Defaults under the Primary Credit Facility included the failure to maintain certain financial covenants and the failure to pay obligations as they became due, including payments to the Franchisor. Defaults under the Franchise Agreements included the failure to remit required payments when due.

The Company entered various waivers and forbearance agreements with its respective lenders other than Union Bank. It also entered into a Letter of Agreement with QIOR effective November 2025, followed by a First Amended Letter of Agreement effective January 2026 and a Second Amended Letter of Agreement effective April 2026, under which the Franchisor conditionally agreed not to cancel or terminate the Franchise Agreements through August 2026.

The Restructuring and Portfolio Optimization Program

In response to these pressures, management retained Fort Dearborn Partners, and Kevin Cleary, its managing partner and founder, was retained by the Company on December 31, 2025 and appointed Chief Restructuring Officer (the "CRO"). Under the CRO's direction, the Company undertook a comprehensive restructuring and portfolio optimization program:

Expiration of the Standstill and the Termination Notice

Both the Second Amended and Restated Letter of Agreement with QIOR and the Third Amendment to Forbearance Agreement with City National Bank expired on their stated terms on or about August 18, 2026, after which QIOR and the Lenders were no longer prevented from taking enforcement actions in respect of the outstanding events of default. The Company continued negotiating with QIOR and the Lenders to renew forbearance and standstill terms through October 2026, but those potential forbearances never materialized. On September 16, 2026, QIOR delivered a Notice of Termination of Franchise Rights and Termination of Lease Occupancy (the "Termination Notice"). The Company disputes the effectiveness of the Termination Notice as a matter of law and under the terms of the respective Franchise Agreements, and contends that the Franchise Agreements remain in effect and are property of the bankruptcy estates. The Company filed Chapter 11 in the Western District of Michigan on September 17, 2026.

Chapter 11 Filing

The Company intends to review all strategic options that preserve the core Wendy's franchise operations and maximize value for all stakeholders. The key elements of the restructuring strategy are continued portfolio optimization through the closure or sale of underperforming locations; resolution of the franchise termination dispute with QIOR; potential strategic market sales to generate liquidity and reduce the portfolio to a sustainable size; and recapitalization of the balance sheet. The Company believes it can achieve a successful restructuring while preserving jobs and restaurant operations across the 15-state footprint.

First-Day Relief

The Company seeks access to cash collateral to continue operations, supported by separate CRO declarations filed with each of the three cash collateral motions. The balance of the first-day package is operational: authority to continue the existing cash management system, maintain existing bank accounts, and continue intercompany transactions and funding consistent with historical practice, together with a waiver of the deposit and investment requirements of section 345(b) and the U.S. Trustee guidelines; authority to pay prepetition wages, salaries, other compensation, and reimbursable expenses and to honor employee benefits programs across the approximately 8,850-person workforce; authority to maintain the customer programs, which the motion ties to maintaining the customer base for store closing sales during the cases, and honor approximately $1.4 million of associated prepetition obligations; authority to pay prepetition taxes and fees; and authority to continue the insurance program, including renewing, amending, or purchasing policies and paying brokerage fees. A vast majority of the first-day motions are described as procedural and non-adversarial and as having the support of the Company's prepetition senior secured lenders.

Key Dates