Welcome to the 124th Pari Passu Newsletter, 

Our last restructuring deep dive will be hard to beat, but we will give it a shot today!

In light of the COVID-19 pandemic, we have seen a wave of retail bankruptcies accelerated by the decline of many brick-and-mortar retailers. Following lockdowns, supply chain disruptions, and consumer habits that relied heavily on physical stores, major chains like JCPenney, Neiman Marcus, and Pier 1 Imports have been forced to restructure and file for Chapter 11. 

The case of Tuesday Morning unpacks another dimension of retail bankruptcies and Chapter 22s, one driven by a complete reliance on physical store presence and complicated by third-party financiers. This case also explores the lease obligations, forbearance agreements, and a unique case of shareholder recovery. Tuesday Morning’s Chapter 22 is a long story, but don’t worry—we’ll break it down clearly and simply. Let’s dive in.

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Tuesday Morning Overview 

Tuesday Morning was an American off-price retailer that specialized in home goods, décor, and gifts with over 700 locations across the United States [1]. The company operated in 40 states with distribution centers in Phoenix and Dallas.

Tuesday Morning sourced excess inventory, closeouts, and overstocked merchandise from manufacturers and sold them at a fraction of their original retail prices; around 80% of its inventory was domestically sourced [2]. Unlike traditional big-box discounters, Tuesday Morning focused on a boutique-style shopping experience, with frequently changing inventory that encouraged repeat visits. The company primarily served middle- to upper-middle-class customers looking for high-quality home furnishings at bargain prices, competing with retailers like HomeGoods, TJ Maxx, and Big Lots. 

To understand the historic performance, it is worth highlighting two different time periods of the company: FY 2015 and the period from 2016 to 2019. We will first provide a snapshot of the company’s FY 2015 financials, followed by its pre-pandemic profile: 

In FY 2015, Tuesday Morning was generating revenue of around $906mm, gross profits of around $327mm (gross margins of 36%), operating income of $12.4mm, and net income of $10mm (net margins of 1.21%). Prior to Tuesday Morning’s renovation efforts (which decreased cash flow and stock price dramatically), the company had a market cap of around $741mm in FY 2015 when it was generally healthy [31].

From FY 2016 – FY 2019, Tuesday Morning was generating revenue of around $1bn, gross profits of around $352mm (average gross margins of 35%), operating income of -$11mm, and net income of -$12.4mm (net margins of -1.19%) in FY 2019 [23] [27]. FY 2019 figures, rather than averaging multiple years, best represents the company’s pre-pandemic, pre-bankruptcy financials without distorting cash flow due to one-time developmental costs. Tuesday Morning’s net income fell consistently from 2016 to 2019, not due to weak sales but because of high COGS and SG&A. In parallel, the company pursued costly strategic initiatives, including relocations and store optimizations aimed at increasing revenue. These initiatives increased capex, which, while not affecting net income directly, significantly reduced cash flow. 

Corporate History

Founded in 1974 by Lloyd Ross, the company operated on a treasure-hunt business model, offering brand-name and designer products at discounted prices. Tuesday Morning transitioned from a garage sale format to formal retail stores in 1979. The company went public in 1984 with 57 locations and was later acquired by Madison Dearborn, a private equity firm specializing in middle-market companies, before returning to the public market in 1999 [2]. 

Tuesday Morning’s expanding business and discount appeal to customers strengthened its reputation in the retail industry, leading the company to gain greater access to manufacturers who approached them directly with their stock. The company had remodeled many of its old stores following its 1994 improvement of its distribution system; both of these factors led to steady growth into the mid-2000s. By 2004, Tuesday Morning had expanded to 641 stores in North America [24]. In 2015, Tuesday Morning implemented store optimization strategies and relocations of existing stores. By 2018, these efforts contributed to the company achieving a record $1bn in sales and expanding its footprint to over 700 physical locations [25]. 

Pre-Bankruptcy Financial Condition

Causes of Distress

However, despite this period of expansion and record sales, underlying vulnerabilities in Tuesday Morning’s business model left the company exposed to external shocks. The two main factors contributing to Tuesday Morning’s financial distress were a sharp decline in revenue due to COVID-related shutdowns and costly lease obligations. 

COVID 

A unique aspect of Tuesday Morning’s shopping experience came from its exclusive reliance on its brick-and-mortar stores. Consequently, COVID had a devastating impact on Tuesday Morning’s sales. The closing of all retail locations and key parts of their supply network halted nearly all new revenue starting March 2020 [2]. The niche nature of the company’s retail model didn’t help; unlike traditional retailers that could leverage strong branding or premium pricing, Tuesday Morning was dependent on maintaining low prices to drive customer demand, which made profitability challenging. 

By the end of March 2020, the company faced a severe liquidity crisis after being forced to close all of its leased stores while still owing approximately $10 million in monthly rent. 

As a reminder, Tuesday Morning’s fiscal year ends June 30 of each year, not December 30. In Q2 2020 (before COVID), Tuesday Morning had $4.9mm in cash [29]. With 100% of the company’s revenue coming from physical store sales, the closing of all locations during COVID had a devastating impact on the company; from Q2 2020 (December 2019) to Q3 2020 (March 2020), revenues dropped from $324mm to $166mm. Gross profits dropped by $54mm from $106mm in Q2 2020 to $52mm in Q3 2020 [29]. The closing of all physical stores wiped out all operating cash flow since there was no new revenue, and market cap dropped to $7.6mm in Q4 2020 [23].

In an effort to preserve liquidity, Tuesday Morning halted payments on pending vendor invoices and suspended new orders. In March 2020, the company drew down $55mm from its revolver, increasing its total RCF obligations to $91mm [26]. In March 2020, the company also had $47mm in cash [32], most of which likely came from revolver drawdown (recall the company only had $4.9mm in December 2019). The company also tried to secure emergency financing from government relief programs such as the Main Street Lending Program under the CARES Act, but did not meet borrowing requirements [28]. 

Recall that in FY 2019, Tuesday Morning reported a net loss of $12.4mm despite generating over $1bn in revenue. This net loss was driven by high COGS ($655mm) and SG&A expenses ($363mm). The costly COGS expense stemmed from the nature of the company’s bargain business model; the high COGS expense contributed to the company’s 3-year net loss streak from 2017-2019 [27]. 

Below, we will elaborate on the second driver of net loss, SG&A expenses, and how the company’s lease obligations contributed to its filing. 

Retail Leases

Like many retail bankruptcies, Tuesday Morning’s lease obligations were a major factor in its Chapter 11 filing, as high fixed rent expenses quickly became unsustainable when revenue plummeted. In FY 2019, annual rent expenses totaled $121.5mm (compared to $1bn in revenue). This constituted a large portion of the $363mm total SG&A expenses, and there were no sale-leasebacks prior to the company’s filing. 

Although Tuesday Morning managed to pay March rent in full, it lacked sufficient cash flow to continue payments. A logical question you may have is why Tuesday Morning couldn’t pay a few months more of rent if they drew $55mm of their revolver. While exact uses for the $55mm were not disclosed, the additional liquidity provided by the revolver likely went to vendor payments incurred before the bankruptcy filing (costs that still needed to be paid despite the sudden halt in revenue) rather than covering additional months’ rent. The decline in the company’s accounts payable from $91mm in FY 2019 to $5.5mm in FY 2020 further indicates that vendor payments were likely made during this period [23]. Typically, retailers use accounts payable as a source of liquidity since they can sell products now and pay suppliers later. However, it seems that in this case, Tuesday Morning’s slowing revenue caused this dynamic to flip; in order to catch up on costs and vendor payments, the company turned to using accounts payable as a use of cash rather than a source of liquidity.

Because Tuesday Morning could not cover its rent expenses, the company formally requested rent deferrals. Some landlords agreed to rent relief, but most rejected the request, issuing default notices or pursuing legal action. As financial pressure intensified, the company defaulted on most of its April and May rent payments. In May 2020 (the time of filing), Tuesday Morning had $14.6mm in outstanding letters of credit secured under its prepetition ABL credit agreement. LOCs are important when considering leases because they are often used as financial guarantees for landlords, especially when upfront cash payments are not provided by tenants. When Tuesday Morning defaulted on lease obligations, landlords likely drew on these LOCs, forcing the company or its lenders to replenish the amounts used. This further strained liquidity and contributed to the company’s eventual filing. 

First Chapter 11 Filing

Prepetition Capital Structure

Below is Tuesday Morning’s prepetition capital structure. As you may notice, Tuesday Morning did not hold an overbearing amount of debt Even though the company’s leverage ratio of 8.6x is quite high ($20mm Q2 2020, pre-distressed adjusted EBITDA/$155mm total debt), we cannot characterize this business as a high leverage business because the leverage ratio in this case is largely driven by lease liabilities rather than financing debt; the majority of the company’s debt outstanding ($107mm) is related to its hundreds of leases [23], [2]. This $107mm included obligations to vendors and landlords like unpaid rent prior to bankruptcy and rejection damages from approximately 200 terminated leases [2].

However, total liquidity was still relatively robust with $65mm of availability under its $180mm first lien revolving credit facility (RCF) and $46.7mm in cash and cash equivalents [23]. Tuesday Morning was not able to fully draw down on the revolver due to constraints in its borrowing base, which we will expand on later. 

Forbearance Agreement

Tuesday Morning pursued two main initiatives before filing for Chapter 11: a forbearance agreement and securing a DIP lender. 

First, Tuesday Morning bought more time to restructure and avoid immediate default by entering a forbearance agreement with existing first lien lenders on May 14, 2020. As a review, a forbearance agreement is a temporary arrangement between a borrower and lender(s) that delays enforcement actions such as defaults. The biggest benefit here is to give the company more time to negotiate debt terms, pursue new financing, or prepare for Chapter 11 in an orderly manner [6]. To better understand how this works, let’s take a look at a quick example:

Let’s say Company A owes $100mm to a bank but, due to a sudden decline in sales, misses an interest payment. Normally, this would trigger a default, allowing the bank to seize assets or accelerate debt repayment after a grace period (typically 30 days). Instead, Company A negotiates a forbearance agreement, pausing enforcement actions for 90 days, reducing interest payments, and requiring the company to explore refinancing options. Interest expenses are typically reduced in forbearance agreements to provide the borrower with temporary financial relief, improving the chances of repayment to the lender and avoiding an immediate default.

The benefits to Company A are clear: if it is able to secure new financing, it avoids bankruptcy. If not, it is able to enter Chapter 11 in a more organized way after having extended time to plan. The main benefits to the lender are increased chances of recovering the loan and higher recoveries; even if liquidation is not the immediate outcome, Company A might be forced to file for Chapter 11 earlier without forbearance, potentially reducing its restructuring options and lender recoveries. A liquidation would likely yield lower recovery values for the lender, so it is in the bank’s best interest to keep Company A operational to increase the chance of a successful restructuring. You can think of a forbearance agreement as the lesser evil for a lender, especially when a borrower still has a chance to recover. 

Tuesday Morning’s case is very similar to our example. A slight difference is that Tuesday Morning entered a forbearance agreement with its RCF lenders, not its landlords. At first glance, this might seem puzzling as most forbearance agreements are between borrowers and their landlords. Recall that Tuesday Morning requested rent deferrals, but most landlords refused, opting instead to issue default notices or pursue legal action​. While many distressed retailers successfully negotiated rent forbearance during COVID, Tuesday Morning’s financial position and pre-existing store closures made landlords less willing to accommodate, as they viewed the company as a high-risk tenant. The revolver was not immediately due, but Tuesday Morning’s defaults triggered lender-imposed restrictions. Specifically, their store closures violated a provision under the Existing First Lien Credit Agreement that prohibited the suspension of operations under normal business functions. Put simply, the loan agreement required Tuesday Morning to keep its stores open, and closing too many locations put them in violation of their contract with lenders. Instead of defaulting, Tuesday Morning negotiated a forbearance agreement with the existing first lien lenders, resulting in a reduction in the first lien credit facility from $180mm to $130mm and additional prepetition payments. In return, Tuesday Morning was required to pay down around $25mm of the first lien RCF debt from its cash reserves. This allowed the lenders to avoid an outright default while securing partial repayment and tightening control over the company's liquidity [2]. 

While it may seem logical for Tuesday Morning to have drawn the full revolver at the onset of COVID to bolster liquidity, several factors prevented this. First, the revolver was asset-based, meaning borrowing capacity was tied to inventory and accounts receivable, both of which were declining due to store closures. Second, lender-imposed restrictions tightened access to additional funds, and drawing the full revolver upfront could have triggered further constraints or accelerated cash depletion.

DIP Financing

DIP RCF

Tuesday Morning ultimately pursued two DIP financing transactions: 

First, Tuesday Morning secured a $110mm revolving DIP loan from JPMorgan Chase Bank, Wells Fargo Bank, and Bank of America. The DIP Revolving Credit Facility allowed these existing first lien lenders to roll up their debt into a new superpriority tranche. The DIP lenders imposed aggressive DIP financing terms with a Full Chain Liquidation Trigger, which is a provision in DIP financing that mandates the immediate liquidation of all stores if certain financial or operational conditions are not met. The conditions for the liquidation of all Tuesday Morning stores were if (1) total liquidity dipped below $20mm, (2) the company failed to confirm a plan within 70 days of filing, or (3) the company failed to secure Real Estate DIP.

Recall that Tuesday Morning’s total prepetition debt was around $155mm; DIP lenders saw an opportunity to guarantee downside protection and fully recover their capital through liquidation rather than a prolonged restructuring if Tuesday Morning failed to comply with the DIP terms. More specifically, there was an upfront fee for the DIP lenders of 0.75% of the commitment as well as backstop fees consisting of ten million warrants at a 150% strike price and expense reimbursement to the backstop parties. Backstop fees are payments made to backstop parties, who guarantee the full funding of a financing commitment by agreeing to purchase any unsubscribed portion in exchange for fees or reimbursements. 

Despite Tuesday Morning not owning its retail locations, its asset base still made liquidation a viable option for lenders. Below is their liquidation analysis, which projected asset liquidation proceeds of $164.8mm to $202.2mm, largely driven by inventory sales ($99.7mm–$116.3mm) and real estate holdings ($39.9mm–$53.2mm from the Dallas distribution center) [2]. 

DIP loans are usually structured to be highly protective, ensuring the DIP lenders have superpriority claims and are first in line for repayment. While stringent DIP terms are not uncommon, the full-chain liquidation trigger is particularly aggressive in this case, considering that Tuesday Morning did not own its retail locations. To illustrate when such a clause would be more easily justifiable, let’s look at a quick hypothetical:

Suppose Company X is a retailer that owns a significant portion of its store locations. In this case, liquidation would yield significant real estate sale proceeds, which would result in a higher liquidation valuation due to the intrinsic value of the real estate. Here, lenders would lean toward liquidation because they could directly seize and sell high-value real estate assets, ensuring stronger recoveries.

Real-Estate Backed DIP 

Second, Tuesday Morning also pursued a separate real-estate-backed DIP secured by the company’s owned property. To clarify, this is not the same DIP as the second option in the initial proposal; this DIP was pursued alongside the $110mm DIP RCF. Franchise Group, Inc. was the DIP lender, and this financing was ultimately not drawn upon [2]. 

Store Closures and Lease Obligations

A significant benefit of the Chapter 11 process is the ability for a debtor to reject unprofitable or burdensome leases under Section 365 of the Bankruptcy Code. When a debtor rejects a lease, they avoid continued rent payments which would otherwise continue to drain cash flow. Lease rejections are particularly helpful for retailers like Tuesday Morning who often lease a large number of store locations, making lease obligations one of their biggest fixed costs; rejecting leases allows companies to slim down their capital structure significantly. 

Tuesday Morning rejected approximately two hundred leases, closing two hundred stores in two waves. While the exact amount the company was able to save through the rejection of these leases is not available, we can do a quick calculation to get a ballpark figure. Tuesday Morning had monthly lease obligations of around $10mm. Before bankruptcy, they operated around 700 stores [2]. In reality, each location’s rent differs but we can make the simplifying assumption that Tuesday Morning paid roughly $14,300 ($10mm/700 leases) per month in rent expenses. When they rejected the 200 leases, they eliminated $2.86mm ($14,300 monthly rent expense*200 rejected leases) in monthly costs. This means their annualized savings amounted to around $34.3mm ($2.86mm*12 months), which compares to pre-filing 5-year average of $968.4mn in revenue and -$5.6mm in net income [27].

Tuesday Morning also entered a sale-leaseback transaction with Rialto Real Estate Fund IV – Property LP for $70.25mm. Sale-leasebacks were discussed in detail in our 75th newsletter, but the basic concept is that a company can get immediate upfront cash from selling the property while continuing to use the property for operations by leasing it back from the buyer. As part of Tuesday Morning’s agreement, the company leased back its headquarters facility for ten years and its warehouse facilities for an initial term of two and a half years [2]. This transaction provided Tuesday Morning with extra liquidity while allowing it to maintain operations at its headquarters and warehouse locations. As a result of the sale-leaseback, Tuesday Morning incurred annual operating lease expenses of $5mm ($4.2mm from distribution center leases and $0.8mm from corporate office leases) [2] 

100% Recovery Plan

The most unique aspect of this case is the 100% recovery plan for the Unsecured Creditor Committee (UCC) and reinstatement of new common stock for equityholders; all creditor groups received 100% recovery.

The UCC represents unsecured creditors like vendors, landlords, and bondholders. Typically in a Chapter 11 bankruptcy, the UCC gets little (if any) recovery in the waterfall since they get paid after all of the secured creditors in absolute priority. They may receive small payouts, new debt instruments like bonds with extended maturities, or reorg equity. The UCC in Tuesday Morning’s bankruptcy (inclusive of vendors, landlords, and bondholders) received full recovery in the form of cash payments from the General Unsecured Cash Fund as well as post-petition interest.

Similarly, equityholders are at the very bottom of the cap stack and usually receive nothing in bankruptcy. However, Tuesday Morning’s unique scenario of being a solvent debtor case (suggesting Tuesday Morning had more assets than liabilities) enabled the judge to approve an equity committee, which only happens if there is a possibility for equityholders to recover value. All equityholders would be reinstated with reorg equity [2]. 

A logical question you may have about the 100% recovery plan is, why file at all if all stakeholders would get full recovery? What was a perfectly solvent debtor doing in Chapter 11? To answer this question, recall that insolvency is not the only reason companies file for bankruptcy. Solvent debtors can also file for strategic purposes. We knew from the beginning that Tuesday Morning did not have an overbearing amount of debt. Thus, we can infer that this bankruptcy was not about eliminating debt but rather to gain legal protections under Chapter 11. For the company, Chapter 11 was likely pursued as an avenue to achieve three legal benefits: the ability to reject and negotiate leases, DIP financing, and automatic stay. 

First, the ability to reject and negotiate leases was likely the biggest strategic reason behind Tuesday Morning’s filing. The company’s $10mm monthly rent expenses were a large source of financial distress, so being able to reject two hundred of those leases allowed Tuesday Morning to better align its store count with realistic post-pandemic demand and reduce liabilities. The negotiation of better terms for leases the company wanted to retain also allowed Tuesday Morning to keep certain stores that would have otherwise been shut down. More generally, the ability to reject leases in Chapter 11 gives debtors more negotiating power against their landlords because they can threaten lease rejection if the landlords do not accept the new terms. 

Second, Tuesday Morning secured $110mm in DIP financing, along with an additional $25mm that ultimately went unused. In their case, DIP financing was likely needed to continue operations following the cessation of nearly all new revenues from their store closures as the complete lack of omnichannel capabilities meant that there would be no new cash flows. 

Finally, the protection provided by the automatic stay meant that all lawsuits and enforcement efforts by creditors against Tuesday Morning would be halted. As discussed earlier, the company had defaulted on most of its April and May rent payments leading up to the filing. Automatic stay protections were critical in pausing all landlord litigation and potential eviction proceedings as a result of the defaults. Effectively, this allowed them to achieve the rent relief they were seeking in the first place when requesting deferral of rent payments. 

Second Chapter 11 Filing

Tuesday Morning emerged from its first Chapter 11 filing in December 2020 with a new $110mm exit revolver, $25mm of additional liquidity in the form of subordinated notes, and a $70.25mm sale-leaseback transaction involving their distribution center and corporate offices [30]. While Tuesday Morning successfully emerged from its first Chapter 11 filing in December 2020 with a 100% recovery plan and a streamlined store footprint, its challenges were far from over. Changing consumer preferences and global supply chain issues persisted after COVID, and Tuesday Morning was not able to adjust to post-pandemic norms [7]. In this next section, we will explore the factors leading to Tuesday Morning’s second bankruptcy, the role of new investors like Invictus, knotty litigation between parties, and ultimate liquidation of the company. For clarity, we will refer to this second bankruptcy as “Chapter 22” to distinguish it from the Chapter 11 filed in 2020. 

As a recap, Tuesday Morning emerged from its first Chapter 11 filing in December 2020 where it raised $40mm through a rights offering and obtained a $110mm DIP RCF from JPMorgan Chase, Wells Fargo, and Bank of America. Following its emergence from bankruptcy, Tuesday Morning struggled with declining foot traffic, supply chain disruptions, and rising costs, which weakened its liquidity position over time. By early 2023, the company had exhausted efforts to secure additional financing and defaulted on its debt agreements. Facing lender-imposed liquidity constraints, it was forced to file for Chapter 11 again [30].  But prior to filing in February 2023, Tuesday Morning also tried to pursue out-of-court alternatives, including refinancing, recapitalization, and a substantial sale of assets [9].

At the time of filing, Tuesday Morning had 487 open stores [5]. Their plan was to exit Chapter 11 with 200 stores and a new supply chain strategy where they would outsource warehousing and distribution under a model known as a 3PL Model (Third-Party Logistics Model) [7], [15].

Prepetition Capital Structure 

Retail Ecommerce Ventures Steps In

There are a few new players who become relevant in the Chapter 22. First is Retail Ecommerce Ventures (REV), which held $26mm in prepetition debt in the FILO C and Junior Convertible Notes. They tried to improve Tuesday Morning’s liquidity position by injecting an additional $35mm of new capital with hopes to prevent another filing in the latter half of 2022 [7]. They clashed with existing senior management (CEO, COO, CFO), who had a negative outlook on Tuesday Morning’s prospects, and forced them to resign [4]. This initial tussle with senior management was only the beginning of a messy, complicated Chapter 11 process.

Initial Push for Liquidation

In January 2023, Tuesday Morning voluntarily delisted from NASDAQ. Around the same time that REV was desperately trying to recoup Tuesday Morning’s financial situation, first lien ABL lenders Wells Fargo Bank (WFC) and Gordon Brothers Retail Partners LLC started heavily advocating for a company-wide liquidation. 

The ABL lenders proposed a $40mm DIP agreement, which required Tuesday Morning to guarantee a full liquidation within 60 days as a condition for receiving the financing. Wells Fargo, in particular, tried to coerce the company into an agreement by cutting off their liquidity from Wells Fargo accounts right before a critical payroll date. From their perspective, liquidation would offer the most downside protection because they were so high in the cap stack. Keeping Tuesday Morning running as a going concern was too risky, whereas liquidation would ensure immediate repayment. 

Invictus’s Role and DIP Financing Battle

Invictus Global Management Proposes an Enticing Offer 

The second new player in the Chapter 22 is Invictus Global Management, a special situations investment firm. Just as Tuesday Morning thought they were out of options, Invictus stepped in to provide $51.5mm in DIP financing along with a stalking horse bid for the company’s inventory [10]. For context, Invictus held around $6mm of general unsecured claims in the form of trade claims in Tuesday Morning’s first bankruptcy, all of which was fully recovered under the company’s 100% recovery plan [2] [18], [2]. Despite the failed Chapter 11 in 2020 and depressed earnings since, Invictus was still confident that Tuesday Morning had substantial reorg value and provided additional funding for legal fees and payroll costs, amounting to an additional $2.4mm+ separate from the DIP [4]. Unlike the ABL lenders, who wanted to cut losses quickly, Invictus had an incentive to keep the company afloat to extract higher recoveries.

Let’s take a closer look at the significance of the promised stalking horse bid from Invictus. This bid was designed to establish Tuesday Morning as a going concern, meaning the company would continue operating rather than being forced into liquidation. A going concern valuation typically results in higher recoveries for stakeholders compared to a liquidation scenario (which Wells Fargo and Gordon Brothers were proposing), which often yields significantly lower proceeds [19]. The importance of Invictus’ stalking horse bid lay in the signal it sent to creditors and the market, suggesting that Tuesday Morning had a viable future. This will be an important sentiment that we will revisit soon. 

Tuesday Morning promptly accepted Invictus’s offer and entered Chapter 22, marking the beginning of a chaotic saga of legal battles between Tuesday Morning, Invictus, and other lenders. 

Wells Fargo and Gordon Brothers opposed the Invictus DIP from the start. They objected to the financing structure, arguing that Invictus was attempting to roll up its junior bridge financing and charge excessive DIP fees of around $4mm [4]. The ABL lenders were likely frustrated by this decision for two main reasons: increased financial risk and concerns about Invictus’s ability to follow through on their commitment. 

First, the Invictus DIP loan would be secured using the same assets as the ABL lenders’ loan [20]. Accepting Invictus’s DIP financing would introduce new liens on the same collateral, diluting the ABL lenders’ priority. The ABL lenders also raised concerns that the Invictus DIP did not provide sufficient adequate protection to safeguard their interests [22]. Adequate protection is a bankruptcy principle ensuring that secured creditors' collateral value isn't diminished by new financing arrangements. The introduction of Invictus's DIP, secured by the same assets, threatened to undermine the ABL lenders' secured positions. 

Second, the ABL lenders were highly skeptical of Invictus’s ability to fulfill its commitments. These concerns likely stemmed from Invictus’s prior misconduct in Tuesday Morning’s first Chapter 11, where it was sanctioned for creating a fake trade claimant website to manipulate creditor claims. As mentioned earlier, trade claims typically recover very little in bankruptcy. By influencing creditors to vote against Tuesday Morning’s initial Chapter 11 plan, Invictus aimed to derail the proposed restructuring in hopes of improving its own recoveries [11]. This history made lenders wary that Invictus might not act in good faith or could prioritize its own interests over the long-term viability of Tuesday Morning.

It turns out the ABL lenders’ concerns were justified. Shortly after entering Chapter 22, Invictus pulled out of their initial agreement to provide a stalking horse bid. They cited poor due diligence results and left Tuesday Morning in a worse position than before.

Tuesday Morning Returns to ABL Lenders for DIP Financing

Tuesday Morning’s acceptance of Invictus’s DIP proposal was largely contingent on its stalking horse bid. The DIP financing from Invictus was more than just a loan; it was tied to the broader strategy of keeping Tuesday Morning operational. If Invictus was willing to put up a stalking horse bid, it signaled confidence in the company’s reorganization potential, making the DIP financing seem like a more reliable source of funding. However, once Invictus backed out of the stalking horse bid, its commitment to the DIP became questionable.

With no other financing options available, Tuesday Morning was forced to return to the ABL lenders it had initially tried to avoid. The company secured a $12.5mm incremental DIP loan from the ABL lenders to fund a partial liquidation, the financing rights of which were then purchased by Invictus via assignment of the loan. Assignment of the loan refers to the transfer of a lender’s rights and obligations under a loan agreement to a new lender, who then assumes responsibility for the debt. In this case, Invictus purchased the rights and obligations of the original DIP loan from the ABL lenders, effectively becoming the new lender responsible for funding the loan [12].

Instead of providing those funds, however, Invictus attempted to impose new conditions, including extra fees, immediate payback of the DIP if they lost the 363 auction, and blocking the UCC’s legal counsel. Tuesday Morning eventually filed a motion to force Invictus to comply with the terms of the DIP, and Invictus begrudgingly sent $3.5mm, which was far short of the $10mm required under a separate existing credit agreement. The minimal funding was only enough to keep Tuesday Morning barely operational [16].

The complications caused by Invictus’s contradictory actions highlight a more general risk with relying on third-party financiers in distressed situations: while such financiers often claim to support a turnaround, their primary objective is typically to maximize their own position, sometimes at the expense of the company’s survival. This is evidenced by Invictus prolonging and complicating the Chapter 22 process through first retracting its stalking horse bid, then delaying funding, and finally trying to introduce aggressive new conditions to the DIP. In the end, their efforts to assert control ultimately led both themselves and Tuesday Morning into a futile process with no meaningful outcome. 

363 Asset Sale and Opposition from the UCC

After Tuesday Morning finally settled its DIP financing situation, the company put up its assets for sale under a 363 auction with two bidders: Hilco Merchant Resources, a liquidation firm, and Invictus. Hilco entered the auction with a straightforward cash bid, while Invictus attempted to compete using a combination of cash and a $19 million credit bid. Tuesday Morning had doubts about Invictus’s ability to follow through, given their history of backing out of financial commitments, so they accepted Hilco’s bid (even though Invictus offered a slightly higher bid) in order to prioritize reliability over bid value [12].

Now enter the UCC, which shared the frustration of Tuesday Morning and the ABL lenders regarding Invictus' actions. The general significance of the UCC is to ensure fair treatment of all unsecured creditors, who often get wiped out if the company liquidates. Their role is to investigate the debtor’s financial affairs to uncover potential fraud or mismanagement, negotiate with secured creditors and DIP lenders, and challenge unfair restructuring plans that jeopardize their returns. 

A UCC can be formed in two ways. It can be appointed by a US Trustee, who will solicit interest from the largest unsecured creditors after a company files and selects a group to represent all unsecured creditors. In this case, the UCC receives legal standing in court and gets its legal fees paid by the bankruptcy estate. Alternatively, unsecured creditors can form an ad hoc committee but must cover their own legal fees. 

The UCC in Tuesday Morning’s case was an official UCC [14]. The UCC filed multiple legal motions and challenged DIP financing arrangements, both of which require legal standing in court. They filed a number of adversary complaints against Invictus, but we’ll hone in on three in particular: Invictus as a bad actor, sanctions and surcharges, and Invictus’s prepetition loan being unsecured [12]. 

First, let’s take a look at Invictus acting in bad faith. The UCC accused Invictus of being a bad actor following their multiple attempts to increase their own recoveries or returns through aggressive litigation. Recall how Invictus was sanctioned for their fake trade claimant website in 2020. This website misrepresented information and was misleading to other creditors, affecting how trade claims were handled in the case. The UCC brought this up again, arguing that Invictus had a pattern of abusing the system, and began pushing for additional sanctions [21]. 

Second, the UCC wanted to impose sanctions and surcharges against Invictus’s collateral. Sanctions are punitive, financial punishments for wrongdoings in court. Surcharges are compensatory, shifting administrative costs onto a secured creditor whose actions increased bankruptcy expenses. The UCC argued that Invictus’s actions forced additional administrative costs onto the bankruptcy estate, and they should pay for those costs instead of unsecured creditors. In doing so, the UCC was actively trying to weaken Invictus’s financial position by seeking sanctions for bad faith actions and surcharges to offset costs [21].

Finally, the UCC sought a declaration that Invictus’s prepetition loan was unsecured. The UCC challenged the validity and perfection of Invictus’s lien, likely arguing that deficiencies in documentation or filing rendered it unperfected. Lien perfection is the legal process that ensures a creditor’s security interest is enforceable.  Given Invictus’s history of aggressive tactics in Tuesday Morning’s first bankruptcy, the UCC may have also used this as leverage to question whether the claim was asserted in good faith. Their objective was to maximize recoveries for unsecured creditors, which could be achieved by reducing the claims of secured creditors like Invictus. If the court determined that Invictus’s prepetition loan was secured, Invictus would hold a higher repayment priority than unsecured creditors. By reclassifying the loan as unsecured, the UCC aimed to make it pari with their own claims, effectively increasing their potential recoveries while reducing the share available to Invictus [21]. 

All of this chaos culminated in Hilco getting a full liquidation in mid-2023, when Judge Edward Morris officially turned Tuesday Morning’s Chapter 22 into Chapter 7. Unsecured creditors would be left with no recovery value [12]. After being acquired by Hilco for $34.5mm, Tuesday Morning closed all of its stores [17]. You can now purchase items on their website.

Implications

In the broader scope of retail bankruptcies, Tuesday Morning’s Chapter 22 represents the most extreme embodiment of the risks of brick-and-mortar stores. Its complete reliance on physical stores catalyzed the company’s initial filing in 2020, and an inability to adapt to new preferences led Tuesday Morning to fall short on liquidity, leading to its second filing just two years later. Let’s recap the three main takeaways from this case: (1) burden of lease expenses for retailers, (2) unique case of equityholder recovery, and (3) challenges of inter-creditor legal disputes. 

Most clearly, Tuesday Morning’s downfall underscores the financial burden of retail lease obligations and the risks of over-reliance on physical store footprints. With $10 million in monthly rent expenses, the company’s liquidity quickly deteriorated once store closures eliminated its revenue stream. While rejecting 200 leases in Chapter 11 helped reduce costs, it was ultimately insufficient to prevent a second filing. This case underscores the vulnerability of retailers without omnichannel capabilities, emphasizing the growing need for adaptability in an evolving retail landscape.

Beyond operational challenges, Tuesday Morning’s 100% recovery plan in its first bankruptcy presents a unique contrast to its subsequent collapse. Unsecured creditors and equity holders rarely see full recoveries in retail Chapter 11 cases, making Tuesday Morning’s first restructuring seem unusually strong. However, its rapid descent into Chapter 22 revealed the deeper fragility of its financial position. In acknowledging the unique nature of equityholder recovery, we can simultaneously highlight a broader reality: high recoveries alone do not ensure long-term viability when fundamental business weaknesses remain unaddressed.

Compounding these challenges, creditor conflicts played a pivotal role in shaping Tuesday Morning’s fate. The ABL lenders prioritized liquidation to recover value quickly, while Invictus Global Management pursued a restructuring strategy that ultimately fell apart when it withdrew its stalking horse bid. The resulting chaos, including DIP financing disputes, UCC adversary complaints, and last-minute funding reversals, underscored how financial players increasingly use aggressive tactics to maximize recoveries at the expense of operational stability. 

Finally, we can quickly summarize the operational failures that caused Tuesday Morning to liquidate while competitors remain in business. Tuesday Morning’s failure stemmed from an inability to modernize its operations in a rapidly evolving retail landscape. Unlike TJ Maxx and Marshalls (comparable treasure-hunt, discount stores), which blended e-commerce with brick-and-mortar sales, Tuesday Morning remained fully reliant on physical stores. Furthermore, as mass merchants like Amazon, Target, and Walmart expanded into home goods, the company also struggled to keep up with these merchants’ greater convenience and broader product selection. It was no longer enough for Tuesday Morning to only compete on price, and the pandemic accelerated and widened these discrepancies [34]. 

Sources: [1], [2], [3], [4], [5], [6], [7], [8], [9], [10], [11], [12], [13], [14], [15], [16], [17], [18], [19], [20], [21], [22], [23], [24], [25], [26], [27], [28], [29], [30], [31], [32], [33], [34]

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