On October 23, 2026, K. Heeps HoldCo, LLC and its operating subsidiary, K. Heeps, LLC, obtained final approval to use Salem Five Cents Savings Bank’s cash collateral for working capital and bankruptcy administration under an approved budget. The order leaves $1.5 million segregated in a pledged account and grants Salem protections against a decline in its collateral value. Final cash-collateral order, pp. 14–18
The operating dispute remains unresolved. K. Heeps wants a determination that its co-packing agreements with Medtrition expired before bankruptcy or, alternatively, permission to reject them. Medtrition opposes that relief. The October 23 amended hearing agenda lists the contract motion and related litigation for status conferences on October 27. Amended hearing agenda, pp. 1, 12
Cash access remains subject to the $1.5 million pledge
The relief authorizes K. Heeps to spend encumbered cash for operations, general corporate purposes, and case administration, subject to the order’s conditions and approved budget. Final cash-collateral order, pp. 14–15
The order confirms that $1.5 million was deposited into the pledged account and restricts use of that money without Salem’s consent, subject to its release provisions. Dias’s declaration describes the account as additional security for obligations under the business term loan and real-estate loans. Final cash-collateral order, pp. 15–18; First-day declaration, ¶ 55
Salem receives replacement liens and a superpriority administrative claim to the extent its collateral interest suffers a diminution in value, subject to the carve-out and specified priorities. The replacement liens exclude bankruptcy avoidance actions and their proceeds. Adequate protection also includes nondefault interest and qualifying lender expenses. Final cash-collateral order, pp. 15–18
The authority has termination conditions. The order defines maturity by the earliest of 180 days after the petition date, the specified confirmed-plan effective date or substantial consummation, consummation of a sale of substantially all assets, or an event of default. These are termination triggers, rather than evidence that a plan or sale has occurred. Final cash-collateral order, ¶ 16(a), pp. 31–32
The customer dispute preceded the credit squeeze
According to President Christopher Dias’s declaration, K. Heeps manufactures nutrient-dense puréed foods for people with swallowing disorders and serves hospitals and long-term care facilities. It operates a 50,000-square-foot plant in Allentown, Pennsylvania. AEP K. Heeps Investors acquired a controlling interest in 2021 and held 68.85% of HoldCo at filing. First-day declaration, ¶¶ 8–9, 15
Dias identified Medtrition as the company’s largest customer and primary revenue source. He attributed the debtors’ financial strain to an injunction that required continued production for Medtrition while restricting the competing Eatsential product line. According to the declaration, Salem subsequently declined to extend the business term loan beyond its July 14, 2026 maturity and issued a default notice accelerating indebtedness and ending further advances. That is the debtors’ account of the connection between the litigation and their liquidity problems. First-day declaration, ¶¶ 32–33, 43–49
A September 22 forbearance agreement changed that position before bankruptcy. Dias reported that Salem withdrew acceleration of the real-estate loans, released HoldCo from business term-loan liability, terminated the revolving credit line, and agreed to forbear on collection of the business term loan for six months pending reorganization efforts. The agreement also treated the real-estate guarantees as contingent obligations not presently payable. First-day declaration, ¶¶ 54–55
The distinctions matter when assessing debt load. Dias reported approximately $2.2 million of secured debt excluding contingent obligations and related-party obligations. His capital-structure table separately listed approximately $6.65 million of contingent guaranteed real-estate debt and a $1.1 million unsecured subordinated seller note. The debtors elected Subchapter V to restructure secured debt and address the disputed Medtrition obligations. First-day declaration, ¶¶ 16, 56
Expiration and rejection present different disputed questions
The debtors’ October 1 motion asks the court first to determine that the co-packing agreements expired before the petition date. Only if an agreement remained executory do they seek rejection, effective retroactively to September 23. Their position is that the 2016 agreement required written renewals, no renewal extended it beyond July 2021, and subsequent business proceeded through individual purchase orders. These are requested determinations, rather than findings established by the cash-collateral order. Contract motion, pp. 1–4
Medtrition argues that the parties’ course of dealing preserved the agreement and that the bankruptcy court should respect the Pennsylvania proceedings. It also contends that rejection would constitute a breach rather than terminate the agreement, leaving its non-compete rights and the state-court injunction intact. Medtrition asks that any rejection be delayed and conditioned on a manufacturing transition, which it says likely could not be completed until the end of the first quarter of 2027, depending on unforeseen manufacturing issues. That timing is Medtrition’s position, not a court-approved deadline. Medtrition objection, ¶¶ 5, 34, 39
In their October 22 reply, the debtors maintained that the agreement expired and denied allegations that Eatsential misused Medtrition’s trade secrets. They also denied Medtrition’s allegations of bad faith in the bankruptcy filing. Debtors’ reply, pp. 1–4
The October 23 amended agenda schedules status conferences on the contract motion and related adversary proceeding for October 27, 2026, at 10:30 a.m. Eastern. The agenda does not announce a merits ruling. The parties still contest whether K. Heeps can end the co-packing obligations and pursue its competing product line. Amended hearing agenda, pp. 1, 12; Contract motion, pp. 2–3; Medtrition objection, ¶ 5
Sources
Final cash-collateral order, pp. 14–18 /documents/04d681fc-6c9d-4e06-bd92-757652138979/
Amended hearing agenda, pp. 1, 12 /documents/2ad291ca-5351-4b68-8a2e-8a9c3e3d3ad1/
Debtors’ reply, pp. 1–4 /documents/23391bb7-ec4f-41a0-a1c5-adce372a57a1/
This article was researched and written with AI assistance, using court filings, public records, and news sources. AI-generated content can contain errors. Verify all information against primary sources before relying on it. This is not legal or financial advice. See the disclaimer.