Lunya: DTC Sleepwear Brand's Subchapter V Success

Lunya, a direct-to-consumer luxury sleepwear brand, filed for chapter 11 bankruptcy protection under Subchapter V on June 16, 2023, in the U.S. Bankruptcy Court for the District of Delaware. The Los Angeles-based company entered bankruptcy after revenue dropped 30% from its 2020-2021 peak, citing Apple's iOS 14 privacy changes as a driver of declining Facebook-dependent marketing performance; monthly revenues began year-over-year declines starting June 2021. Through the Subchapter V process designed for small businesses, Lunya confirmed its plan via cramdown despite creditor rejection, retained founder equity, secured $2.5 million in exit financing, and closed its case within 12 months of filing.

Debtor(s)	Lunya Company
Court	U.S. Bankruptcy Court, District of Delaware
Petition Date	June 16, 2023
Confirmation Date	November 6, 2023
Effective Date	April 1, 2024
Substantial Consummation	May 17, 2024
Case Closed	June 10, 2024
Lead Counsel	Pashman Stein Walder Hayden, P.C.
Subchapter V Trustee	David M. Klauder
Claims Agent	Stretto, Inc.
Exit Financing	$2.5 million from Assembled Brands Capital Funding LLC
Prepetition Unsecured Debt	~$6 million (trade and credit card)
Insider Debt	~$27 million (Merrill Living Trust)

From Living Room Startup to $50 Million Brand

Ashley Merrill launched Lunya from her living room in 2012 after noticing she was wearing her husband's old frat T-shirt and rolled-up boxer briefs to bed. That observation led to the idea for a sleepwear line combining comfort with sophistication. The news that she was pregnant while enrolled in business school in 2012 "lit a now-or-never fire" that pushed her to launch the company. Her husband, Marc Merrill, is president and co-founder of Riot Games, the video game developer behind League of Legends that generates more than $1 billion in annual revenue. While Ashley built Lunya, she also took on the role of chairwoman of Outdoor Voices, the activewear brand that would later face its own financial struggles.

The company officially launched in 2014, two years after Merrill began developing the concept. Lunya positioned itself as a premium brand focused on quality materials and design. The Santa Monica-headquartered company, with its executive team structured around brand and operations, initially sold exclusively online for its first five years, operating as a pure-play DTC brand before the pandemic accelerated that model's adoption across retail. Lunya marketed "thoughtfully designed" sleepwear that blended technical performance with luxury positioning. The brand differentiated itself through proprietary fabric development, creating Meneya, a fabric made from Pima cotton, Lycra, and Celliant—a technical fiber that uses infrared energy to stimulate cell performance and increase circulation. A washable silk pajama set retails for approximately $248, with the women's bestselling washable silk set (tank top and pull-on shorts) at $188.

In October 2019, Merrill introduced Lahgo, a men's sleepwear line. The name is a play on "lago," meaning lake in Italian and Spanish, connoting "peaceful waters and flexibility." Best sellers included a washable short silk set for $238, a Restore jogger for $148, and a cotton/silk long-sleeved Henley for $98. The brands operated separately until merging in August 2022, consolidating operations as financial pressures mounted. At its peak, the company grew 400% year-over-year, eventually expanding from sleepwear into a broader "rest" category including dresses, sweaters, loungewear, bedding, and sleep masks. Industry observers noted the brand's combination of premium positioning and DTC efficiency.

COVID-19 Surge and iOS 14 Disruption

Lunya's trajectory aligned with broader market dynamics during 2020 and 2021. The global sleepwear market grew from $10.6 billion in 2020 and is projected to reach $22 billion by 2028, representing a 9.9% compound annual growth rate. The COVID-19 pandemic accelerated demand for comfortable home attire as remote work and stay-at-home orders changed how consumers dressed. The company experienced a revenue surge as demand for loungewear increased during lockdowns, consumers shifted spending online, and customer acquisition relied on Facebook and Instagram advertising. Revenue climbed beyond $50 million in both 2020 and 2021.

The turning point came in April 2021 when Apple's iOS 14 privacy update changed digital advertising. The App Tracking Transparency framework required apps to obtain explicit user permission before tracking activity across other companies' apps and websites. Only a small percentage of Apple users agreed to allow their online activity to be tracked, reducing the precision of ad targeting used by many DTC brands. The company's iOS 14 changes severely impaired the brand's ability to effectively target advertisements on Facebook and Instagram—Lunya's primary customer acquisition channels. Without efficient ad targeting, customer acquisition costs increased significantly. Monthly revenues began declining year-over-year starting in June 2021.

Business of Fashion characterized the period as a "reckoning." Rising digital marketing costs as social media platforms became more crowded, combined with new privacy regulations restricting customer targeting, altered the economics of digitally native brands. Brands built on Facebook advertising—termed "DTC 1.0" brands—faced particular difficulties scaling in the new environment. As one industry observer noted, "DTC as we knew it—from the Warby Parker and Dollar Shave Club days—is dead. The playbook has changed."

Financial Distress and Capital Structure

One of Lunya's challenges was overestimating post-pandemic demand. Bolstered by strong 2020 sales and expecting continued growth, the team placed orders approximately 60% higher than needed for 2021, resulting in an inventory glut. Court documents revealed the company accumulated 66 weeks of supply on hand—far above the typical 13-16 weeks that apparel businesses would maintain. This excess inventory tied up capital as the company faced declining sales and marketing challenges. Analysts examining the filing highlighted how the inventory miscalculation compounded existing challenges from changing digital marketing economics. The inventory overhang created a set of problems: storage costs at third-party logistics facilities mounted, and cash that could have funded marketing experiments or operational improvements sat locked in warehouses. The company faced difficult choices between liquidating inventory at deep discounts or continuing to carry excess stock.

By the petition date, Lunya's capital structure reflected both its financial distress and the source of its funding. The company had no traditional secured funded debt—a contrast to many distressed retailers burdened by leveraged buyout debt or asset-based facilities.

The insider debt structure—with approximately $27 million owed to the Merrill Living Trust through a revolving credit line and convertible notes—meant the company relied heavily on insider financing. Company filings indicate that from 2020 to 2022, finance and operations leadership lacked specialized e-commerce or retail experience, leading to operational gaps including poor financial closing procedures that delayed accurate reporting, absence of weekly cash flow modeling, high third-party logistics costs driven by expensive returns processing and aged inventory storage, and continued over-ordering even as demand signals weakened.

Retail Expansion Gone Wrong

While managing inventory and marketing challenges, Lunya expanded physical retail. Blair Lawson was named CEO in mid-May 2022, replacing founder Ashley Merrill who transitioned to an advisory role. Lawson, who previously served as Chief Merchandising Officer at Goop from 2015 to 2019, inherited expansion plans during a period of declining e-commerce performance. The brand had already expanded from four to eight boutiques and was striking wholesale partnerships with Neiman Marcus, Bloomingdale's, and Saks Fifth Avenue. By 2023, Lunya operated seven owned retail stores in locations including Los Angeles, New York, San Francisco, Atlanta, Houston, and Boston.

However, the company had entered into leases "for locations that were too large and with rents that were too high." The stores collectively lost approximately $135,000 per month—roughly $1.62 million annually—while contributing only 8% of total revenue.

As part of bankruptcy proceedings, Lunya moved to reject leases at three locations:

The company also rejected contracts with Leap Services, Inc. (a retail platform agreement), Klarna, Inc. (buy-now-pay-later merchant services), and Catch Inc., describing these obligations as "an unnecessary drain on the company's limited resources."

Pre-Filing Turnaround Efforts

Before filing, CEO Blair Lawson implemented operational changes over 13 months.

The reduction in out-of-stock rates (from 42% to 14%) and improvement in full-price sell-through (from under 25% to 80%) reflected improved inventory and merchandising execution. Despite achieving a 45% reduction in EBITDA losses despite a 29% revenue decline, the company remained unable to pay vendors in full while covering ongoing operating expenses. The balance sheet required restructuring through bankruptcy.

Subchapter V Restructuring

Lunya filed under Subchapter V of Chapter 11—a streamlined process added through the Small Business Reorganization Act of 2019 for businesses with unsecured debts below $7.5 million. The provision offered several advantages:

The elimination of the absolute priority rule mattered for Lunya. Under traditional Chapter 11, equity holders cannot retain ownership unless unsecured creditors are paid in full or consent. Subchapter V removes this requirement, allowing the Merrills to retain their equity stake even though unsecured creditors received only partial payment. The court approved $700,000 in debtor-in-possession financing on October 5, 2023, providing working capital during the proceedings. Lunya retained Pashman Stein Walder Hayden, P.C. as bankruptcy counsel and Stretto, Inc. as claims and administrative agent. David M. Klauder served as Subchapter V Trustee.

Plan Confirmation and Emergence

Lunya filed its initial plan in September 2023 and a First Amended Plan in October 2023. General unsecured creditors (Class 2) voted to reject the proposed plan. On November 6, 2023, the court confirmed the plan via cramdown under Bankruptcy Code Section 1191(b). This provision permits non-consensual confirmation when the plan meets specific requirements, including that all projected disposable income be applied to payments over a three-year period.

The retention of equity by Class 3—the Merrill interests—while Class 2 unsecured creditors received only partial payment illustrates the Subchapter V framework. This outcome would have required unsecured creditor consent or full payment under traditional Chapter 11.

In April 2024, Lunya secured a $2.5 million exit credit facility from Assembled Brands Capital Funding LLC, with an initial term through April 1, 2026.

Proceeds were used to repay the DIP loan, satisfy outstanding claims under the modified plan, cover bankruptcy-related expenses, and provide working capital for ongoing operations. The plan became effective on April 1, 2024, with distributions commencing on April 11, 2024. On May 17, 2024, the court entered a notice of substantial consummation, confirming that the plan had been materially implemented. On June 10, 2024—less than twelve months after filing—the court entered a final decree closing the case. Blair Lawson remains as CEO of the reorganized company, with quarterly distributions to unsecured creditors scheduled through Q4 2026 under the three-year plan commitment period.

DTC Industry Context

Lunya's bankruptcy occurred amid changes in the direct-to-consumer landscape. Digitally native brands have begun embracing more hybrid distribution models as the limitations of online-only approaches become apparent. First-party data became increasingly valuable as third-party tracking eroded, forcing brands to invest in email lists, loyalty programs, and owned customer relationships rather than renting attention through social platforms. Use of pop-ups to test new markets and wholesale partnerships can help DTC businesses scale without the fixed-cost burden of permanent retail locations.

The COVID-19 pandemic disrupted global supply chains and delayed production even as it accelerated demand. DTC brand databases tracked how companies like Lunya navigated these cross-currents. Consumer spending patterns changed as many focused on essential goods. The sleepwear market is projected to reach $22 billion by 2028.

Post-Emergence Status

With lease rejections and inventory reductions, the company continued e-commerce sales. CEO Blair Lawson's pre-filing turnaround efforts reduced EBITDA losses by 45% despite declining revenue. The wholesale channel, which grew 201% year-over-year in Q1 2023, remained part of the revenue mix. The company has partnerships with retailers like Nordstrom, Neiman Marcus, and Bloomingdale's.

Under the confirmed plan, Lunya must make quarterly distributions to unsecured creditors through Q4 2026. The plan's "disposable income" mechanism means that creditor recoveries depend on the company's actual profitability. The $2.5 million exit facility from Assembled Brands runs through April 2026.

Frequently Asked Questions

What caused Lunya's bankruptcy?

Multiple factors converged: Apple's iOS 14 privacy changes impaired the company's Facebook-dependent marketing strategy, post-COVID demand normalized while the company held 66 weeks of excess inventory, seven retail stores lost $135,000 monthly, and declining revenues created a liquidity crunch with approximately $6 million in non-insider unsecured debt.

What is Subchapter V bankruptcy?

Subchapter V is a streamlined Chapter 11 process for small businesses (debts under $7.5 million) created by the 2019 Small Business Reorganization Act. It allows faster plan filing, generally no creditors' committee, plan confirmation without creditor approval through cramdown, and elimination of the absolute priority rule that normally requires equity to be wiped out before unsecured creditors can be impaired.

Did Lunya's creditors approve the plan?

No. General unsecured creditors voted to reject the plan. The court confirmed it via "cramdown" under Section 1191(b), which allows confirmation without impaired class acceptance when the plan commits all disposable income to creditor payments over three years.

What happened to Lunya's founder?

Ashley Merrill transitioned to an advisory role when Blair Lawson became CEO in May 2022. The Merrill Living Trust retained significant financial exposure through approximately $27 million in insider debt. Existing equity interests—including Merrill's stake—were retained through the restructuring, a key benefit of Subchapter V.

How long was Lunya in bankruptcy?

Approximately 12 months from filing (June 16, 2023) to case closure (June 10, 2024). The plan was confirmed on November 6, 2023, with the effective date on April 1, 2024.

How much did Lunya's revenue decline?

Revenue fell from over $50 million at its 2020-2021 peak to approximately $35 million in 2022—a 30% decline. First quarter 2023 was down another 29% year-over-year compared to Q1 2022.

What happened to Lunya's retail stores?

Three store leases were rejected in bankruptcy (Atlanta, Houston, San Francisco). The seven stores collectively lost approximately $1.62 million annually while contributing only 8% of revenue.

Did shareholders lose their investment?

No. Unlike most Chapter 11 cases, existing equity interests were unimpaired and retained—a feature of Subchapter V that eliminates the absolute priority rule. This allowed the Merrill family to maintain ownership despite unsecured creditors receiving less than full payment.

How did iOS 14 impact Lunya specifically?

Lunya relied heavily on Facebook and Instagram advertising for customer acquisition. When iOS 14's App Tracking Transparency reduced the effectiveness of targeted advertising in April 2021, customer acquisition costs increased while conversion rates declined. Monthly revenues began year-over-year decline starting June 2021.

What is the exit financing arrangement?

Assembled Brands Capital Funding LLC provided a $2.5 million exit credit facility with a term through April 1, 2026. The facility requires first-priority security in virtually all assets and a $300,000 minimum cash reserve.

Is Lunya still operating?

Yes. The reorganized company continues operations under CEO Blair Lawson. Quarterly distributions to unsecured creditors are scheduled through Q4 2026 under the plan commitment period.

Who provided the insider debt and why did it matter?

The Merrill Living Trust—associated with founder Ashley Merrill and her husband Marc Merrill (Riot Games co-founder)—provided approximately $27 million in insider debt through a revolving credit line and convertible notes. This insider financing represented a significant portion of the company's capital structure.

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