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.
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.
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. The First Day Declaration 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.
Inventory Metric
April 2022
April 2023
Industry Standard
Retail Value
$42 million
$20 million
—
Weeks of Supply
66 weeks
25 weeks
13-16 weeks
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.
Debt Category
Amount
Secured Funded Debt
$0
Unsecured Debt (Non-insiders)
~$6 million (trade and credit card)
3PL Provider Debt
~$500,000
Insider Debt (Merrill Living Trust):
Revolving Line of Credit
~$7 million
Convertible Notes
~$20 million
Total Insider Debt
~$27 million
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. The First Day Declaration indicates 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," according to the First Day Declaration. The stores collectively lost approximately $135,000 per month—roughly $1.62 million annually—while contributing only 8% of total revenue.
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.
Metric
Before (Q1/Dec 2022)
After (Q1/May 2023)
Change
Inventory Retail Value
$42M (Apr 2022)
$20M (Apr 2023)
-52%
Weeks of Supply
66 weeks
25 weeks
-62%
Full-time Employees
46 (Dec 2021)
28 (June 2023)
-39%
Quarterly Non-Marketing OpEx
$3.8M
$2.8M
-26%
Quarterly EBITDA Losses
-$3.9M
-$2.1M
-45%
Bestseller Out-of-Stock Rate
42% (Sept 2022)
14% (May 2023)
-28 pts
Seasonal Full-Price Sell-Through
<25%
80%
+55 pts
Quarterly Wholesale Revenue
$279K
$839K
+201%
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, listing $18.3 million in scheduled assets against $32.7 million in liabilities. The provision offered several advantages:
Subchapter V Feature
Benefit
Plan Filing Deadline
90 days (vs. 120 days for standard Chapter 11)
Creditors' Committee
Generally not required
Plan Filing Exclusivity
Only the debtor may file a plan
Cramdown Confirmation
Plans can be confirmed even if no impaired class accepts
Absolute Priority Rule
Eliminated
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 DIP 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 entered the Confirmation Order 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.
Claim Class
Description
Status
Treatment
Unclassified
Administrative Expense Claims
—
Paid in full as funds available
Unclassified
Priority Tax Claims
—
Quarterly installments Q4 2024 - Q4 2026
Class 1
DIP Lender Secured Claim
Unimpaired
Full recovery
Class 2
General Unsecured Claims
Impaired
Pro rata share of Disposable Income over 3 years
Class 3
Equity Interests
Unimpaired
Retained by existing holders
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, documented in the Second Plan Supplement, with an initial term through April 1, 2026.
Exit Facility Term
Detail
Borrower
Lunya Company
Lender
Assembled Brands Capital Funding LLC
Facility Amount
$2.5 million
Initial Term
Through April 1, 2026
Security
First-priority security interests in virtually all assets
Minimum Cash Reserve
$300,000 required
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.
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.
For more insights on bankruptcy cases and restructuring trends, visit the ElevenFlo blog.
First Amended Plan /documents/5feb2e14-158a-4dfe-999c-8dadf98919eb/
Second Plan Supplement /documents/c76b2737-5186-4f60-a0b6-3e8b31daaa6d/
Final Decree /documents/59273e3f-70f3-4f18-bad9-44e45fcdfa29/
Ashley Merrill launched Lunya from her living room in 2012 https://www.inc.com/magazine/201911/anna-meyer/ashley-merrill-lunya-boxing-stress-relief-exercise.html
The news that she was pregnant while enrolled in business school https://www.entrepreneur.com/leadership/how-the-founder-of-a-wildly-popular-dtc-clothing-brand/431283
chairwoman of Outdoor Voices https://dot.la/behind-her-empire-podcast-real-talk-on-building-family-and-business-with-ashley-merrill-founder-of-lunya-2648386763.html
the activewear brand that would later face its own financial struggles https://fortune.com/2024/03/26/outdoor-voices-bankruptcy-closure-layoffs-ashley-merrill/
Santa Monica-headquartered company https://www.crunchbase.com/organization/lunya
executive team structured around brand and operations https://theorg.com/org/lunya
Meneya, a fabric made from Pima cotton, Lycra, and Celliant https://wwd.com/fashion-news/fashion-scoops/sleepwear-brand-lunya-uses-fabric-innovation-to-improve-category-1202759422/
introduced Lahgo, a men's sleepwear line https://wwd.com/business-news/technology/lahgo-mens-from-lunya-founder-1203316521/
Industry observers noted https://ecommercemasterplan.com/lunya-lahgo-podcast/
global sleepwear market grew from $10.6 billion in 2020 and is projected to reach $22 billion by 2028 https://www.researchdive.com/8352/sleepwear-market
COVID-19 pandemic accelerated demand for comfortable home attire https://www.transparencymarketresearch.com/loungewear-market.html
Revenue climbed beyond $50 million https://www.modernretail.co/operations/dtc-sleepwear-startup-lunya-has-filed-for-chapter-11-bankruptcy/
Only a small percentage of Apple users agreed to allow their online activity to be tracked https://www.retaildive.com/news/were-going-back-to-the-drawing-board-dtc-brands-brace-for-more-anti-tra/606326/
Rising digital marketing costs as social media platforms became more crowded https://www.businessoffashion.com/articles/direct-to-consumer/the-state-of-fashion-2023-report-dtc-ecommerce-online-retail-channel-strategy/
Analysts examining the filing https://petition.substack.com/p/lunya
created a set of problems https://faheemsiddiqi.medium.com/business-breakdown-lunyas-bankruptcy-filing-a68aa05e5687
Blair Lawson was named CEO in mid-May 2022 https://wwd.com/fashion-news/intimates/lunya-lahgo-ashley-merrill-blair-lawson-sleepwear-retail-1235235606/
added through the Small Business Reorganization Act of 2019 https://www.americanbar.org/groups/litigation/resources/newsletters/bankruptcy-insolvency/small-business-reorgs-subchapter-v-chapter-11/
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.