Novation Companies: Prepackaged Second Chapter 11 Preserves $731M NOL Stack

Novation Companies, Inc. and three affiliates filed chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware on August 13, 2023, opening lead case No. 23-11153 before Hon. J. Kate Stickles. The cases were jointly administered with Novation Holding, Inc., Healthcare Staffing, Inc., and NovaStar Mortgage, LLC and were anchored by an August 4, 2023 restructuring support agreement signed with the supporting noteholders before the petition.

The filings implemented a debt-for-equity prepack centered on roughly $97.8 million of senior secured note debt, full payment of general unsecured claims, cancellation of legacy parent equity, and preservation of approximately $731 million of net operating losses through plan-side section 382 protections. The case moved fast on the front end — 54 days from petition to confirmation and 74 days to the effective date on October 26, 2023 — but the administrative tail ran more than two years before the court closed the cases on March 3, 2026. This was Novation's second chapter 11; the same corporate group had filed a 2016 case in Maryland that emerged in 2017.

Debtor(s)	Novation Companies, Inc. (4 jointly administered entities)
Court	U.S. Bankruptcy Court, District of Delaware
Case Number	23-11153
Petition Date	August 13, 2023
Confirmation Date	October 6, 2023
Effective Date	October 26, 2023
Final Decree	March 3, 2026
Judge	Hon. J. Kate Stickles
DIP Facility	Up to $1.77 million new-money multiple-draw term loan from Nighthawks Holdings I, LLC and HOMF II Distressed Opportunities, Ltd.; 13% interest, 3% default uplift; $900,000 interim cap

From 2016 Maryland Reorganization to Second Filing

Novation, formerly NovaStar Financial, ran a subprime mortgage operation before the financial crisis and pivoted to a holding-company structure as the legacy mortgage book wound down. In July 2016 the parent and subsidiaries filed chapter 11 in the District of Maryland, reporting $33.15 million in assets against $85.65 million in liabilities. The 2016 process restructured roughly $84 million of senior note obligations and folded in a $24 million acquisition of Healthcare Staffing, Inc. from Butler America that closed on July 27, 2017. The combined transaction was named M&A Advisor's 2017 Distressed M&A Deal of the Year.

Two parallel features of that earlier deal carried into the 2023 filing. First, the senior secured note structure remained the dominant capital instrument, with the noteholder group continuing to drive any subsequent restructuring. Second, the 2017 plan period coincided with a $165 million class-action settlement involving NovaStar Mortgage's pre-crisis residential mortgage-backed securities — a settlement structured to be funded primarily through insurance and asset sources rather than ongoing operating cash flow, leaving the surviving holding company with limited operating depth even before Healthcare Staffing began deteriorating.

The Wyse Declaration confirms that NovaStar Mortgage had ceased operations by 2018 and was a non-operating legacy entity at the 2023 petition, while Healthcare Staffing was the only operating subsidiary. The 2023 case is therefore not a fresh distress event but a second pass at the same corporate group, with substantially the same secured creditor architecture and a narrowing operating base.

Healthcare Staffing Losses and Run-Up to the RSA

The Wyse Declaration attributes the second filing to sustained operating losses at Healthcare Staffing and the inability to stabilize the platform outside a balance-sheet restructuring. The declaration reports a Healthcare Staffing net loss of approximately $0.4 million in 2021, $2.6 million in 2022, and $4.0 million year-to-date through the petition-period discussion in the declaration. Wyse identified the termination of customer contracts — including the loss of contracts with community service boards — as a specific operational driver of the deterioration.

The debtors took the typical pre-filing path. Novation retained Wyse Advisors LLC in January 2022, with Michael Wyse stepping in as chief restructuring officer and supplying interim management services. Over the next eighteen months, the debtors explored strategic alternatives, ran a sale and restructuring process, and negotiated successive term sheets with the noteholder group: an initial term sheet in January 2023, a revised term sheet in April 2023, and the executed RSA on August 4, 2023. The RSA bound the consenting noteholders to support the prepackaged plan, debt-for-equity treatment, and the new-money DIP, and locked in the section 382-based restrictions designed to preserve the NOL stack.

The RSA architecture explains why the case moved so quickly post-petition. By the time the petitions were filed, voting was largely complete, the disclosure statement was drafted, and the financing package was already wired to the same noteholder group on the way to becoming the reorganized owner.

$97.8 Million Note Stack and the NOL Preservation Strategy

The capital structure is straightforward. The Wyse Declaration reports approximately $97.8 million of secured funded debt outstanding under a July 27, 2017 note purchase agreement, inclusive of accrued interest and fees. Under that agreement, Novation Companies, Inc. is the issuer, Novation Holding, Inc. and Healthcare Staffing, Inc. are guarantors, the Taberna and Kodiak noteholder vehicles are the lender group, and Wilmington Savings Fund Society, FSB serves as collateral agent. The same noteholder group constituted the supporting parties under the RSA, which is why the 2023 case effectively converts the secured note position into post-emergence equity rather than running a third-party sale process.

Outside the secured stack, the declaration reports approximately $1.3 million of trade and other prepetition unsecured claims, plus another $1.625 million of unsecured pre-bankruptcy funding extended by the plan sponsors and their affiliates. That pre-bankruptcy funding was treated as exit-funded rather than rolled into the DIP, which materially affected the size of the new-money DIP commitment and the structure of the post-petition cash runway.

The most distinctive piece of the capital structure is the tax-asset side of the balance sheet. The debtors reported approximately $731 million of aggregate NOLs as of the petition date, including unrealized losses on legacy NovaStar mortgage securities. The plan and disclosure statement embed section 382-based eligibility and transfer restrictions on the reorganized equity to protect the post-emergence usability of those NOLs, and the debtors filed an NOL motion at the start of the case to lock in trading restrictions during the chapter 11 window. For a holding company with a thin operating base, the NOL stack — not the going-concern value of Healthcare Staffing — is the largest economic asset the plan was designed to preserve.

$1.77 Million DIP From Nighthawks and HOMF

The DIP motion sought authority for up to $1.77 million of new-money, multiple-draw term-loan financing from Nighthawks Holdings I, LLC and HOMF II Distressed Opportunities, Ltd. — the same plan sponsors slated to receive the reorganized equity. Interim access was capped at $900,000 under the August 15, 2023 interim DIP order, with the remaining commitment unlocked on entry of the final order on September 11, 2023. The pricing was 13% annual interest with a 3% default-rate uplift, and the package included priming liens on substantially all assets subject to the carve-out and specified senior third-party liens.

The fee structure was equally compact. The motion set a 6% facility fee, with $55,000 payable on entry of the interim order and the remaining $51,200 payable on entry of the final order. Maturity was the earliest of 90 days after the petition date, the effective date of a confirmed plan, dismissal or conversion, or the debtors' support of a restructuring path outside the RSA. Adequate protection for the prepetition collateral agent took the standard form of replacement liens and related protections rather than a separate cash-pay component.

Two structural points are worth flagging. First, the DIP did not roll up the $1.625 million of pre-bankruptcy funding from the plan sponsors; that funding sat outside the DIP and was addressed through exit financing under the plan, which kept the new-money DIP relatively small. Second, the DIP commitment was sized for a roughly two-month chapter 11 path, not a full operating runway — consistent with a prepack designed to confirm and emerge inside three months. The interim authorization was framed in those same terms.

Plan Class Treatment and Equity Cancellation

The disclosure statement and joint prepackaged plan divided creditor and equity interests across multiple classes, with the impairment and recovery profile concentrated at the top and bottom of the stack.

Class 3 noteholder claims were the only meaningfully impaired voting class. In exchange for the secured note position, the noteholders were to receive interests in the Class 3 Equity Pool, preferred stock consideration, and limited additional cash consideration subject to plan mechanics and offsets. This is the debt-for-equity core of the deal: Class 3 took the new common and preferred equity in the reorganized debtor, and the recovery profile flows through that equity rather than through cash distributions.

Class 4 general unsecured claims were designated unimpaired and entitled to payment in full in cash on the later of the effective date, 30 days after allowance, or the ordinary-course payment date. Treating GUC as unimpaired is consistent with the small absolute size of the trade pool — roughly $1.3 million per the Wyse Declaration — and avoided the cost and litigation surface of a contested unsecured class. Class 7a equity interests in Novation Companies, Inc. were impaired, deemed to reject, and cancelled without any distribution. Legacy public equity holders received nothing on emergence.

The confirmation order records that Class 3 voted to accept and that Class 7a along with certain other impaired classes were confirmed over deemed rejection under section 1129(b)(1). The same order approved the plan's release, discharge, injunction, and exculpation provisions in Article X and found the reorganized governance disclosures consistent with creditor interests and public policy. The plan also preserved the section 382-based transfer restrictions tied to NOL preservation and authorized the corresponding governance and stock-issuance mechanics.

Confirmation, Effective Date, and Closing the Cases

The court entered the bar date order on August 23, 2023, and notice subsequently set the general claims bar date for September 25, 2023. The combined confirmation hearing was held on October 4, 2023, and the combined disclosure statement approval and confirmation order was entered on October 6, 2023.

The reorganized debtors filed the notice of occurrence of the effective date on October 26, 2023. That notice fixed November 27, 2023 at 4:00 p.m. Eastern as the administrative claim bar date and November 16, 2023 at 4:00 p.m. Eastern as the final fee claim bar date. For executory contracts and unexpired leases rejected as of the effective date, rejection-damages claims were due November 27, 2023; for later rejections, the notice provided a rolling 30-day deadline after service of the rejection notice by the reorganized debtors. The same notice confirmed emergence for public-market purposes.

The post-effective administrative window was unusually long. The reorganized debtors did not move for a final decree until February 13, 2026, and the court entered the final decree on March 3, 2026. That order closed the chapter 11 cases effective immediately, required Stretto to prepare and docket a final claims register, forward electronic proofs of claim and the creditor matrix to the clerk within 28 days, authorized destruction of physical proofs of claim 60 days after the clerk received the electronic copies, and required any remaining post-confirmation reports within 30 days. The two-and-a-half-year administrative tail reflects the time needed to fully wind down legacy NovaStar mortgage obligations and complete distributions, not active substantive litigation, but it is a reminder that emergence from a prepack is not the same as case closure.

Professional Retentions and Fee Awards

Young Conaway Stargatt & Taylor, LLP served as Delaware counsel to the debtors. The firm's third monthly and final application covered August 13, 2023 through October 26, 2023 and sought $358,572.50 in fees plus $356.15 in expenses, building on earlier monthly fee requests of $92,314.50 for the August period and $180,120.00 for the September period.

Wyse Advisors LLC — the firm that had supplied the chief restructuring officer and interim management services since January 2022 — sought approval of a $125,000 amended success fee in its first and final fee application, with retention treated as effective August 13, 2023 for purposes of the case-period work. Counsel and CRO compensation reviewed in this pass support at least $483,928.65 of professional comp and expense requests for Young Conaway and Wyse Advisors combined; that figure does not include every retained professional in the case.

Stretto served as claims and noticing agent and was identified by name in the final decree as the party responsible for the final claims register, electronic claims forwarding, and disposition of physical proofs of claim. The relatively compact professional roster is consistent with a prepack: a Delaware lead counsel, a CRO firm, plan sponsor counsel on the noteholder side, and an administrative agent rounding out the active retentions.

Key Timeline

Frequently Asked Questions

Who is the claims agent for Novation Companies?

Stretto serves as the claims and noticing agent. The firm maintains the official claims register and was identified in the final decree as the party responsible for preparing the final register, forwarding electronic proofs of claim and the creditor matrix to the clerk, and managing the disposition of physical proofs of claim.

What was the size of the DIP facility?

The court approved up to $1.77 million of new-money DIP financing from Nighthawks Holdings I, LLC and HOMF II Distressed Opportunities, Ltd., with $900,000 available on an interim basis. The facility carried 13% annual interest plus a 3% default-rate uplift and a 6% facility fee.

How were noteholders treated under the plan?

Class 3 noteholder claims, totaling approximately $97.8 million of secured note debt under the July 2017 note purchase agreement, were impaired and exchanged for interests in the Class 3 Equity Pool, preferred stock, and limited additional cash consideration. Class 4 general unsecured claims were unimpaired and paid in full, while Class 7a equity in Novation Companies, Inc. was cancelled with no recovery.

Why was preserving net operating losses so important?

The debtors reported approximately $731 million of aggregate NOLs as of the petition date, including unrealized losses on legacy NovaStar mortgage securities. The plan embeds section 382-based eligibility and transfer restrictions on the reorganized equity to protect the post-emergence usability of those tax assets for the new ownership group.

Was this Novation's first chapter 11?

No. Novation Companies and certain affiliates previously filed chapter 11 in the U.S. Bankruptcy Court for the District of Maryland in July 2016 and emerged in 2017 after restructuring roughly $84 million of senior note obligations and acquiring Healthcare Staffing for $24 million. The 2023 Delaware case was the corporate group's second chapter 11.

When were the cases closed?

The court entered the final decree on March 3, 2026, more than two years after the October 26, 2023 effective date, closing the jointly administered cases.

For more bankruptcy case coverage, visit the ElevenFlo bankruptcy blog.