Smallhold: Subchapter V Plan and Opt-Out Release Ruling

Smallhold, Inc. is a Brooklyn-based specialty mushroom vertical farming company that filed for Subchapter V Chapter 11 on February 18, 2024 in the U.S. Bankruptcy Court for the District of Delaware (Case No. 24-10267, Judge Craig T. Goldblatt). The company, founded in 2017, grew from a shipping-container farm into a multi-city footprint and later announced a nationwide Whole Foods Market rollout.

In the years before the filing, Smallhold said it was expanding both physical capacity and retail distribution. The company opened a 34,000-square-foot Los Angeles farm that it said brought its footprint to 75,000 square feet, announced placement in 192 Sprouts Farmers Market stores, and reported being in 650+ retailers. A mid-2023 expansion update said the company was in 1,000+ retailers and restaurants.

Court filings describe Smallhold as a Delaware public benefit corporation with indoor farms in New York City, Austin, and Los Angeles, a product mix of specialty mushrooms and home-grow kits, and approximately 81 employees at filing. Filings also describe a rapid operational reset: Texas and New York farms were being shut down, the Los Angeles farm remained operational, and management shifted toward partner-farm relationships and renegotiated shipping and packaging costs.

The restructuring combined a sponsor-backed DIP facility, early operational relief to preserve logistics, and a five-year disposable-income plan confirmed under Section 1191(b). The plan went effective on September 6, 2024, and the case produced a Delaware opinion on opt-out release mechanics. A post-emergence announcement described a partner farm network and investment led by Monomyth.

Restructuring

First-day stabilization and shipping continuity. Smallhold sought early relief to keep logistics functioning. An interim order authorized up to $150,000 in prepetition shipper claims, conditioned on continued services on historical trade terms and allowing recovery of amounts paid if those services were not maintained.

Operational reset and contract pruning. Court filings show Smallhold shutting down Texas and New York farms while keeping the Los Angeles facility open as a bridge to an interim strategy focused on partner farms and cost renegotiations. The debtor also moved to reject a Brooklyn office lease and a set of vendor contracts to reduce overhead, with an effective rejection date of February 29, 2024.

A post-emergence announcement later stated that the company closed farms in Texas, New York, and California during the reorganization and shifted to a partner-farm network.

DIP financing and budget controls. The debtor obtained a $900,000 DIP facility from the Monomyth Sponsor Group, with $300,000 available after the interim order and up to $600,000 after the final order. Draws were limited to one per seven-day period, a $100,000 minimum and a $200,000 cap (other than the initial draw), with no ability to reborrow repaid amounts. Court filings set tiered interest rates based on trailing two-week revenue: 17% at $75,000 or less, stepping down to 14% if revenue exceeded $125,000, plus a 2% default premium. The final order added a 1% commitment fee and a facility fee payable at maturity. The DIP required a rolling 13-week budget, variance reporting, and pro forma budget compliance before each borrowing.

The DIP package imposed detailed reporting and variance testing. The debtor had to refresh its 13-week cash forecast every other Thursday, maintain line-item receipt tests at 90% of budget, and keep line-item disbursements (excluding professional fees) within 110% of budget, alongside a rolling four-week receipts test of at least 90%.

Plan structure and creditor treatment. The confirmed plan applied five years of projected disposable income to distributions. Monomyth converted DIP debt into convertible notes and provided $500,000 of exit financing through additional convertible notes, with conversion to equity if not repaid by the conversion date. Administrative claimants could elect cash paid pro rata from disposable income or convertible notes bearing 8% interest. General unsecured creditors were assigned to a $155,000 GUC Recovery Pool, with $75,000 scheduled for Q3 2025 and the remaining $80,000 paid over the balance of the plan term, all guaranteed by the sponsor. Class 1 (DIP lender) accepted the plan, Class 2 (general unsecured creditors) rejected it, and the court confirmed the plan under Section 1191(b) as a cramdown.

Business and Operating Footprint

Smallhold produces specialty mushrooms including yellow and blue oyster, lion's mane, maitake, shiitake, and trumpet varieties, sells home-grow kits, and added a mushroom pesto product in 2023. Court filings describe a national retail footprint across 500+ locations in 10 states, while press releases highlighted broader expansion milestones such as a 650+ retailer footprint and the Sprouts rollout. A post-emergence release said Smallhold's products were in over 700 retail locations.

The company built a multi-city footprint before filing. A Brooklyn profile traced the origin to a container farm, while a Los Angeles facility opening framed the 34,000-square-foot LA site as part of a 75,000-square-foot total operating footprint. Court filings later indicated the Texas and New York farms were being shut down while the Los Angeles site remained operational.

Ownership, Governance, and Capital Structure

Court filings describe Smallhold as a Delaware public benefit corporation with no secured funded debt and roughly $1.4 million in unsecured trade debt at filing. Ownership shifted shortly before the petition when Monomyth acquired shares to reach 90.77% of common stock, and both founders resigned from the board. The company appointed Gustavo Reichmann as interim CEO and Tariq Jawad as interim CFO, retained Pashman Stein Walder Hayden, P.C., and cited pressure from certain lessors in the lead-up to the filing.

Liquidity and Cash Flow

Smallhold's August 2024 monthly operating report highlighted liquidity strain even after the DIP facility. The report showed negative cash balances and a material net cash outflow for the month, alongside DIP financing listed among postpetition payables.

Industry Context and Filing Drivers

Court filings attributed the filing to a venture capital fundraising downturn and a flat fresh-mushroom category, and a report on the filing described the company as being in substantially worse financial shape than previously disclosed, with closures and headcount reductions. Industry coverage also linked Smallhold to the broader wave of controlled-environment agriculture bankruptcies and the struggle to sustain unit economics, a theme highlighted in vertical farming coverage.

Delaware Opinion on Opt-Out Releases

The case produced a memorandum opinion addressing opt-out third-party releases after Purdue Pharma. The court held that silence is not consent, and that opt-out mechanics alone cannot bind creditors to releases. The opinion concluded that creditors who affirmatively voted on the plan and were given clear notice and an opt-out mechanism could be treated as consenting, while non-voting unimpaired parties were not deemed to consent. A case update analyzing the decision emphasized the court's reliance on affirmative consent mechanics.

Frequently Asked Questions

What does Smallhold do? Smallhold is a specialty mushroom vertical farming company founded in Brooklyn in 2017. It grows oyster, lion's mane, maitake, shiitake, and trumpet mushrooms, sells home-grow kits, and added mushroom pesto in 2023. The company scaled to national retail distribution and expanded into multi-city operations.

Where were Smallhold's farms and what changed during the case? Court filings list indoor farms in New York City, Austin, and Los Angeles. The filings also show Texas and New York farm shutdowns and the Los Angeles site remaining operational as a bridge to a partner-farm strategy.

Why did Smallhold file for Subchapter V? The company cited a venture capital fundraising downturn and a flat fresh-mushroom category. A report on the filing described the business as being in substantially worse financial shape than previously disclosed, and industry coverage tied Smallhold to the wider wave of CEA restructurings.

Who is Monomyth and what role did it play? Monomyth acquired shares to reach 90.77% of common stock shortly before the filing and became the DIP lender and plan sponsor. In bankruptcy it provided the DIP facility, guaranteed creditor distributions, and funded exit financing through convertible notes.

What was the DIP financing structure? The DIP facility had a $900,000 commitment with staged availability and revenue-based interest tiers ranging from 14% to 17%. Draws were limited by minimum amounts, frequency caps, and a 13-week budget with variance tests. The final order added a 1% commitment fee and a facility fee payable at maturity.

What early relief did the company request? Smallhold obtained an interim order authorizing up to $150,000 in prepetition shipper claims to preserve shipping continuity and filed a motion to reject a Brooklyn office lease and several vendor contracts effective February 29, 2024.

What do unsecured creditors receive? General unsecured creditors receive a guaranteed GUC Recovery Pool totaling $155,000. The plan scheduled $75,000 in Q3 2025 and the remaining $80,000 over the rest of the five-year plan term, with Monomyth guaranteeing the pool.

How was the plan confirmed? The Third Amended Plan was confirmed under Section 1191(b) (cramdown) because Class 2 general unsecured creditors rejected the plan while Class 1 (the DIP lender) accepted it. The court found the plan did not unfairly discriminate and was fair and equitable under Subchapter V standards.

What did the August 2024 monthly operating report show? The report showed negative beginning and ending cash balances, $691,266 in cash receipts, $1,163,885.16 in disbursements, and DIP financing payables of $939,000.

Has Smallhold emerged from bankruptcy? A September 2024 announcement described Smallhold's emergence and a partner farm network supported by investment led by Monomyth.

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