Hotel Chapter 11: 6 Issues That Make a Hotel Bankruptcy Different

A hotel in Chapter 11 is a building that must be sold again every night, and the Bankruptcy Code treats each night's sale as belonging, at least in part, to the mortgage lender. That single fact separates a hotel case from the reorganization of a machine shop or a restaurant group. The rest of what makes a hotel bankruptcy different follows from the contracts layered on top of the building: a franchise that lends the property its name, a manager that may employ everyone on site, a loan that may belong to a securitization trust rather than a bank.

Six issues shape a Chapter 11 hotel restructuring. They arrive in roughly this order.

1. Room Revenue Is Cash Collateral From the First Night

The general rule in section 552(a) is that property a debtor acquires after filing is free of liens created by security agreements signed before it. Section 552(b) then makes exceptions, and one of them was written for this industry. Where a prepetition security interest reaches the property and "the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties," the lien extends to those payments received after the petition, to the extent the security agreement provides, unless the court orders otherwise "based on the equities of the case."

Section 363(a) closes the loop by naming those same room charges in its definition of cash collateral. A hotel's operating account on the morning after filing therefore holds money in which the lender has an interest, and section 363(c)(2) forbids using it unless the lender consents or the court, after notice and a hearing, authorizes the use. The court shall condition that use as necessary to provide adequate protection.

The consequence is practical before it is legal. Housekeeping payroll, linen service, the booking engine's commission, the franchise royalty, and the electricity bill are all paid out of revenue the lender claims, which makes the first cash collateral order the most important document in the case, and it is usually an interim order, renewed, or not, on a budget the lender has read line by line. A hotel owner who assumes that nightly revenue belongs to the operation because the operation earned it has confused two questions: who earned the money, and who holds an interest in it. The Code answers the second. Where a merchant cash advance funder also claims the same receipts, the question of whose interest attaches, and in what order, becomes part of that hearing, and it turns on documents the owner signed years apart with no thought of how they would sit together.

The guests pay the hotel. The Code decides whose money they have paid.

Spending the lender's cash collateral without consent or an order is not a technical lapse. Section 1112(b)(4)(D) counts it, where the spending substantially harms a creditor, among the causes on which the court shall convert or dismiss the case.

2. The Franchise Agreement Must Be Assumed, Renovation Bill and All

A flagged hotel operates under a franchise agreement that licenses the brand, the reservation system, and the loyalty program. In Chapter 11 that agreement is an executory contract, and the debtor must decide whether to assume or reject it. Section 365(e)(1) prevents the franchisor from terminating it solely because the hotel filed or became insolvent. It does not excuse defaults.

To assume a contract in default, section 365(b)(1) requires the debtor to cure, compensate for actual pecuniary loss, and provide "adequate assurance of future performance." Here the property improvement plan enters. Franchise systems commonly require owners to renovate on a schedule the brand sets, and a hotel that filed partly because it could not fund those renovations must now show the court how it will. The Code itself does not name franchise agreements, and whether a particular trademark license can be assumed over the franchisor's objection is a question of applicable law that counsel will need to address for the specific brand and circuit.

3. The Lender May Be a Servicer Acting for Bondholders

Many hotel mortgages are pooled into commercial mortgage-backed securitizations. After a default, the borrower tends to deal not with the bank that made the loan but with a special servicer acting under the securitization's servicing agreement, for investors the owner will never meet.

You call the lender and you reach someone whose job is the bondholders.

4. Whether the Hotel Is Single Asset Real Estate Sets the Clock

Section 101(51B) defines single asset real estate as a single property or project that generates substantially all of the debtor's gross income and "on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto." If a debtor fits that definition, section 362(d)(3) gives the mortgage lender a shortcut out of the stay.

Ninety days into the case, counted from the order for relief (or 30 days after the court determines the debtor is subject to the rule, if later), the stay lifts as to that lender unless the debtor has filed a plan with "a reasonable possibility of being confirmed within a reasonable time" or has begun monthly payments equal to interest at the nondefault contract rate on the value of the lender's interest in the property. A single-entity hotel owner is precisely the debtor a lender will argue fits the definition. The owner will answer that a hotel, with its front desk, its restaurant, its banquet sales and its staff of dozens, conducts substantial business beyond owning real estate, and whether that answer succeeds is a question of fact for the court. The classification also matters for Subchapter V, since a debtor whose primary activity is owning single asset real estate is excluded from the definition of small business debtor. Chapter 11 was built for operating businesses. A hotel is one, most days, and it may have to prove it.

5. The Management Company Is a Counterparty, Not a Department

Where a third-party manager runs the property, the management agreement is another executory contract to assume or reject. Rejection produces a damages claim that section 502(g)(1) treats as if it arose before the petition, which places the manager among the general unsecured creditors for that claim. The manager may also control the operating accounts, employ the staff, and hold the guest data, and a rejection that is legally clean can still leave the hotel without a payroll system on the following Monday, a detail the transition plan has to settle before the motion is filed.

6. Guest Deposits and Utilities Carry Their Own Rules

An individual who paid a deposit for a room or an event for personal, family, or household use holds a priority claim under section 507(a)(7), up to $3,800 per individual as adjusted April 1, 2025, for services not provided. A wedding booked for next June is the ordinary example. Utilities, for their part, may alter or refuse service in a Chapter 11 case if they do not receive, within 30 days of the petition, adequate assurance of payment satisfactory to the utility, subject to the court's power to modify the amount.

Before the Hotel Files

Much of a hotel's distress sits in instruments no settlement company can touch: the mortgage, the franchise agreement, the management contract, the securitization's servicing terms. A hotel facing foreclosure, a brand default, or a special servicer that will not negotiate needs bankruptcy or real estate counsel, not a debt settlement firm. Where the pressure comes instead from merchant cash advances layered on top of an otherwise serviceable mortgage, Delancey Street reviews those positions in a free, confidential first conversation and negotiates with the funders. The firm is not a law firm and does not file cases; legal matters go to independently licensed counsel. Whichever path an owner takes, the question at the center will be the one the cash collateral hearing asks, and it is worth answering on paper before a judge asks it: whose money is in the operating account tonight.