Four wind-down entities created from the remains of a once-thriving Arizona-based paper manufacturer are seeking bankruptcy court approval to sell employee retention credits worth over $6 million to a specialized purchaser, according to a motion filed in the U.S. Bankruptcy Court for the District of Delaware.
HRHI Wind-down, LLC and three related entities filed the motion on August 7, 2025, requesting permission to sell a 100% participation interest in employee retention credits (ERCs) valued at $7,196,429.17 to 1861 Acquisition LLC for $6,116,962.23—representing 85% of the credits' face value. The case is proceeding under Case No. 25-10674 (TMH) in Delaware bankruptcy court.
The transaction represents the final major asset monetization for companies that were once part of Royal Interco, LLC, a family-owned business that began in 1992 as a single converting line operation in Phoenix, Arizona, supplying napkins and bath tissues to local retailers. The company had grown into a vertically integrated manufacturer serving major retailers including Aldi, Whole Foods, Trader Joe's, Kroger, and Meijer before facing financial distress.
From Family Business to Bankruptcy
The underlying paper manufacturing business experienced significant challenges in 2024, including labor shortages and a February warehouse fire that severely impacted the company's ability to meet customer demand. With annual revenue of approximately $220 million and 105 customers, the company struggled with supplier credit reductions as its senior debt maturity approached.
The original entities filed for Chapter 11 protection on April 8, 2025, and successfully sold substantially all their operating assets to Sofidel America Corp. for $126 million in a sale that closed on June 16, 2025. The current wind-down entities—HRHI Wind-down, LLC; DPM Wind-down, L.L.C.; HRHP Wind-down, LLC; and SPC Wind-down, LLC—were created to handle the liquidation process, with the ERCs representing one of the few remaining valuable assets not included in the main business sale.
Specialized Asset Sale Process
The debtors worked with Ryan LLC, a leading global tax services firm specializing in employee retention credits, and investment banker Novo Advisors, LLC to conduct the sale process. Despite the specialized nature of the assets, the marketing effort reached 11 potential purchasers, though only four executed non-disclosure agreements and ultimately only two submitted letters of interest.
"The market for entities willing to purchase the ERCs is limited, and the Debtors believe the RPA represents the highest value for the ERCs that is available," the debtors stated in their motion. The Risk Participation Agreement (RPA) with 1861 Acquisition was selected as the winning bid over a competing offer for a lower amount.
The ERCs in question relate to claims filed with the Internal Revenue Service for qualified wages paid during the first, second, and third quarters of 2021, when the original paper manufacturing operations were still running at full capacity with over 100 employees across facilities in Phoenix, Arizona; Gila Bend, Arizona; and Duncan, South Carolina. The debtors are currently awaiting IRS approval of the credits, and the purchase price would be adjusted if any portion is approved, impaired, or disallowed before the sale closes.
Legal Standards and Business Justification
Under the proposed sale terms, 1861 Acquisition would purchase the ERCs free and clear of all liens and encumbrances, with the purchaser taking on the risk of IRS approval or denial. The debtors argue this represents sound business judgment given the specialized nature of the asset and limited buyer pool.
"The Debtors, in their sound business judgment, believe the Sale of the ERCs to the Purchaser is supported by sound business reasons and is in the best interest of the Debtors and their estates," according to the motion filed by Morris, Nichols, Arsht & Tunnell LLP, which represents the debtors.
The sale meets the requirements under Section 363 of the Bankruptcy Code for asset sales outside the ordinary course of business, the debtors contend. Although no formal auction is contemplated, they argue that competitive bidding was accomplished through the marketing process conducted by their advisors.
Final Chapter for Paper Manufacturer
The ERC sale represents the closing chapter for a business that once operated sophisticated paper-making facilities, including a Gila Bend mill housing two paper machines "each the size of a single-family home." The company had expanded from its Phoenix roots to include East Coast operations through the 2020 acquisition of Sun Paper Company in South Carolina, creating a vertically integrated manufacturer serving both retail ("At-Home") and commercial ("Away-from-Home") markets.
Michael Ragano, who served as Chief Restructuring Officer during the bankruptcy process and is a partner with Novo Advisors, had overseen the transformation from operating company to wind-down entities following the successful asset sale to Sofidel.
Court Timeline
Parties have until August 21, 2025, at 4:00 p.m. Eastern Time to file objections to the proposed sale, with a hearing scheduled for August 28, 2025, at 2:00 p.m. The debtors are also seeking to waive the typical 14-day stay period that follows bankruptcy court orders to expedite the closing.
Employee retention credits were created as part of federal COVID-19 relief legislation to help businesses retain workers during the pandemic, but processing delays and compliance requirements have created a secondary market for the credits.
This article was prepared using Stretto Conductor, our new AI-powered assistant that's here to help. Stretto Conductor was able to create this summary of a 16 page court filing in less than a minute. Always review the underlying docket filings for accurate information. The information and responses generated by Stretto Conductor may contain errors or inaccuracies and should not be relied upon as a substitute for professional or legal advice.