A Texas bankruptcy judge has officially confirmed Party City’s Chapter 11 liquidation plan, pushing the struggling retailer one step closer to winding down operations. The approval came Wednesday, despite strong objections from the U.S. Trustee’s Office, which claimed the plan improperly slashes administrative claims and risks skirting the Bankruptcy Code.

During the virtual hearing, U.S. Bankruptcy Judge Alfredo R. Perez emphasized that while the outcome is far from ideal, it provides a significantly better recovery for creditors compared to a Chapter 7 liquidation.

“In Chapter 7, administrative claimants might see only half — or even less — of what they’ll get here, while unsecured creditors would walk away with nothing,” Judge Perez said. “This isn’t the outcome anyone would prefer, but it’s the best outcome under the circumstances.”

Trustee Pushback and Consent Dispute

The U.S. Trustee’s Office filed objections arguing the plan’s reliance on an opt-out consent mechanism fails to prove true agreement from administrative claimants.

“There’s no clear evidence of who consented and who didn’t,” said Jana Smith Whitworth, representing the trustee. “The Bankruptcy Code requires administrative claims to be paid in full, and this scheme risks circumventing that mandate.”

The trustee further alleged the plan attempts to reroute funds, with $1 million earmarked for unsecured creditors that should legally go to administrative claims first.

A Divided but Strategic Path

Despite these challenges, Judge Perez sided with Party City, highlighting that creditors overwhelmingly supported the deal. The plan ensures first-lien creditors are paid in full, while second-lien creditors and administrative claimants will share what’s expected to be between $10.8 million and $19.3 million in remaining cash.

Administrative claimants, unless they opt out, will accept reduced recoveries estimated between 23% and 33%.

“This plan isn’t flawless — far from it,” said Abraham Bane of Davis Polk & Wardwell LLP, representing the second-lien noteholders. “But it minimizes costs, sets up a liquidating trust, and offers the cleanest path forward.”

Party City’s Tumultuous Decline

The New Jersey-based retailer filed for Chapter 11 protection in December, staggering under $399 million in debt. The company plans to close about 700 stores and liquidate after efforts to revive sales collapsed, even following a previous bankruptcy in 2023.

Attorneys from Porter Hedges LLP and Paul Weiss Rifkind Wharton & Garrison LLP represented Party City, while the U.S. Trustee’s Office and multiple creditor groups, including the official committee of unsecured creditors, weighed in on the case.

Judge Perez concluded: “The plan may not be perfect, but it is the best path under grim financial realities.”