What Happens to GPUs When a Neocloud Goes Bankrupt

Oct 23, 20268 min read

When a neocloud files for bankruptcy, its GPUs stay in the racks and its lender cannot touch them. The automatic stay stops every repossession, lockout and sale the moment the petition is filed.^{[1]11 U.S. Code Section 362: automatic stayhttps://www.law.cornell.edu/uscode/text/11/362} In Chapter 11 the operator keeps running the cluster, and the lender gets the GPUs back only by agreement, a court order, a court-approved sale or a plan.

An aircraft lender in the same position gets its planes back after 60 days unless the airline cures and keeps paying.^{[2]11 U.S. Code Section 1110: aircraft equipment and vesselshttps://www.law.cornell.edu/uscode/text/11/1110} GPU lenders have no such deadline, as Section 1110 for GPUs explains.

The automatic stay freezes the GPUs

The stay is an injunction that arises by statute on filing, with no hearing. It bars any act to take possession of estate property, to create, perfect or enforce a lien, or to collect a pre-filing debt.^{[1]11 U.S. Code Section 362: automatic stayhttps://www.law.cornell.edu/uscode/text/11/362}

It binds every creditor at once. For a GPU lender, that means:

No self-help. Shutting off remote access, pulling servers or instructing the colocation provider to lock the cage violates the stay.
No sweep. The lender cannot set off or sweep the borrower's operating account without court approval.
No late filing. A lien that was not perfected before the petition generally cannot be perfected after it.
No colocation lockout either. The colocation provider is stayed too, which keeps the power on for the lender as well as the debtor.

Core Scientific stopped paying its equipment lenders on October 26, 2022, filed on December 21, and kept running the financed miners in its own sites until it emerged on January 23, 2024.^{[3]Core Scientific, Form 8-K: decision not to make payments due on equipment and other financings (October 26, 2022)https://www.sec.gov/Archives/edgar/data/1839341/000119312522270236/d395956d8k.htm}^{[4]Blockworks, "Core Scientific emerges from bankruptcy" (January 2024)https://www.blockworks.com/news/core-scientific-emerges-from-bankruptcy} Its lenders got out on timelines from about six weeks, for NYDIG's negotiated return of its miners, to 13 months under the plan, as the GPU loan default casebook details.^{[5]The Block, "Core Scientific cuts deal with lender NYDIG to extinguish $38.6 million in debt" (February 2023)https://www.theblock.co/post/208323/core-scientific-cuts-deal-with-lender-nydig-to-extinguish-38-6-million-in-debt}^{[6]Core Scientific, Form S-1: plan of reorganization, miner equipment lender elections (April 2024)https://www.sec.gov/Archives/edgar/data/1839341/000162828024016122/core-20240413.htm}

GPUs held in an SPV

The stay covers the estate of the entity that filed. GPUs owned by a separate bankruptcy-remote SPV stay outside the parent's case unless the SPV files too.

SPVs do file. In 2009 General Growth Properties put solvent property-level SPVs into its Chapter 11 case, and the court refused the lenders' motions to dismiss those filings.^{[7]In re General Growth Properties, Inc., 409 B.R. 43 (Bankr. S.D.N.Y. August 11, 2009)https://www.courtlistener.com/opinion/1551709/in-re-general-growth-properties-inc/}

Chapter 11 or Chapter 7

The chapter decides whether the GPUs keep earning. In Chapter 11 the debtor stays in possession and runs the business.^{[8]11 U.S. Code Section 1107 and 1108: rights of a debtor in possession and authority to operate the businesshttps://www.law.cornell.edu/uscode/text/11/1108} In Chapter 7 a trustee takes over to liquidate, and a neocloud's cluster usually goes dark.

Question	Chapter 11	Chapter 7
Who runs the GPUs	The operator, as debtor in possession	A trustee, usually not an operator
Offtake revenue	Keeps flowing if the customer stays	Usually stops within weeks
Lender's fastest path	Negotiated return or a sale	Trustee abandons collateral with no equity
Collateral value	Held up by the running contract	Falls with every idle month

A Chapter 7 trustee may abandon property that is burdensome or of inconsequential value to the estate.^{[9]11 U.S. Code Section 554: abandonment of property of the estatehttps://www.law.cornell.edu/uscode/text/11/554} A fully encumbered cluster qualifies, so a lender often gets its GPUs back sooner in Chapter 7. It gets them back cold, with no customer, from a facility that may already be unpaid.

How the lender gets the GPUs back

There are four routes out of the stay.

Agreement with the debtor. The debtor surrenders the collateral in exchange for releasing all or part of the debt, with court approval.
A motion for relief from stay. The court must lift the stay for cause, including lack of adequate protection, or when the debtor has no equity in the collateral and the collateral is not necessary to an effective reorganization.^{[1]11 U.S. Code Section 362: automatic stayhttps://www.law.cornell.edu/uscode/text/11/362} The stay ends 30 days after the motion unless the court keeps it in place after a hearing.
A court-approved sale. The estate sells the assets under Section 363, and the lien attaches to the proceeds.^{[10]11 U.S. Code Section 363: use, sale, or lease of property, including cash collateralhttps://www.law.cornell.edu/uscode/text/11/363}
A plan of reorganization. The plan decides what each class gets.

The relief motion is weaker than it reads. In an early Chapter 11 case, a cluster that produces all of the debtor's revenue is plainly necessary to a reorganization, so the "no equity" test rarely frees it. The fight moves to adequate protection.

Leases

A lessor under a true lease of equipment gets current rent starting 60 days after a Chapter 11 filing, unless the court orders otherwise, and gets the servers back if the debtor rejects the lease.^{[11]11 U.S. Code Section 365: executory contracts and unexpired leaseshttps://www.law.cornell.edu/uscode/text/11/365} A lease that is really a financing, such as a full-life lease with a $1 buyout, is treated as a secured loan and loses that right.^{[12]Uniform Commercial Code Section 1-203: lease distinguished from security interesthttps://www.law.cornell.edu/ucc/1/1-203}

Adequate protection pays for decline, not delay

Adequate protection compensates the lender for any decline in its collateral's value while the stay holds it. The court can order cash payments, replacement liens on other assets, or other relief.^{[13]11 U.S. Code Section 361: adequate protectionhttps://www.law.cornell.edu/uscode/text/11/361}

The Supreme Court held in 1988 that an undersecured lender gets no compensation for the delay in foreclosing.^{[14]United Savings Association of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365 (1988)https://www.law.cornell.edu/supremecourt/text/484/365} The secured claim itself is capped at the collateral's value, and the rest is unsecured.^{[15]11 U.S. Code Section 506: determination of secured statushttps://www.law.cornell.edu/uscode/text/11/506}

For GPUs, the decline is the argument. A GPU server that steps down in value each time NVIDIA ships a new generation makes a stronger adequate-protection case than a building does. The evidence is an appraisal at the petition date, the resale curve for the exact model, and a schedule of monthly decline.

Who gets the offtake revenue

In Chapter 11 the GPUs keep earning, and the fight shifts to the cash. Cash in which a lender holds a lien is "cash collateral," and the debtor cannot spend it without the lender's consent or a court order.^{[10]11 U.S. Code Section 363: use, sale, or lease of property, including cash collateralhttps://www.law.cornell.edu/uscode/text/11/363}

Whether post-filing revenue is covered depends on the security agreement. A pre-filing lien reaches post-filing proceeds, products and profits of the collateral, unless the court rules otherwise on the equities.^{[16]11 U.S. Code Section 552: postpetition effect of security interesthttps://www.law.cornell.edu/uscode/text/11/552} GPU-hour revenue comes from the servers plus the operator's power, staff and software, so a debtor can argue that much of it is not proceeds of the GPUs.

Lenders close that question before a filing. They take a direct lien on the offtake contract, its receivables and the deposit account the offtaker pays into, under a deposit account control agreement (DACA).

The offtake contract and the colocation agreement

Both are executory contracts, and the debtor chooses to assume or reject each one. Clauses that let a counterparty terminate because of a bankruptcy filing are generally unenforceable.^{[11]11 U.S. Code Section 365: executory contracts and unexpired leaseshttps://www.law.cornell.edu/uscode/text/11/365} The offtaker cannot walk merely because the operator filed.

The same rule protects an offtaker that files. It can reject the offtake contract, and the operator is left with an unsecured claim for damages, treated as a pre-filing debt.^{[17]11 U.S. Code Section 502(g): claims arising from rejection of executory contractshttps://www.law.cornell.edu/uscode/text/11/502} Lenders cover that side with offtaker credit work and lost revenue cover.

If the debtor rejects the colocation agreement, the GPUs must leave the building. The lender's removal window then comes from the colocation access agreement it signed before funding.

References

Frequently Asked Questions

What happens to GPUs when a neocloud goes bankrupt?

They stay where they are. The automatic stay (11 U.S.C. 362) stops the lender, the colocation provider and every other creditor from taking or selling them. In Chapter 11 the operator keeps running the cluster as debtor in possession, and the lender gets the GPUs back only by agreement, a court order lifting the stay, a court-approved sale, or a plan. In Chapter 7 a trustee usually shuts the cluster down and may abandon fully encumbered equipment to the lender.

Can a lender get relief from the automatic stay for GPU collateral?

Yes, for cause, including lack of adequate protection, or when the debtor has no equity in the GPUs and they are not necessary to an effective reorganization (362(d)). Early in a Chapter 11 case a cluster that produces the revenue is usually necessary, so the fight tends to turn to adequate protection payments or a negotiated return.

Does the lender get the offtake revenue during the bankruptcy?

Only if its lien reaches it. Cash subject to a lien is cash collateral, which the debtor cannot use without the lender's consent or a court order (363(c)(2)). GPU-hour revenue also depends on the operator's power, staff and software, so lenders take a direct lien on the offtake contract, its receivables and the deposit account the offtaker pays into.

Can the offtaker terminate its contract because the neocloud filed for bankruptcy?

Generally no. Clauses that terminate a contract because of a bankruptcy filing are unenforceable against the debtor (365(e)). The debtor decides whether to assume or reject the offtake contract and the colocation agreement. If it rejects the colocation agreement, the equipment has to leave the facility.

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Written by

Bernie Margulies, CEO

Bernie leads program business at American Compute. He maintains relationships with reinsurers and a range of capacity managers, and enjoys the nuances of designing unique coverages for specialty risk. He holds the Chartered Property Casualty Underwriter (CPCU) designation and is a candidate for the Associate in Captive Insurance (ACI). His background spans technology investment, insurtech leadership, and underwriting for emerging asset classes. Previously held senior roles at multi-billion dollar venture-backed insurance and technology companies.

AC Research

The AC Research team publishes analysis on GPU economics, AI infrastructure financing, and hardware depreciation. Our work is informed by direct experience underwriting GPU residual value insurance solutions.