Another One Bites the Dust: Sonder Files for Bankruptcy

Photo by Annie Spratt on Unsplash

Sonder Files for Chapter 7 Bankruptcy

In a quick succession of unfortunate events, Sonder collapsed within a week, joining a long list of company failures at the convergence of tech and real estate, like WeWork and OpenDoor. 

Sonder is a San Francisco-based short-term rental and boutique hotel company. Once called a “billion-dollar competitor to Airbnb”, Sonder officially filed for Chapter 7 liquidation proceedings on November 14th in federal bankruptcy court in Delaware.

A week earlier, on November 9th, Marriott announced an abrupt end to its licensing agreement with Sonder due to the company’s default, cutting a key lifeline of the company. The next day, Sonder announced that it plans to immediately wind down its US operations and file for Chapter 7 bankruptcy. The immediate cessation of operations caught many off guard, especially employees and guests. Guests in properties across the world were ordered to vacate their hotel rooms within 24 hours, and all employees were laid off. 

The downfall of the company had been simmering below the surface, and I had a front-row seat to the business drama. I booked through Marriott’s platform a weekend stay at a Sonder property in Nashville. The night before the trip, on November 6th, I logged into Sonder’s app and, to my surprise, discovered that my reservation was cancelled. In a moment of panic, I called Sonder’s customer service to find out what happened. It turns out that a week before, Sonder abruptly ended its lease at the property and subsequently cancelled all reservations at the property. However, I received no communication in any format from either Sonder or Marriott about the cancellation. Fortunately, I received a full refund for the stay, and upon protest, Marriott compensated me 5000 reward points for my trouble. Imagine if I had relied upon the company’s silence and did not check before my trip, I would have flown across the country only to discover that I was no longer welcome at the property and would have been homeless for the weekend. 

Sonder’s Rise and Mostly Fall

Founded in 2014 by Francis Davidson in Montreal, Sonder aimed to adopt a technology-driven model to reduce operating costs in running hotels. However, the company has always struggled with the potential scalability of software technology and a high leverage in the physical world. Unlike Airbnb, where individual owners list their properties for rent, Sonder leases its short-term rental properties directly, which made the company’s financial position highly leveraged. The “asset-light” model really put the company in the worst of both worlds. As the company expanded globally, unlike outright ownership of properties, the company had to burn through its working capital and tap its free cash flow to meet recurring long-term obligations of property leases. Meanwhile, its revenue is subject to the tremendous volatility of the hospitality industry. The 2020 pandemic only exposed the problem. 

Still, during the SPAC craze in 2021, Sonder went public via the controversial SPAC process, which valued the company at $2 billion. However, since the stock hit the public market, it has been on a continuous free fall. As of November 18th, the market capitalization of the company is down to around $1 million. 

In 2024, Sonder entered into a strategic partnership with Marriott, which marked the beginning of the end of the company. Under the agreement, Marriott provided liquidity and a distribution channel for Sonder. Sonder’s properties would be listed within Marriott’s Bonvoy ecosystem, granting access to a global customer base and loyalty program. The relationship was expected to stabilize revenue and reduce customer-acquisition costs. But in reality, Sonder claimed “significant, unanticipated integration expenses” and a “sharp decline in revenue arising from the Marriott partnership.” 

In the weeks before bankruptcy, Sonder and Marriott explored options to continue Sonder’s operation. On November 5th, Marriott agreed to provide Sonder with about $1.5 million in funding for Sonder’s immediate US payroll and payroll taxes obligations. However, Sonder repeatedly requested additional funding to orderly wind down its operations, to which Marriott declined. Marriott claimed it had no obligation to provide Sonder further financial assistance.  

In the negotiations, according to Marriott’s filing in the bankruptcy proceeding, Sonder threatened to “shut down hotel systems and leave thousands of guests locked out of their rooms mid-stay, without regard to whether those rooms contained medication, passports, personal effects, or other essentials, and be left with no place to sleep.” Unfortunately, the threat did not help Sonder in securing financing, and the threat materialized in many guests’ actual experience. 

A Legal Mess

Chapter 7 Liquidation

Sonder chose Chapter 7 liquidation proceedings over many other forms of bankruptcy, such as Chapter 11 reorganization. In a Chapter 7 bankruptcy, a company ceases all business operations immediately, usually at the moment of filing. Sonder made a drastic move and preemptively shut down the whole operation within a day of announcing its intention to file for bankruptcy. Although the few days between announcement and actual court filing mean little for a doomed company, Sonder still chose the most chaotic approach. 

In a Chapter 7 bankruptcy, the court also appoints a trustee immediately to oversee the liquidation process, and the company management effectively loses control over the company. The merit hearing in this case is scheduled on November 18th to determine the appointment of a trustee. 

Liquidation under Chapter 7 follows a strict priority order: secured creditors, administrative expenses for the liquidation proceedings, priority unsecured claims, general unsecured claims, and equity holders. In virtually all Chapter 7 liquidation cases, shareholders usually receive nothing. 

Sonder, an asset-light company, has few assets to satisfy all the claims. The most considerable claims against the company are probably landlords who hold long-term master leases and vendors who provide a variety of services to the company. However, their claims are most likely unsecured and will receive pennies on the dollar. 

Amidst the chaos, a former employee of Sonder filed a class action suit alleging the company failed to provide adequate warning of mass layoffs before it entered Chapter 7 bankruptcy. The employee's class action suit claims that workers are entitled to 60 days' notice under the Work Adjustment and Restraining Notification (WARN) Act, for which they should be compensated with pay and benefits of the warning period. 

The priority of the employees’ claim presents an interesting issue. For unpaid wages and benefit plan contributions accrued before the bankruptcy, these claims receive a priority unsecured status above general unsecured claims. However, WARN Act claims seek damages in the amount of wages during a 60-day warning period, which are recognized as general unsecured claims. For these claims, employees are unlikely to receive anything. 

Chapter 7 liquidations are often accompanied by an investigation of company transactions in the waning days. Most notably, payments made to executives, such as generous compensation or imprudent insider business transactions, would be heavily scrutinized. When fraud is involved, creditors may be able to claw back some of the transactions. 

Marriott’s Liability

As a troubled company, Sonder’s remaining assets cannot satisfy angry creditors and customers. Expectedly, some angry plaintiffs will turn to Marriott for its deeper pocket. However, Sonder is not a subsidiary of Marriott, and the parties only have a contractual relationship that amounts to a small portion of Marriott’s global business empire. Whatever harm Sonder’s bankruptcy has on Marriott is minuscule, and Marriott will most likely come out of the mess unscathed. 

Shareholders of Marriott may bring securities fraud claims against Marriott, claiming that Marriott misrepresented material facts regarding the Sonder partnership, which led to its stock drop upon Sonder’s collapse. However, shareholders’ securities fraud claim will certainly fail. First, Marriott’s stock only went up recently. Second, shareholder-plaintiffs face a heightened hurdle in showing affirmative misrepresentation. Likewise, shareholders may also bring derivative actions against Marriott executives, claiming they negligently partnered with an unstable company. However, absent fraud or gross negligence, business decisions by Marrriot executives, even bad ones, are protected by the Business Judgment Rule. So Marriott management will be unlikely to shoulder any liability. 

Customers of Marriott might also bring a variety of contract-based claims or consumer protection claims. These claims are also a long shot from success. Marriott can easily dismiss these claims and appease angry customers like me with refunds and small compensation.  

Business Lesson

Sonder’s liquidation is not just the failure of a single company but once again highlights a structural problem for a particular business model. A technology valuation framework works when the business is highly scalable with little marginal cost. However, this framework does not work for companies that are mostly tech-enabled or tech-enhanced business models in more traditional industries. In Sonder’s case, the marginal cost of operating a new property does not approach zero just because the business has an app. It remains subject to the same fixed-cost structure in the hospitality industry. Security guards, maintenance crew, and furniture need to be paid for. As a much smaller business, Sonder takes on a much higher leverage than Marriott by signing long-term master leases while Marriott operates mainly on a franchising model. Ultimately, Sonder’s collapse exposes a fundamental flaw of financial misalignment in its operating model. 

I carry so many memories from my stay at Sonder over the years: warm afternoons in Montreal drafting my law school personal statement, late-night conversations with friends at Georgetown Law in D.C., quiet mornings in Milan piecing together my journal note. Each of those moments felt so alive then, so full of possibility. Now they sit like postcards in a box, softened by time, precious because they’re gone.

*The views expressed in this article do not represent the views of Santa Clara University.