Houston, We Have (Another) Problem

Section 1123(a)(4) of the US Bankruptcy Code requires that each holder of a claim within a class receive ‘the same treatment’. In modern Chapter 11 practice, however, restructurings frequently rely on transactional mechanisms—such as equity rights offerings and backstop commitments—that can allocate value to some creditors but not others. This dynamic reflects a broader tension in restructuring law between the US Bankruptcy Code’s formal commitment to creditor equality and the practical need for flexibility in negotiating complex reorganisations. My article examines a recent decision by the US District Court for the Southern District of Texas in In re ConvergeOne Holdings, Inc, which provides an important application of the equal-treatment requirement to these increasingly common restructuring structures. The decision suggests that courts may scrutinise not only formal plan distributions but also whether valuable transactional opportunities offered in connection with a restructuring are made available on equal terms to all creditors within a class.

In ConvergeOne, the debtor negotiated a restructuring support agreement with a group of secured lenders holding a majority of the company’s funded debt prior to filing for Chapter 11. The resulting pre-packaged plan incorporated an equity rights offering that permitted participating lenders to purchase equity in the reorganised company at a discount to plan value. The same lenders also agreed to backstop the rights offering and were entitled to the premium economics associated with that commitment as well.

Participation in both the rights offering and the backstop arrangement, however, was limited to the lenders that negotiated the restructuring agreement. Other lenders within the same class—despite holding identical claims—were excluded from these opportunities. Because the rights offering allowed participating lenders to acquire reorganised equity at a favourable valuation, the excluded lenders faced materially lower recoveries than their participating counterparts. The bankruptcy court nevertheless confirmed the plan, prompting an appeal by the excluded lenders.

The District Court reversed confirmation, holding that the plan violated section 1123(a)(4)’s equal-treatment requirement. Central to the Court’s reasoning was the conclusion that the opportunity to participate in the rights offering and backstop constituted valuable consideration. Because that opportunity was tied to the lenders’ status as creditors and was not made available to all members of the class, the Court determined that the plan effectively conferred additional value on some creditors but not others.

The Court’s analysis drew on two key precedents. First, the Supreme Court’s decision in Bank of America National Trust & Savings Ass’n v 203 North LaSalle Street Partnership recognised that exclusive opportunities to obtain equity tied to pre-existing claims may violate core bankruptcy principles when they are not exposed to market competition. Secondly, the Fifth Circuit’s recent decision in In re Serta Simmons Bedding, LLC emphasised that section 1123(a)(4) protects not only equality in formal plan distributions but also equality in the opportunity to obtain value. Drawing on these authorities, the district court concluded that restricting participation in the rights offering and backstop effectively provided additional plan consideration to a subset of creditors within the class.

The ConvergeOne decision has potentially significant implications for restructuring practice. Rights offerings and backstop commitments are widely used in in-court restructurings, with negotiations often occurring among a subset of lenders prior to filing. ConvergeOne suggests that courts may increasingly scrutinise whether such arrangements allocate value ‘on account of’ a creditor’s claim and, if so, whether the opportunity to obtain that value must be offered on equal terms to all members of the class.

Although the ultimate reach of ConvergeOne remains uncertain, the decision underscores a broader point: the Bankruptcy Code’s equal-treatment requirement may extend beyond the formal terms of plan distributions and reach the allocation of valuable transactional opportunities offered in connection with a restructuring.

The author’s article is available here.

Jeffrey D. Pawlitz is a Partner, Restructuring, at Willkie Farr & Gallagher LLP.