Corporate Restructuring/Finance Update
This past September 2025, the U.S. District Court for the Southern District of Texas reversed the bankruptcy court's approval of plan confirmation in ConvergeOne Holdings, finding that a backstop agreement for an equity rights offering available exclusively to a majority of lenders - without a market test - violated the equal treatment requirement of section 1123(a)(4) of the Bankruptcy Code. Relying on decisions by the U.S. Supreme Court in LaSalle and the Fifth Circuit in Serta, the District Court held that the ConvergeOne Chapter 11 plan contravened section 1123(a)(4) because it furnished greater recoveries to certain lenders than to others in the same class. Like Serta, ConvergeOne represents another decision in which courts closely scrutinize transactions favoring a majority lender group that excludes minority lenders.
The District Court examined various factors in ascertaining whether the treatment of creditors was equal for Code section 1123(a)(4) purposes. In discussing these factors against the backdrop of the Supreme Court's analysis of section 1129(b) in LaSalle, the District Court found the ConvergeOne plan lacking. First, the Court noted that the parties were treated unequally from a process standpoint: the debtors never offered the backstop opportunity to the excluded lenders. Moreover, the Court was not persuaded by the majority lenders' argument that the excluded lenders could have offered a competing deal after the plan had been filed. The Court found that at no point were the excluded lenders ever given any opportunity to participate in the backstop offering. The District Court also expressed concern that the debtors made no effort to market test the value of the backstop by soliciting competing offers.
ConvergeOne amplifies the growing tension between judicial policing of fairness in judicial restructurings and the Bankruptcy Code's policy of facilitating creditors' reliance on confirmed Chapter 11 plans. By refusing to approve exclusive anchor economics without a real market test, the District Court strengthened the equality of opportunity norm that has animated other recent decisions and narrowed the margins for structural creativity in the Chapter 11 arena. Following this important decision, exclusive backstop rights are now riskier unless subjected to a market process, which may be cost prohibitive to run where a business enterprise undergoing restructuring is not large enough or is otherwise facing severe liquidity constraints.
Implications
Backstopped rights offerings are a common method of increasing certainty for exit financing in larger Chapter 11 cases. It is not unusual for a backstop opportunity to be granted only to certain creditors, even without a market test. The District Court in ConvergeOne invalidated the backstop arrangement by reasoning that "at the time the bankruptcy petition was filed, the train had already left the station, and the Minority Lenders were never permitted to board." ConvergeOne may fairly be construed as continuing down the path laid out in LaSalle and Serta of scrutinizing deals with majority lenders at the expense of minority creditors.
Investors should understand that even a Chapter 11 plan confirmed by a bankruptcy court may be vulnerable to continuing litigation on appeal, including unwinding of side deals like exclusive backstop rights or equity allocation carveouts if process or fairness objections are sustained. In large reorganization cases, lack of certainty around plan confirmation may cause investors to rethink the relative benefits and risks of pursuing a non-pro rata structure, demand enhanced economics to compensate for heightened litigation risk, or decline to participate in exit financing at all, depending on the particular circumstances.
Equality of opportunity and risk allocation should take center stage when structuring a distressed recapitalization. Maintaining a clear record of the company's solicitation efforts, evaluation of bids, valuation rationales, and internal deliberations remains of utmost importance in the wake of recent rulings like Serta and ConvergeOne. Because ConvergeOne introduces elevated structural risk and uncertainty in economic awards, funds active in distressed credit or special situations should disclose the existence of such risks to investors in order to properly align expectations and also point out that such challenges could increase costs and reduce anticipated returns.
At bottom, the ConvergeOne decision places significant limits on the use of exclusive backstop deals and may fundamentally alter negotiations between and among debtors and creditors as well as majority and minority lenders in the same class.