Liability Management After ConvergeOne: Equal Treatment, Exclusive Opportunities, and the Next Phase of "Lender-on-Lender" Warfare
For more than a decade, borrowers and their sponsors have used liability management exercises ("LMEs") to create runway, preserve liquidity, and rationalize capital structures outside of formal insolvency proceedings. In market parlance, these transactions include "uptiers," "double-dips," "drop-downs," non-pro rata exchanges, debt-for-debt tenders, and rights offerings calibrated to reward cooperation and speed. These mechanisms are designed to address two persistent features of distressed credit markets: first, the high cost of unanimity in widely held capital structures; and second, the latitude afforded by modern credit agreements to amend with majority consent as long as "sacred rights" are unchanged except upon each affected lender's consent.
The headline risk in these deals is lender-on-lender conflict. Majority lender groups may authorize priming or otherwise create structurally senior tranches in exchange for new money or enhanced economics, effectively subordinating nonparticipants. Sponsors, arrangers, and companies have argued that these are lawful innovations that reflect commercial reality. Excluded lenders have sometimes framed them as breaches of pro rata treatment or end-runs around sacred rights.
As the use of LME financial mechanisms has matured, appellate courts have begun to supply durable rules—most prominently in In re Serta Simmons Bedding, L.L.C., 125 F.4th 555 (5th Cir. 2024), petition for cert. filed, No. 24-1322 (U.S. June 18, 2025), and Ocean Trails CLO VII v. MLN Topco Ltd., 233 A.D.3d 614 (N.Y. App. Div. 2024) ("Mitel")—and bankruptcy courts have grappled with whether plan mechanics can distribute incremental value to supportive cohorts without violating the Bankruptcy Code's "equal-treatment" requirements (discussed below). The U.S. District Court for the Southern District of Texas's recent ConvergeOne decision squarely joins that latter debate. See In re Ad Hoc Group of Excluded Lenders, No. 4:24-cv-02001 (S.D. Tex. Sept. 25, 2025) (Dkt. 54) ("ConvergeOne").
What follows briefly situates ConvergeOne within the LME landscape, synthesizes the key strands of Serta, Mitel, In re Peabody Energy Corp., 933 F.3d 918 (8th Cir. 2019), In re iHeartMedia, Inc., 597 B.R. 339 (Bankr. S.D. Tex. 2019), and Bank of Am. Nat. Tr. & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434 (1999), and then provides an analysis of ConvergeOne's facts, issues, legal reasoning, and practical implications for ongoing restructurings and documentation strategy. In brief, ConvergeOne underscores a simple rule of decision: Debtors must either give every creditor in a class a genuine opportunity to participate on the same terms, or validate exclusivity through a credible market test.
The Statutory Background
Section 1123 of the Bankruptcy Code sets forth various requirements for a chapter 11 plan. Among them is the requirement in section 1123(a)(4) that a plan must "provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest." Section 1123(a)(4) addresses only the "equal treatment" of claims or interests in the same class of claims and interests, not a chapter 11 plan's overall treatment of creditors or interest holders. See generally Collier on Bankruptcy 1123.01[4][b] (16th ed. 2025).
Some circuit courts of appeals have concluded that a chapter 11 plan may treat certain claimholders more favorably than others, provided that the disparate plan treatment is based on identified rights or contributions from the favored claimants separate from their claims. See Ahuja v. LightSquared Inc., 644 F. App'x 24, 29 (2d Cir. 2016) (section 1123(a)(4) was not violated where a plan treated certain interest holders more favorably than other interest holders with interests in the same class because the favored interest holder: (i) held a secured claim in addition to its interest; and (ii) had "agreed to attribute" to the reorganized debtor certain causes of action against third parties); Mabey v. Sw. Elec. Power Co. (In re Cajun Elec. Power Coop., Inc.), 150 F.3d 503, 518–19 (5th Cir. 1998) (a plan proponent's payments to certain members of a debtor power cooperative did not violate section 1123(a)(4) because the payments were "reimbursement for plan and litigation expenses," not payments "made in satisfaction of the [members'] claims against [the debtor]"); Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1362–63 (9th Cir. 1986) (upholding confirmation of a plan that provided payments to one shareholder because payments were for the shareholder's service as a director and officer of the debtor, not for the shareholder's ownership interest).
Section 1129(b) of the Bankruptcy Code governs "cram-down" or nonconsensual confirmation of a chapter 11 plan, mandating that a cram-down plan's treatment of dissenting impaired unsecured claims must be both "fair and equitable" and not "discriminate unfairly." Section 1129(b)(2)(B) of the Bankruptcy Code provides that a plan is "fair and equitable" with respect to a dissenting impaired unsecured class if the creditors in the class "receive or retain" property of a value equal to the allowed amount of their claims or, failing that, in cases not involving an individual debtor, if no creditor of lesser priority, or no equity holder, receives or retains any distribution under the plan "on account of" its junior claim or interest. This requirement is sometimes referred to as the "absolute priority rule."
Survey of the Case Law
Two bodies of law dominate recent LME jurisprudence: New York contract law governing syndicated loan agreements and federal bankruptcy law, especially the Bankruptcy Code's equal-treatment and priority provisions.
Serta reframed the "open market purchase" debate. Applying New York law, the U.S. Court of Appeals for the Fifth Circuit held that the chapter 11 debtors' private, bilateral exchange employing an "open market purchase" exception could not be reconciled with the term's plain and trade usage. An "open market purchase," the court explained, refers to purchases on the designated secondary market for syndicated loans, not bespoke, invitation-only swaps used to induce consents that circumvent pro rata sharing. That holding reinvigorated sacred-rights protections and narrowed borrowers' ability to use open market exceptions to accomplish non-pro rata uptiers by consent.
On the plan side, the court also excised targeted indemnity protections incorporated into the debtors' confirmed plan. It concluded that the provision functioned as an impermissible "resurrection" of disallowed contingent reimbursement claims and, in any event, violated equal treatment because its expected value varied dramatically depending on whether a creditor had participated in the prepetition uptier.
Mitel went the other way. The New York Appellate Division held that the obligor's uptier did not trespass sacred rights because the amendments did not actually waive, amend, or modify protected terms; rather, majority lenders tendered their loans back and received new loans under amended agreements. Crucially, the obligor's documents authorized it to "purchase by way of assignment," without the "open market" limitation that proved dispositive in Serta. That textual difference and the court's insistence that "purchase," "refinancing," and "exchange" are not mutually exclusive concepts preserved discretion for majority-led refinancings where drafting is less constrained.
Peabody and iHeart frame two additional poles. In Peabody, the U.S. Court of Appeals for the Eighth Circuit rejected equal-treatment challenges to preferred equity and backstop economics embedded in a chapter 11 plan where all similarly situated creditors could qualify on the same terms by providing consideration (i.e., commitments, plan support, and backstop obligations). The court emphasized equality of opportunity, even if equality of outcome was not achieved. Conversely, in iHeart, the bankruptcy court rejected efforts to impose equitable liens tied to "springing lien" theories, holding that the borrower's decision to manage maturities and avoid immediate encumbrances reflected legitimate business judgment and did not trigger the indenture's equal-and-ratable protections or support unjust enrichment.
LaSalle supplies the U.S. Supreme Court's touchstone for exclusive opportunities in chapter 11. The Court read the phrase "on account of" in section 1129(b)(2)(B)(ii) to mean "because of," and held that a plan giving old equity an exclusive chance to acquire the reorganized enterprise without competition or market valuation violated the absolute-priority rule. While LaSalle addressed junior interests under the cram-down statute rather than intraclass equality under section 1123(a)(4), its insistence on either open competition or a credible market test to validate exclusive, value-bearing rights has become the analytical template courts invoke when assessing whether plan-granted opportunities confer additional "treatment" on claims or interests.
Read together, these cases draw several lines: Open market purchase clauses will be read narrowly; "purchase by assignment" clauses admit borrower-led exchanges absent "open market" constraints; equal treatment under section 1123(a)(4) tolerates different outcomes where all class members receive a bona fide opportunity to qualify by furnishing equivalent consideration; exclusive, value‑rich opportunities must be subjected to competition or credible market testing to avoid being treated as granted "on account of" the recipient's existing claim or interest; and equitable remedies will not rewrite clear contracts or police rational capital‑structure management absent actual breach.
ConvergeOne: Facts, Issues, Analysis, and Disposition
ConvergeOne arrived against this backdrop with a prepackaged plan negotiated under a restructuring support agreement ("RSA") executed immediately prepetition. The plan contemplated a rights offering at a substantial discount to plan equity value, backstopped by a subset of first-lien lenders. Those backstoppers received lucrative, exclusive economics—both the discount and a premium—tied to the backstop commitment. Minority lenders in the same impaired class were not invited to participate in backstop negotiations or the backstop itself; they objected at confirmation and then appealed, arguing that the plan violated section 1123(a)(4)'s equal-treatment requirement because the exclusive opportunity yielded materially higher recoveries for some class members "on account of" their claims.
The factual record was straightforward. The debtors, the sponsor, and a majority lender group negotiated through late 2024 and early 2025 and entered into an RSA just before the debtors filed for chapter 11 protection. The plan was filed immediately thereafter and moved rapidly to confirmation on the strength of prepetition votes exceeding 80% of first- and second-lien claims. The backstop was never market tested; the RSA contained a no‑shop clause. The minority lenders were candidly excluded from the prepetition process and were told participation was "restricted" to the largest creditors. After filing, the excluded lenders proposed two alternatives within the compressed prepack timeline. Neither gained traction in light of the confirmable plan already in hand.
The bankruptcy court confirmed the debtors' chapter 11 plan, and the minority lenders appealed the ruling to the district court, which denied the appellants' motions for a stay pending appeal and direct certification of the appeal to the Fifth Circuit.
On appeal, the district court faced three legal questions: whether the appeal was "equitably moot"; whether the exclusive backstop was "treatment for [a] claim" within the meaning of section 1123(a)(4); and if so, whether the plan nevertheless satisfied equal treatment because the extra value was simply market compensation for new obligations.
On mootness, the district court held relief was available without unwinding the plan. According to the court, the remedy could be surgical, such as by ordering the favored lenders to sell the incremental equity to excluded lenders on equivalent terms. The appeal thus proceeded.
On the merits, the district court drew heavily from Serta and LaSalle's "on account of" reasoning and from Peabody's equality-of-opportunity refrain. The court accepted that the exclusive backstop was "treatment" for a claim because the opportunity and its embedded economics were only offered to holders of claims in the class and resulted in meaningfully higher recoveries on those claims. It then examined whether the opportunity was either: (i) offered equally to all class members; or (ii) sufficiently market-tested such that the exclusivity was on demonstrably full-value terms unrelated to the claim.
Neither condition was met. Unlike in Peabody, where any creditor could qualify by tendering specified consideration, the ConvergeOne debtor's backstop cohort was handpicked in a closed prepetition process. Minority lenders were blocked from the negotiating table and given no realistic path to qualify on equal terms. And unlike the market-based checks LaSalle envisioned, there was no competitive bidding, third‑party process, or other mechanism to establish that the exclusivity itself was fairly priced. The debtor's banker acknowledged no market test occurred; the RSA's no‑shop foreclosed alternatives. The court also rejected the notion that brief, post‑filing windows to propose alternatives in a prepack with locked‑up votes could satisfy either equal opportunity or market testing.
Two additional points anchored the holding. First, the court underscored Serta's "function over form" approach to equal treatment. Dressing the exclusivity up as "new consideration for new obligations" could not obscure the unequal effect on recoveries within the same class when excluded lenders were never afforded the opportunity to furnish the same consideration on the same terms. Second, the court emphasized that while plans can produce different outcomes among equals, section 1123(a)(4) demands at a minimum an equality of opportunity, not a baked‑in distributional tilt that depends on prepetition gatekeeping.
Disposition followed from the analysis. The district court reversed the confirmation order to the extent it overruled the minority lenders' section 1123(a)(4) objection and remanded for proceedings consistent with its opinion. In denying equitable mootness, the court flagged practical remedial options that would avoid plan unwinding while curing the equal‑treatment violation.
How ConvergeOne Fits—and What It Means
ConvergeOne's core contribution is not to expand Serta's "open market purchase" analysis—that remains a New York-law contract question—but to situate equal treatment firmly in the center of prepackaged plan design where exclusive, value‑rich investment rights are used to secure creditor support. Three features bear emphasis.
First, equal opportunity matters. Peabody remains good law precisely because participation was open to all class members willing to furnish the same consideration. ConvergeOne signals that exclusive, negotiated-backroom economics that drive a 20–30% recovery differential within a single class are vulnerable unless similarly situated creditors have a bona fide chance to participate on the same terms.
Second, market testing or a substitute that creates genuine competitive tension matters. LaSalle did not enshrine a single methodology, but it made clear that exclusive opportunities untethered from market price discovery are suspect when they deliver value "because of" the recipient's status and support. Where backstop fees, discounts, or side economics are awarded without competition or credible alternatives, courts will scrutinize whether the opportunity itself has been fairly priced vis‑à‑vis the excluded class members.
Third, form does not trump function. Serta's equal-treatment analysis focused on the real-world value differential across a class, not the nominal symmetry of plan text. ConvergeOne applies the same lens. Calling disparate economics "compensation for new money" will not save a plan if the new-money lane was walled off by design and yielded inflated recoveries unavailable to equally situated creditors.
These principles yield practical guidance. Credit agreement drafting still drives the options that are available for prepetition restructurings and plan structures. Serta constrains borrowers relying on "open market purchase" exceptions; Mitel shows that "purchase by assignment" language expands flexibility. Borrowers and sponsors should expect sharper lender focus on sacred‑rights architecture, "uptier blockers," assignment restrictions, and explicit definitions of permitted buybacks and exchanges.
On plan architecture, prepackaged deals that pair rights offerings with backstop fees and exclusive discounts should build equal‑access pathways or a record of market testing. Where the economics are restricted to a subset, the record must demonstrate either that any creditor could have qualified by providing equivalent consideration on the same timeline and terms, or that the opportunity's exclusivity and pricing were set through a process that credibly mimics competitive tension.
Process discipline now carries outsized weight. No‑shop RSAs, compressed prepackaged timelines, and curated invite lists may achieve speed but create litigation risk under section 1123(a)(4) when they produce meaningful intraclass recovery disparities. These choices are increasingly outcome‑determinative evidence for equal‑treatment challenges.
On remedies and risk allocation, ConvergeOne's rejection of equitable mootness for targeted relief raises the cost of betting that confirmation and prompt consummation will insulate exclusive economics. Parties should anticipate remedies that surgically redistribute incremental value post‑confirmation.
Key Takeaways
ConvergeOne pushes parties toward a more level playing field in chapter 11 plan economics for similarly situated creditors. It does not bar rights offerings or backstops; it regulates their exclusivity. If all class members can opt in on the same terms, or if exclusivity is validated by an authentic market process, differential outcomes may survive attack, as Peabody illustrates. If not, Serta's function‑over‑form approach to equal treatment will expose a plan to reversal or remedial reallocation.
The broader arc is that courts are converging on a coherent framework for LMEs and plan design. Under New York law, textual nuance is dispositive. "Open market purchase" means what it says; "purchase by assignment" means something else, and uptier blockers and sacred‑rights drafting carry real bite. Under the Bankruptcy Code, equal treatment requires more than artful phrasing and spin. Plans cannot target exclusive, value‑rich opportunities within a class without offering an equal opportunity or establishing that the exclusivity itself is fairly priced by market forces. Sponsors, arrangers, and borrowers retain meaningful tools to manage liabilities. But exclusivity without access or market discipline is a litigation magnet, with ConvergeOne providing the roadmap for how those challenges will be analyzed and remedied.
The debtors in ConvergeOne appealed the district court's reversal of the bankruptcy court's confirmation order to the Fifth Circuit on October 22, 2025. The first lien ad hoc group followed suit on October 24, 2025.
