Andrew Dunlap & Samuel Kwak Speak on Incora decision shocker
On January 14, 2024, in the Chapter 11 case of Wesco (d/b/a Incora), Judge Marvin Isgur of the United States Bankruptcy Court for the Southern District of Texas ruled that claims alleging that Wesco and a group of its favored lenders had improperly subordinated a group of excluded lenders could proceed to trial.
In March 2022, Wesco and its favored lenders agreed to a transaction in which those holders’ notes were exchanged for newly issued secured notes, while the liens securing the notes of other, excluded holders were released. The excluded noteholders sued Wesco, the favored noteholders, the indenture trustee, and Platinum (Wesco’s equity sponsor) for (among other things) breach of the indenture agreements, breach of the implied covenant of good faith and fair dealing, and tortious interference. The parties cross-moved for summary judgment.
Judge Isgur denied summary judgment on the contract claims, finding that various indenture provisions—including “scared right” provisions that require the consent of all affected lenders for some amendments of the indenture agreements—were ambiguous, so claims for breaches of those provisions could go to trial. While other courts had held similar provisions ambiguous at the pleadings stage in TriMark, Serta (pre-bankruptcy), Boardriders, and Mitel, Judge Isgur was the first to do so at the summary judgment stage. Those rulings also came in state and federal trial courts. Judge Isgur was the first bankruptcy judge to agree with them; in Serta (bankruptcy) and In re TPC, other bankruptcy courts that resolved similar provisions in favor of the debtors as a matter of law. This may indicate that debtors considering non-pro rata liability management transactions face a risk that claims brought by excluded lenders may go to trial, even in bankruptcy courts.
Judge Isgur granted summary judgment to Wesco on the excluded noteholders’ claim for breach of the implied covenant of good faith and fair dealing against Wesco and the indenture trustee, finding it duplicative of their breach of contract claims. This adds to a split in authority. Courts in Serta (pre-bankruptcy) and Boardriders denied motions to dismiss similar claims; courts in TriMark and Mitel granted them.
Judge Isgur denied summary judgment on the excluded lenders’ tortious interference claims against Platinum. The equity sponsor had raised an economic interest defense, which had been enough for other courts to dismiss similar claims at the pleadings stage. Judge Isgur, however, denied summary judgment because the underlying issue of whether Wesco breached the governing indentures was unresolved. This is the furthest that a tortious interference claim against an equity sponsor has proceeded, and signals that some courts will be open to such claims.
Judge Isgur denied summary judgment on the excluded lenders’ tortious interference claim against the favored lenders, but granted summary judgment against the excluded lenders on their breach of the implied covenant of good faith and fair dealing claim against the favored lenders, as the favored lenders were not signatories to the indenture agreements. This ruling suggests, however, that a non-signatory lender might still be liable for breaches of indenture agreements if it intentionally induced those breaches in bad faith.
Finally, Judge Isgur also concluded that, with one minor exception, the excluded noteholders’ contract and tort claims were “non-core” to the bankruptcy. This is the first decision of its kind. If replicated elsewhere, it could allow excluded lenders to litigate similar claims outside of bankruptcy court, by having those claims withdrawn to a federal district judge or potentially remanded to a state court.
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