By John J. Harmon, Esq.
In the Chapter 11 case filed by Wesco Aircraft Holdings, Inc. (commonly known as Incora), the United States Bankruptcy Court for the Southern District of Texas recently addressed the viability of claims by noteholder creditors who had been excluded from participating in the debtor’s prepetition uptiering restructuring.[1] In the restructuring, a simple majority of noteholders approved the issuance of new debt under the indentures governing their notes and, equipped with supermajority voting power by virtue of the new debt, approved stripping off liens held by a minority of noteholders. The restructuring also, according to an unsecured noteholder, reduced the priority of unsecured notes by virtue of the new debt issued in the restructuring transaction. A group of formerly secured noteholders and an unsecured noteholder separately filed lawsuits in state court against Incora and the noteholders who benefitted from the uptiering restructuring. After Incora filed for bankruptcy, the actions were removed and consolidated in an adversary proceeding before the bankruptcy court.
The court’s opinion addresses a variety of disputes, including: (i) whether Incora breached its contractual obligations to the noteholders under the governing indentures when it engaged in the uptiering restructuring, and (ii) whether the claims asserted by the plaintiff noteholders against noteholders who benefitted from the debt restructuring were property of the estate.
Whether the Uptiering Restructuring Constituted a Breach of Contract Under the Integrated Transaction Doctrine
The series of restructuring transactions at issue, which the court and the parties described as the 2022 Transaction, “consisted of several steps: (1) amending the Indentures to allow for the issuance of additional notes, (2) issuing the additional notes, (3) amending the Indentures a second time to exchange the notes of the Participating Noteholders for notes with higher-priority liens, and (4) stripping the liens from the non-participating 2024/2026 Noteholders to effectuate the transaction.”[2]
The parties agreed that New York law governed. The plaintiff noteholders argued that under New York’s integrated transaction doctrine, all documents executed in connection with the 2022 Transaction should be treated as a single transaction. If treated as a single transaction, the 2022 Transaction breached the governing indentures by stripping liens from the non-participating noteholders without their consent.
Under New York’s integrated transaction doctrine, multiple agreements “executed at the same time, by the same parties, and for the same purpose, … are, ‘in the eye of the law, one instrument.’”[3] The Debtor and the participating noteholders did not dispute that all of the agreements comprising the 2022 Transaction were executed together on the same day. The Debtor and the participating noteholders argued that the integrated transaction doctrine does not operate as a “collapsing” doctrine that converts multiple agreements into a single agreement, but only requires related agreements to be read together as an aid to identifying the parties’ intent in each agreement.[4]
The Debtor’s argument against “collapsing” the agreements that formed the 2022 Transaction appears difficult to sustain in light of the “one instrument” language from the Fernandez and BWA decisions quoted above. The Debtor’s briefing did not directly address BWA’s use of the term “one instrument.”[5]
The court denied the plaintiff noteholders’ motion for summary judgment. The court held that two factual disputes precluded summary judgment: “(i) whether the Amendments [to the Indentures] were conditioned upon the execution of the other documents related to the 2022 Transaction (including the Note Purchase Agreement and the Exchange Agreement); and (ii) whether the parties intended the 2022 Transaction to be one single transaction.”[6] The court stated that resolution of these issues “will be based on the parties’ intentions.”[7] Given the significant sums at stake in this action, the Court’s reluctance to grant summary judgment is understandable. It is difficult to see, however, what facts could indicate that the 2022 Transaction was not intended as a single transaction, since there is no economic rationale for the participating noteholders to extend additional credit to Incora without the assurance that the series of contracts would culminate in the execution of the Exchange Agreement, which granted the participating noteholders senior liens on the Debtors’ assets and stripped the liens of the non-participating noteholders.
The court is currently conducting a trial on these issues. Any opinion issued in connection with that trial will presumably provide further guidance on the relevant facts that determine intent under the integrated transaction doctrine.
Whether the Plaintiff Noteholders’ Claims were Property of the Estate
The Debtor and the defendant noteholders who cooperated with the Debtor in the uptiering restructuring argued that the plaintiff noteholders’ claims against the defendant noteholders were property of the estate and could not be asserted by the plaintiffs. The court held that the plaintiffs’ claims for breach of contract (including claims based on a third party beneficiary argument), tortious interference and conversion were directly held by the plaintiffs against the defendant noteholders, and were not property of the estate.[8]
The court reached a different conclusion on the claims against the defendant noteholders seeking imposition of equitable liens and equitable subordination. The court found that the plaintiffs’ equitable claims sought to avoid the effect of the prepetition restructuring transaction, and recapture the status their notes held prior to the restructuring transaction (secured status with respect to the formerly secured noteholder plaintiffs, and an unsecured note with fewer senior secured claims with respect to the unsecured noteholder plaintiff). The court adopted a test from an opinion in the Revlon bankruptcy case in the Southern District of New York which examines whether the challenged claims are “similar in object and purpose to claims that the trustee could bring in bankruptcy regardless of whether such claims are technically part of the estate of the bankrupt.”[9]
The court highlighted the fact that prior to Wesco’s bankruptcy filing, the plaintiffs had filed a state court lawsuit that asserted fraudulent transfer claims resting on the same factual basis that now supported their equitable claims in the bankruptcy adversary proceeding. Further, the court observed, the state court fraudulent transfer claims and bankruptcy equitable claims both sought the same relief – restoration of the plaintiffs’ liens and elimination of the new notes and liens created in the restructuring of the indentures. The court therefore dismissed the plaintiff noteholders’ claims for equitable liens and equitable subordination.[10]
[1] Wesco Aircraft Holdings, Inc. v. SSD Invs. (In re Wesco Aircraft Holdings, Inc.), Nos. 23-90611, 23-3091, 2024 Bankr. LEXIS 85 (Bankr. S.D. Tex. Jan. 14, 2024).
[2] Id. at 14-15.
[3] Fernandez v. Cohen, 110 A.D.3d 557, 558, 973 N.Y.S.2d 183, 185 (App. Div. 1st Dept. 2013) (quoting BWA Corp. v. Alltrans Express U.S.A., Inc., 112 A.D.2d 850, 852, 493 N.Y.S.2d 1, 3 (App. Div. 1st Dept. 1985)).
[4] ECF Doc 270 at p.31-35.
[5] See ECF Docs 199, 270, 319.
[6] Wesco, supra, at *68.
[7] Ibid.
[8] Id. at *30, *52.
[9] Id. at *32 (quoting In re Revlon, Inc., No. 22-10760, 2023 Bankr. LEXIS 388, 2023 WL 2229352, at *15 (Bankr. S.D.N.Y. Feb. 24, 2023)).
[10] Id. at *35.