LME Litigation in Focus

Key Insights

• Recent appellate-level case law with respect to LME transactions affirms the centrality of contractual language when courts assess debt agreements in LME litigation. Courts’ focus on the text of debt agreements highlights the need for careful drafting among “sophisticated parties.”
• Lower court jurisprudence also reflects this trend, with decisions surrounding pro rata sharing clauses in Serta (2026) and Del Monte Foods (2026) reveal the pitfalls and differentiated outcomes that can result from ambiguous drafting.
• In-court LMEs, such as non-pro rata backstops and DIP rollups, are increasingly scrutinized for violating both “equal treatment” principles and pre-petition credit agreement language.
• Minority lenders and debtors are raising novel antitrust law challenges to traditional LME transaction structures, namely majority lender cooperative agreements.
• While courts increasingly require LME transactions comply with judicially-defined processes, such as “market tests,” these definitions remain contested.
• Courts remain reluctant to support challenges to LME transactions grounded in violating the “implied covenant of good faith.” The claims generally do not survive a motion for summary judgment (see Mitel (2024)), although they have successfully survived motions to dismiss in isolated cases (i.e., STG Logistics (2026)).

Contract Language in Credit Agreements

• Recent appellate decisions indicate that the plain text of debt instruments remains key to LME litigation outcomes.
  • Most notably, the Fifth Circuit’s Serta decision (Dec. 2024) rejected a 2020 uptier by finding that a privately negotiated debt exchange did not qualify as an “open market purchase.” However, because “open market purchase” was undefined in the underlying credit agreement, the Fifth Circuit looked toward industry custom and usage in defining an “open market.”
• Lower courts have also emphasized that a focus on the text of an agreement is especially appropriate in litigation among sophisticated parties who are often repeat players in LME transactions.
  • The NY First Appellate Division in Mitel (Dec. 2024) rejected a minority lender challenge to an uptier on similar grounds. The court found the minority lenders were “sophisticated parties” and had they “wanted to prohibit amendments such as those at issue here, they could have done so, but they did not.”
  • In Wesco/Incora (SDTX, Dec. 2025), the court rejected a more holistic reading of a credit agreement in determining an uptier transaction’s impact, instead citing Serta (2024) as “underscor[ing] the importance of adhering to the precise language of indenture agreements.”
  • Recently, a further decision from the Southern District of Texas Bankruptcy Court in Serta (July 2026) held that the 2020 uptier breached the credit agreement’s pro rata payment provision as it constituted a “payment”. The court rejected arguments that the provision only applied to cash payments and not to the uptier’s cashless debt exchange, finding that “the parties knew when and how to include Cash when they wanted to. And they didn’t do it”.

Equal Treatment for Backstops

• ConvergeOne (SDTX, 2025) raised the possibility that non-pro rata treatment in post-petition recoveries (in-court LMEs) can be successfully challenged. The court held that the Restructuring Support Agreement (the “RSA”) in a pre-pack violated the equal treatment provision of the Bankruptcy Code (11 U.S.C. § 1123(a)(4)).
  • The RSA exclusively permitted majority lenders to receive discounted equity in a post-reorganization rights offering and to backstop the offering in exchange for a 10% premium.
  • Since the backstop was not an independent new money opportunity and there was no “market test” or bidding process, the court found it violated the requirement to “provide the same treatment for each claim or interest of a particular class.”
• This is an example of continued judicial scrutiny of exclusionary LMEs. It remains unclear whether the decision will influence future cases, and the court did not clarify what a valid market test would look like.

Pro Rata Treatment in DIP Roll-ups

• Standard usage of non-pro rata DIP rollups may now need to align more closely with the express conditions of pre-petition debt documents.
  • In American Tire (Bk. D. Del, 2024), the court indicated it would reject a non-pro rata DIP rollup where the debt documents included a DIP exception in its Serta subordination blocker but not the non-pro rata payment blocker. The court viewed the rollup portion of the DIP as prohibited non-pro rata payment of pre-petition debt and thus a violation of the credit agreement.
• Impact of American Tire remains unclear, but new financings should ensure that debt documents include a DIP exception for non-pro rata and subordination blockers.
  • January 2026: Excluded lenders challenged a non-pro rata DIP rollup in Del Monte Foods in New Jersey Bankruptcy Court, arguing the rollup violated their sacred rights under a non-pro rata payment blocker in the pre-petition credit agreement. The DIP lenders subsequently brought a motion to dismiss, arguing the rollup was a “cashless exchange” rather than a “payment” that breached the credit agreement.
  • May 11, 2026: The court partially dismissed the excluded lenders’ complaint, supporting the view that the rollup had not violated the credit agreement’s pro rata payment provision. However, the court did not dismiss the complaint entirely, since it held that subsequent payouts on the DIP rollup could still implicate violations of the pro rata payment provision.

Antitrust Challenges & Coop Agreements

• Co-op agreements are being challenged by both debtors and minority holders on antitrust grounds. Co-ops are generally entered into before an LME to either frustrate the debtor’s proposed transaction (“defensive”) or to maximize outcomes for majority holders (“offensive”).
  • October 2025: Selecta holders excluded from an uptier using an offensive co-op filed antitrust and breach of contract claims against co-op participants. They subsequently filed an amended complaint in February 2026 alleging that that their notes were “worthless (or near worthless)” because the participating holders engaged in “uniquely unlawful ‘creditor-on-creditor violence’”.
  • November 2025: Optimum filed antitrust claims describing a defensive lender co-op as a “classic illegal cartel.” The debtor argues the co-op allowed lenders to “price fix” new money terms and enact a “group boycott” on negotiations.
  • February 2026: Optimum co-op members filed a motion to dismiss arguing (1) antitrust claims are inapplicable in “renegotiations with the debtor”, (2) the company failed to define a relevant market for showing anticompetitive effect, and (3) the lender co-op actually had the positive effect of defending against “hostile restructurings” and did not harm the market.
• These suits appear unlikely to prevail. They do not show how co-ops “control a market” for distressed credit and many facilitate mutually-beneficial refinancings.

Continued Approval of Double Dips

• In contrast with other LME transactions, double dips remain comparatively uncontested. A double dip occurs when a lender receives debt from an SPV that is also guaranteed by the OpCo parent (providing a double recovery opportunity in Chapter 11).
  • In Latam Airlines (SDNY, 2022), the UCC objected to a double dip on the grounds that the loan should instead be recharacterized as equity. The court rejected this recharacterization challenge and upheld the double dip structure.
  • Most other double dip challenges (i.e., in the Lehman Brothers or GM bankruptcies) resulted in similar holdings with respect to the double dip or settlement.

Implications for Market Actors

• Drafting Tips: Careful and narrowly tailored drafting is increasingly important for successful liability management, as courts increasingly emphasize the specific terms of underlying documents. This emphasis on textual analysis, however, does not preclude creative structuring and interpretation if permitted by the terms of a document.
• Supporting Documents: Parties participating in LMEs also need to be mindful of the impact of joining groups with other stakeholders and the underlying documentation with respect to such groups, including cooperation agreements and NDAs, as these agreements are the subject of increasingly tight drafting, rigorous negotiation, and, in the case of certain co-op agreements, post-transaction antitrust litigation challenges.
• Litigation Exposure: Lenders and debtors should continue to factor in litigation risk as part of liability management transactions. Minority lenders continue to bring, or threaten to bring, legal challenges to LMEs even when documents appear otherwise tight. New claims, such as the antitrust arguments brought in Selecta and Optimum, underline this perpetual risk.
• Judicial Outcomes: Despite the number of disputes that arise from LMEs, many end in settlement and courts generally continue to favor majority lender and debtor positions when documents are tightly drafted and negotiations proceed in a commercially reasonable fashion.

Appendix A: Timeline of Key LME Litigation

Appendix B: Survey of Recent LME Litigation (2025 – 2026)

Appendix C: Further Reading on LMEs