Texas bankruptcy court issues key rulings impacting claims against secured creditors

This past January in the bankruptcy case of Wesco Aircraft Holdings, Inc. et al., Judge Isgur of Texas held that claims for improper subordination of a lender group could proceed to trial against the debtor and other lenders. Prior to the bankruptcy, the "favoured" lenders had entered into a transaction whereby existing holders' notes were exchanged for newly-issued, secured notes, while the liens securing the notes of other, excluded noteholders were released. In response, the excluded noteholders sued Wesco, the favoured noteholders, the indenture trustee, and Wesco’s equity sponsor for, inter alia, breach of the underlying indenture agreements, breach of the implied covenant of good faith and fair dealing, and tortious interference. In granting and denying various competing motions for summary judgment, the court addressed several important theories issuing, in some instances, a decision of first impression.

The court found that key provisions contained in the underlying agreements requiring the consent of "all affected lenders" for certain amendments of the indenture agreements were ambiguous. While other courts have held similar provisions to be ambiguous at the pleadings stage, e.g. TriMark, Serta (pre-bankruptcy), Boardriders, and Mitel, here the court was the first to do so at the summary judgment stage and in a bankruptcy case. The court granted summary judgment in favour of Wesco and the indenture trustee on the excluded noteholders' claim for breach of the implied covenant of good faith and fair dealing, finding these claims to be duplicative of the breach of contract claims. 

This decision adds to a split in authority as some courts, e.g. Serta (pre-bankruptcy) and Boardriders, have denied motions to dismiss similar claims, while the courts in TriMark and Mitel have granted them. In light of the fact that the favoured lenders were not signatories to the indenture agreements, the court also granted summary judgment against the excluded lenders on the same claims brought against the favoured lenders, while denying summary judgment on the excluded lenders' tortious interference claims against the equity sponsor. This, despite the equity sponsor having raised an economic interest defence, a fact that other courts had found sufficient to secure dismissal of claims.

Finally, the court concluded that, with one minor exception, the excluded noteholders' contract and tort claims were "non-core" to the bankruptcy case. This is the first decision of its kind and is significant because if other courts follow this decision, 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.

What does this mean for litigants? Debtors and lenders considering non-pro rata liability management transactions should be aware that claims brought by excluded lenders may proceed to trial, even if the dispute is raised in bankruptcy court..

Leslie A. Berkoff is a Partner at Moritt Hock & Hamroff LLP and Chair of its Dispute Resolution Practice Group. She concentrates her practice in the areas of Dispute Resolution serving as a mediator and arbitrator, as well as, Corporate Restructuring work working in both arenas nationally and internationally. Leslie is also Regional Chair North America of the GGI Debt Collection, Restructuring & Insolvency (DCRI) Practice Group.