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In a dramatic turn, a Texas federal judge has unraveled key portions of ConvergeOne’s Chapter 11 plan, finding that an exclusive equity backstop opportunity given to certain secured lenders crossed the line of bankruptcy law’s equal treatment rules.

Unequal Opportunity Sparks Reversal

U.S. District Judge Andrew S. Hanen ruled Thursday that the plan’s equity rights pool—earmarked for a majority of first-lien lenders who backstopped a $245 million rights offering—violated Section 1123(a)(4) of the Bankruptcy Code, which requires creditors of the same class to be treated alike.

By limiting the lucrative backstop role to just one faction, the judge said, ConvergeOne’s plan created an imbalance that left minority lenders in the dust. He noted the equity opportunity was neither market-tested nor opened to all first-lien creditors.

“The plan offered a valuable and exclusive opportunity to backstop an equity rights offering for a portion of the class of creditors, but not the remaining creditors,” Judge Hanen wrote, overturning parts of the earlier confirmation order.

The matter now returns to the Southern District of Texas bankruptcy court for amendments.

Minority Lenders Score a Win

The appeal was brought by a minority group of first-lien lenders holding roughly $164 million in claims. They argued the reserved equity tilted recoveries in favor of majority lenders who had signed a restructuring support agreement (RSA).

Attorney David Hillman of Proskauer Rose, representing the minority lenders, said the ruling could rewrite the script on liability management transactions (LMTs), a controversial restructuring tactic where majority lenders cut deals that sideline dissenters.

“This decision reshapes the liability management playbook,” Hillman said Friday, adding that exclusive backstop rights must now either be shared or tested in the market.

A Precedent Echoing Serta Simmons

Judge Hanen leaned on the Supreme Court’s 1999 North LaSalle decision, which struck down a similar exclusive opportunity for equity holders, and the Fifth Circuit’s 2024 Serta Simmons ruling, which voided a plan that treated creditors unequally.

“While debtors in this case can argue that the plan itself treats all creditors the same, Serta rejects a surface-level or overly formalistic inquiry into equality,” Hanen wrote, likening ConvergeOne’s deal to the controversial precedent.

ConvergeOne’s Bankruptcy Path

The IT solutions company filed for bankruptcy in April 2024 with $1.8 billion in secured debt. It struck an RSA with second-lien lenders and 81% of its first-lien lenders to quickly push through a $1.6 billion debt-for-equity swap.

Under the plan, ConvergeOne raised $245 million in exit funding, with $86 million of discounted equity earmarked for its private equity sponsor and RSA lenders who agreed to backstop the deal. Dissenting lenders, however, were excluded from the lucrative backstop pool.

U.S. Bankruptcy Judge Christopher M. Lopez originally overruled objections and confirmed the plan in May 2024, but Thursday’s reversal puts the restructuring back on the drawing board.