Bankruptcy Court Dismisses Pre-Bankruptcy Transaction Challenge – Insolvency/Bankruptcy


There have been several so-called “uptier” transactions in recent years, where lenders have provided “rescue financing” to a distressed company ahead of existing debt. While there have been many comments on whether such financings are permitted by contract, there have been few decisions analyzing challenges to such transactions.1 In Bayside Capital Inc. v. TPC Group Inc. (In re TPC Group Inc.),2 the United States Bankruptcy Court for the District of Delaware (Goldblatt, J.) recently ruled that pre-petition transactions in which some, but not all, bondholders provided new financing and received superior liens to those on existing debt that were not prohibited by applicable law, the indenture or other related agreements.3


Uplevel transactions can take many forms, but typically they involve some or all of the existing lenders agreeing to provide new financing to a borrower (often facing some form of distress) in exchange for these new funds ( and sometimes prior loans) treated as super-priority and thereby subordinate existing debt. These transactions are often made without the consent of all lenders, and nonparticipating minority lenders sometimes claim that such transactions are not permitted under the applicable credit agreement or indenture and that any alleged subordination is not enforceable. The borrower and participating lenders, on the other hand, generally take the position that such upscaling is not explicitly prohibited by applicable documentation and that the transaction itself does not involve any “sacred rights” that requires the consent of all lenders.

In 2019, TPC Group Inc. (“TPC”) issued $930 million of senior secured notes (the “Original Notes”) pursuant to an indenture (the “Indenture”) which were secured by a first lien on fixed assets and a second lien (junior to an asset-based lending facility) on current assets. TPC subsequently had liquidity issues and entered into discussions with certain noteholders holding more than 67% of the original notes (the “Majority Holders”), resulting in the issuance of over $200 million new notes to majority holders in 2021 and 2022 (the “New Bonds”) secured by the same collateral as the Initial Bonds. In connection with these transactions, TPC and the Majority Holders have also entered into a new intercreditor agreement which subordinates the Original Notes to the New Notes. To effect this upgrading of the New Bonds, TPC obtained the consent of the Majority Holders, but it did not offer the opportunity to participate in the transactions to all bondholders.4

Despite this new financing, TPC could not avoid bankruptcy. As part of the debtor-in-possession (DIP) financing project in its Chapter 11 case, among other issues, the court expedited a challenge to upper-tier transactions brought by holders of approximately 10% of the notes (the “objecting noteholders”)). whether the new tickets were superior to the original tickets).5

Legal analysis

The court initially rejected arguments that the opposing bondholders lacked standing to challenge the higher-level transactions due to the “no-action clause” contained in the trust deed, allegedly prohibiting Individual Holders to take action to enforce the terms of the Indenture and requiring at least 25% of such Holders to request that such action be taken by the Trustee under the Indenture. Observing that “jurisprudence expresses strong skepticism regarding a reading of a no-action clause as precluding the exercise of the rights which an agreement expressly grants to individual holders[,]”6 the court concluded that prohibiting opposing bondholders from challenging higher-level transactions would effectively render meaningless any sacred rights in the trust indenture for the benefit of individual

The court then analyzed whether the higher-level transactions violated provisions of the trust indenture that would have given individual noteholders the right to consent to any changes related to the manner in which collateral proceeds would be applied from one manner that would adversely affect such holders.8 Rejecting the argument of the opposing bondholders that passing any debt before them would imply such a sacred right, the court concluded that these restrictions were intended to “protect[] holders’ rights to taxable treatment and should not be construed as a disguised anti-subordination provision. »9 Noting that the release of collateral under the Trust Deed requires only a 67% vote and that “[s]the subordination of a lien to that of another lender is a less drastic intrusion into the rights of an individual holder than to release the full collateral”, the court concluded that it “would not make sense to… allow a two-thirds majority to take a After drastic measure but give each holder the right to block the less extreme measure” and that, therefore, uptiering operations did not require unanimous consent.ten On this basis, the court refused to invalidate the uptiering operation.

Finally, although irrelevant to its central participation, the court responded to criticisms that not all noteholders were invited to participate in higher level transactions. While acknowledging that “to the extent that [Objecting Noteholders] have something to complain about…, this complaint is more than… [they] did not have the opportunity to participate[,]”the court found that the uptiering” did not materially violate the applicable agreements in a way that gives rise to a claim by the
[Objecting Noteholders].”11


It should be very clear that the validity of any upscaling or similar transaction will largely depend on the wording of the underlying agreements and the substance of that transaction. While the TPC ruling may provide a potential reference point for structuring higher-level transactions (depending on the outcome of pending appeals), the court also provided advice to lenders who would like to avoid a similar outcome: if “holders want to be protected from shares interested by borrowers and other holders, [then] they must include these protections in the terms of their agreements.”12 The most obvious way to do this, of course, would be to include as strong anti-subordination language as possible in the underlying credit agreement or trust deed.


1. For example, in the high-profile cases Serta, 2022 WL 953109 (SDNY Mar. 29, 2022) and Trimark, 2021 WL 3671541 (NY Sup. Ct. Aug. 16, 2021), minority lenders were permitted to pursue various claims against the lenders majority to challenge similar transactions.

2. 2022 WL 2498751 (Bankr. Del. July 6, 2022).

3. ID. at 12.

4. ID. to *2-5. The supplemental act for the new notes includes express anti-subordination language.
ID. At 11 o’clock.

5. ID. at *5-6. The plaintiffs appealed the court’s decision and also requested that the decision be stayed pending the appeal. The requested stay was denied by the court but ultimately granted on a temporary basis by the United States District Court for the District of Delaware. Following this suspension, TPC did not seek final approval of its DIP funding.

6. ID. at 8.

seven. ID. to *8-9.

8. ID. at *9-12.

9. ID. at 12.

ten. ID. at *12-13.

11. ID. to *13.

12. ID. at 12.

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