Executive Summary
In what may be an interesting new trend, yet another senior court within the Fifth Circuit Court of Appeals has issued an opinion with the potential for serious disruption to previously accepted market practice.
On September 25, 2025, the United States District Court for the Southern District of Texas issued an appellate ruling in In re ConvergeOne Holdings, Inc., Case No. 24-02001 (S.D. Tex. Sept. 25, 2025):
- determining that backstop fees available only to a majority lender group violate section 1123(a)(4)'s "same treatment" requirement where all members of the applicable class do not receive the same backstop opportunity and where no "market test" for such financing has occurred;
- without precisely defining an acceptable "market test," the District Court suggested somewhat confusingly that the "open market purchase" analysis undertaken by the Fifth Circuit in In re Serta Simmons Bedding, L.L.C.1 would be relevant guidance; and
- in its analysis, the ConvergeOne court was clearly troubled by what it viewed as minority lenders being unjustly excluded from plan negotiations and left only with the dubious remedy of proposing an alternative plan where "the train had already left the station."2
ConvergeOne has serious implications for restructuring participants. As our readership knows, sourcing new capital, and the terms of that capital, is fundamental to practically every restructuring. And, at least until ConvergeOne, the manner in which such new capital was provided had generally been viewed as distinct from the rights any one creditor might hold for purposes of section 1123(a)(4).3
ConvergeOne changes this analysis in a real way—at least if this particular opinion obtains widespread acceptance. Under ConvergeOne, majority lenders cannot simply rely on that same majority position as the basis on which to negotiate the terms by which they commit new capital. Nor does ConvergeOne's reference to a "market test" provide clear guidance as to what may or not be an acceptable process beyond its reference to the more generalized analysis of an "open market purchase" undertaken by Serta. Conversely, minority lenders may be incentivized to make facially implausible if not entirely unrealistic proposals in order to build a record of "unfairness" for litigation to come.
Background
ConvergeOne's facts are unremarkable. Pre-bankruptcy, the ConvergeOne debtors entered into a restructuring support agreement, or RSA, with holders of 81% of nearly $1.6 billion of debt. The transaction contemplated by that RSA included a new money investment backstopped by that "Majority Lender" group. That backstop commitment included a fee in the form of "a 10% premium on [the Majority Lender] claims through certain discounted equity purchases . . . ."4 This backstop commitment apparently did not result from a separate "market test" for that financing.5
A "Minority Lender" group was largely excluded from RSA negotiations. That Minority Lender group did provide alternative proposals, the last of which was rejected as "it lacked enough support from stakeholders and, as proffered, more than likely would not have been confirmed."6
Following the ConvergeOne debtors' bankruptcy filing, the Minority Lender group objected to plan confirmation on the basis that "the exclusive opportunity to backstop the equity rights offering violated Section 1123(a)(4)."7 This argument was rejected by the bankruptcy court, the plan was confirmed, and the Minority Lenders appealed.
The District Court's Opinion
The District Court ruled that the ConvergeOne backstop violated section 1123(a)(4).
Reasoning by analogy to the Supreme Court's analysis of "new value" and section 1129(b) in Bank of America v. 203 North LaSalle,8 the District Court determined the absence of a "market check," coupled with the Minority Lenders' apparent exclusion from deal negotiations, was fatal to the backstop fee at issue.9 In the District Court's view, this fact pattern distinguished the operative fee from a case such as In re Peabody Energy Corp.,10 where a backstop fee was upheld because—in the ConvergeOne court's assessment—"the debtor had considered several alternative ways to raise capital,"11 and "every creditor had the opportunity to participate[.]"12
Interestingly, and as noted above, the ConvergeOne court further cited the Fifth Circuit's Serta opinion as further demanding a "market test" of the fee at issue given the differential treatment between the lender groups: "[g]uided by Serta, this Court must first look 'below the surface to determine whether distributions were in fact equal in value,'"13 given the failure to "submit the deal to an 'open market' as described in Serta."14
ConvergeOne unfortunately did not define what might be a sufficient "market test." While the opinion observed, perhaps unhelpfully, that Serta's "open market" would satisfy its analysis (and more on this below), the Court also cited In re Castleton Plaza, LP15 for its "most persuasive" conception of an acceptable test.
That guidance is still not entirely clear. Castleton Plaza involved the relatively narrow question as to whether a new value plan proposed by an existing equity investor required competitive bidding—i.e., was a single asset debtor required to go sell itself in light of a new value plan?16 Castleton Plaza in no way addressed the far more challenging question as to how the disposition of an "investment right" triggered a market test where a new value plan was not involved, let alone how such a "market check" would occur.17
In any event, ConvergeOne is at least straightforward in its ruling that a chapter 11 plan violates section 1123(a)(4) when it "offer[s] a valuable and exclusive opportunity to backstop an equity rights offering for a portion of the class of creditors but not the remaining creditors."18
Takeaways
As an analytical matter, ConvergeOne's ruling is not complicated. 203 North LaSalle and the "new value" line of cases can, at least arguably, be read to treat an investment right as property of the estate as opposed to that investment right being severable from an underlying claim.19
But this analysis is not always easy to follow. The "new value" cases cited by ConvergeOne in this regard do not actually address the sort of horizontal discrimination at issue in that plan; those cases instead addressed questions of absolute priority. Absolute priority and horizontal discrimination are of course very different things. Notably, horizontal discrimination is itself qualified by the Bankruptcy Code's allowance for at least certain types of discriminatory treatment (as opposed to "unfair" discrimination).20
ConvergeOne's ruling, on an equitable basis, is easier to track. Presumably that court had been convinced that it was simply unfair for a lender group, however large, to exercise an investment right where another similarly situated group of lenders cannot—even if the minority lender group lacked the ability to consummate the chapter 11 plan that it had nominally proposed. And on this basis, ConvergeOne's interpretation of section 1123(a)(4) might be rationalized: a majority lender group reserving backstop economics for itself is just inequitable, res ipsa.21 Again, this is not so much a legal argument as it is an equitable one, but it is also hard not to deny the appeal (if our readers will pardon the pun).
What is more challenging, however, is ConvergeOne's much more nebulous references to a "market test," and what might be a satisfactory "market test" in this context. ConvergeOne does not provide specific guidance in this regard.22 ConvergeOne's reference to Serta is also less helpful, as the "open market" endorsed by Serta, and cited approvingly by ConvergeOne, refers to, among other things, the open market repurchase operations undertaken by the Federal Reserve Bank as an acceptable "open market." As we have previously observed, the Federal Reserve's systematic purchase and sale of billions if not trillions of dollars in Treasuries is a difficult and perhaps less-than-useful comparison to relatively small tranches of illiquid corporate debt.23 Put differently, a "market check" for an executable exit financing package and the Federal Reserve's "open market repurchase" have very little in common with one another apart from the "market."
Similarly, it may be challenging for plan proponents to assess the reasonableness of a financing proposal received from third parties, individual creditors, or a minority lender group that has no practical ability to actually consummate a proposal. At the risk of understatement, third parties, individual creditors, and minority lender groups typically cannot provide the support required to confirm a plan over the objection of a now-hostile impaired class. Yet ConvergeOne seems to open the floodgates to such an "entirely fair" but perhaps entirely unrealistic approach to a "market check."
Footnotes
1 125 F.4th 555 (5th Cir. 2025); cf. Id. at 579 ("As numerous sources confirm, an "open market" is a specific market that is generally open to participation by various buyers and sellers."), with ConvergeOne, slip op. at 19–20 ("There was certainly no attempt to . . . submit the deal to an 'open market' as described in Serta, 125 F.4th at 579.").
2 ConvergeOne, slip op. at 16.
3 See e.g., Ad Hoc Comm. of Non-Consenting Creditors v. Peabody Energy Corp. (In re Peabody Energy Corp.), 933 F.3d 918, 925 (8th Cir. 2019) ("[T]he opportunity to participate in the Private Placement was not 'treatment for' the participating creditors' claims. It was consideration for valuable new commitments made by the participating creditors." (internal citation omitted)).
4 ConvergeOne, slip op. at 3.
5 Id.
6 Id. at 4.
7 Id.
8 526 U.S. 434 (1999).
9 ConvergeOne, slip op. at 14–18.
10 933 F.3d 918 (8th Cir. 2019).
11 ConvergeOne, slip op. at 11–12 (construing Peabody).
12 Id. at 14 (construing Peabody).
13 ConvergeOne, slip op. at 19 (internal quotation marks omitted).
14 Id. at 18.
15 707 F.3d 821 (7th Cir. 2013).
16 Id. at 822–23.
17 Castleton Plaza directed the relevant parties to undertake an auction: "203 North LaSalle requires an auction before [the insider and plan proponent] could receive equity on account of a new investment." 707 F.3d at 822. A third-party financing, by comparison, does not quite lend itself to the same straightforward approach.
18 ConvergeOne, slip op. at 21.
19 See e.g., 203 North LaSalle, 526 U.S. 434, 455 (1999) ("[T]he opportunity is property of some value . . . ."); see also e.g., Castleton Plaza, 707 F.3d at 821 ("The process protects creditors against plans that would give competing claimants too much for their new investments and thus dilute the creditors' interests.").
20 See 11 U.S.C. § 1129(b).
21 See ConvergeOne, slip op. at 13 ("An exclusive opportunity resulting in a significant disparity in value, without consideration for the investment opportunity itself, qualifies as treatment for a claim under § 1123(a)(4).").
22 Id. at 18–19 (analyzing facts under Serta and Castleton Plaza).
23 See our analysis of the Serta opinion, Law Review, Dictionaries, and Uptiers: The Fifth Circuit Weighs In on Serta (Jan. 6, 2025), https://www.ropesgray.com/en/insights/alerts/2025/01/law-reviews-dictionaries-and-uptiers-the-fifth-circuit-weighs-in-on-serta.
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