Fifth Circuit Decisions Level the Playing Field for Creditors

Judges in the US Court of Appeals for the Fifth Circuit spent 2025 pushing back on attempts by certain secured lenders and equity holders to advance their positions in Chapter 11 bankruptcy cases in favor of other creditors in the same class.

These decisions point to a judicial willingness to redistribute power away from “select” creditors and into the hands of similarly situated “outsider” creditors.

The rulings—which give outsiders new ammunition to redirect bankruptcy cases toward more-equalized results—are already making their mark in Texas bankruptcy courts. But it’s uncertain whether judges outside the Fifth Circuit will follow suit.

Serta

The Fifth Circuit in December 2024 reversed and vacated in part the bankruptcy court’s order confirming Serta’s reorganization plan.

Serta’s 2016 syndicated loan agreement required that all lenders receive equal treatment. In 2020, however, Serta entered an uptier transaction that allowed only some of its syndicated lenders to exchange their existing first- and second-lien loans for new super-priority debt. When Serta later filed for bankruptcy, it proposed a plan indemnifying the uptiering lenders for losses related to the uptier transaction.

Although the bankruptcy court confirmed Serta’s plan, the Fifth Circuit held that the uptier indemnity provision violated Bankruptcy Code Section 1123(a)(4), which requires a Chapter 11 plan to provide the same treatment for each claim or interest of a particular class.

The Fifth Circuit advised that bankruptcy courts should carefully examine the actual impact of a plan’s proposed treatment of similarly situated creditors. In Serta, the uptier indemnity benefited some secured lenders over others in the same class.

ConvergeOne

The Fifth Circuit’s Serta opinion is now gaining traction in other contexts. In September, Judge Andrew Hanen of the US District Court for the Southern District of Texas reversed the bankruptcy court’s order confirming ConvergeOne’s prepackaged Chapter 11 plan, which relied on a $245 million equity rights offering struck with the majority of first-lien holders under a restructuring support agreement.

Equity rights offerings are often crucial elements in Chapter 11 cases and are frequently backstopped by preselected prepetition equityholders or secured lenders rather than shopped on the open market. Backstop parties typically receive a fee—a backstop premium—in exchange for agreeing to purchase any unsubscribed shares in a rights offering.

In ConvergeOne, all first-lien holders could participate in the equity rights offering, but only those who negotiated the restructuring support agreement and the prepacked plan could serve as backstop parties and receive the backstop premium. A group of non-majority first-lien holders objected, arguing that their exclusion violated Section 1123(a)(4)’s equal treatment requirement.

The debtors responded that Section 1123(a)(4) didn’t apply because the backstop premium offered to the majority of first-lien holders was for their post-petition commitments rather than any prepetition claims. But the debtors established the backstop structure before commencing their Chapter 11 cases, without including the non-majority first lienholders, and didn’t market-test it.

On appeal, Hanen held that excluding the non-majority first-lien holders from the ability to backstop the equity rights offering from the outset violated the equal treatment requirement of Section 1123(a)(4). Citing Serta, the judge explained that bankruptcy courts must look beyond the language of the plan to the actual implications to determine whether the debtors are affording special treatment to a subclass of creditors.

In ConvergeOne, Hanen found that the excluded first-lien holders never had a realistic opportunity to participate equally in the backstop or propose an alternative and thus were not treated as similarly situated creditors under the plan.

Hanen also found the US Supreme Court’s decision in Bank of America National Trust & Savings Association v. 203 N LaSalle St. Partnership to be instructive. In LaSalle, the Supreme Court held that an investment opportunity offered exclusively to select parties without market-testing could not survive Section 1129(b)(2)(B)(ii)’s absolute priority rule.

The issues underlying ConvergeOne are not new. The bankruptcy court in LATAM discussed similar issues in its order approving a $5.4 billion equity rights backstop to a subset of unsecured creditors. In that case, objectors argued that the backstop should be subject to heightened scrutiny beyond the debtors’ business judgment because it was only offered to insiders and was not market-tested.

Objectors also argued that the backstop granted favorable treatment to some but not all similarly situated unsecured creditors. But in LATAM, the backstop agreement resulted from negotiations in court-ordered mediations to formulate the debtors’ plan and restructuring support agreement.

The bankruptcy court deferred to the mediation outcome and found that the objectors failed to rebut the debtor’s business judgment. Later in the case, the bankruptcy court confirmed LATAM’s plan and sidestepped equal treatment objections by holding that the backstop premiums were not paid on account of prepetition claims.

Genesis Healthcare

A similar issue arose in the Northern District of Texas in the Genesis Healthcare bankruptcy cases. The bankruptcy court approved bidding procedures for the debtors to sell substantially all their assets to a stalking-horse bidder that was both an insider and an affiliate of the debtor-in-possession lender.

Objectors argued that the bidding procedures improperly favored insiders. Moreover, Sens. Elizabeth Warren (D-Mass.), Richard Blumenthal (D-Conn.), and Peter Welch (D-Vt.), and Rep. Maggie Goodlander (D-NH), sent a letter urging the US trustee to object to the debtors’ proposed sale, alleging that the stalking-horse bidder may be using the bankruptcy process to purchase the company at a steep discount and free and clear of all creditor liabilities.

After the debtors selected the stalking horse as the successful bidder, Judge Stacey Jernigan of the US Bankruptcy Court for the Northern District of Texas, swiftly refused to approve the sale. Jernigan cited concerns over fairness in the auction process resulting from the stalking-horse bidder’s insider status and involvement by the debtor’s controlling investor.

Jernigan requested that any future auction be overseen by the unsecured creditors’ committee and the US trustee. Jernigan’s refusal to approve the insider sale further signals a shift in the Fifth Circuit to redistribute power away from select parties—here insiders—in favor of a broader group of stakeholders.

Judges in the Fifth Circuit spent 2025 pushing back on attempts by certain secured lenders and equity holders to advance their positions in Chapter 11 bankruptcy cases in favor of other creditors in the same class.

Together, these 2025 Fifth Circuit decisions indicate a redistribution of power away from certain secured lenders and equity holders in favor of other creditors in the same class.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Peter Amend is partner at Alston & Bird and advises clients across the spectrum of distressed and insolvency-related matters.

Kennedy Bodnarek is an associate at Alston & Bird and provides both debtor and creditor representation in Chapters 7, 11, and 15 bankruptcy proceedings.

Write for Us: Author Guidelines