Welcome to Distressed Debt Legal Insights, Ropes & Gray’s source of timely insights for professionals navigating the complex world of liability management and special situations finance. In this issue we discuss the first major decision of 2026: STG Logistics. The January 3 opinion primarily denies the motions to dismiss brought by defendants seeking to validate their October 2024 drop down plus double dip transaction.
Transaction Details and Procedural History
On May 1, 2024, STG Logistics entered into an amendment to its credit agreement (the “Fifth Amendment”). In exchange for seven quarters of financial covenant relief, lenders received enhanced protections against liability management transactions, including removal of the concept of unrestricted subsidiaries, new J.Crew protection and a strengthened Serta blocker (the “LM Blockers”).
Five months later, on October 3, 2024, STG Logistics amended its credit agreement again (the “Sixth Amendment”) to effectuate a liability management transaction in which the company effectively unwound the LM Blockers in order to permit the drop down of valuable assets to newly created unrestricted subsidiaries who used the assets to incur new structural senior debt. Proceeds of the new loan were loaned back to STG through an intercompany credit agreement, and the new loan was secured by guarantees from the existing credit group, creating a double dip structure.
Lenders not included in the liability management transaction were subsequently offered the opportunity to participate on worse terms, including a lower interest rate and deeper discount. All but two excluded lenders accepted these terms, resulting in a transaction sanctioned by 93% of STG’s lenders.
On January 8, 2025, the two non-accepting excluded lenders – Axos Financial and Siemens Financial Services – sued STG, the administrative agent and the participating lenders in New York state court. Defendants filed motions to dismiss on March 31 and April 1, and oral arguments relating thereto were held on August 12.
Examining the Court’s Opinion
On January 3, Justice Anar Patel released an opinion that primarily sided with the plaintiffs. It is important to remember that in a motion to dismiss, the court must accept all pleadings as true and determine only whether the facts as alleged are sufficient for a cognizable legal claim. So, while this opinion does not find for the plaintiffs on the merits of their claims, it is still a significant victory for them moving forward.
As a threshold matter, the court found that the “no action” clause in the credit agreement did not bar the plaintiffs’ claims because of the futility in asking the agent to sue itself. The no action clause requires lenders to seek remedies exclusively through the administrative agent rather than individually.
The primary discussion in the opinion is whether the Fifth Amendment or Sixth Amendment is the valid operative document, as the plaintiffs seek declaratory judgment that the Sixth Amendment is not a valid and enforceable contract. The court found that the plaintiffs sufficiently alleged that the liability management transaction could be treated as a single integrated transaction, because the relevant documents “had the same purpose, were executed at the same time, and are mutually dependent.” Treating the transaction as a single integrated transaction, the plaintiffs sufficiently pled violations of their sacred rights such that the Sixth Amendment may be invalid.
The defendants argued that the Mitel decision precluded finding that amendments permitted by their terms implicate sacred rights, but the court distinguished Mitel because it did not involve any textual changes to the credit agreement. Finding the defendants’ narrow reading of the sacred rights language “ambiguous at best,” the court denied the motion to dismiss the claim for declaratory judgment.
The court also denied motions to dismiss the various breach of contract claims, because whether there was a breach of contract will depend on whether the Fifth Amendment or Sixth Amendment is the operative loan document.
The court further distinguished STG from Mitel in denying the motion to dismiss claims based on a breach of the implied covenant of good faith and fair dealing. Per the court, the “crux” of the plaintiffs’ allegations in STG is that the bargained-for protections in the Fifth Amendment, on which the plaintiffs reasonably relied, were removed, whereas in Mitel, the parties had not negotiated an amendment that specifically prohibited the transaction.
The court also refused to exculpate the administrative agent, finding that the plaintiffs had sufficiently alleged gross negligence and willful misconduct (the standard in the credit agreement) given the agent’s alleged intentional participation in an unlawful scheme and potential conflicts in its role as agent and lender.
The court granted one motion to dismiss based on statutory language relating to jurisdiction in the Uniform Voidable Transactions Act.
Why This Matters
As the opinion itself states, “Seldom does a sponsor-financed debt restructuring contain as many discrete legal issues as the instant case both with respect to credit agreements generally, and with respect to the emerging body of jurisprudence related to Liability Management … more specifically.”
Judicial resolution of this case could answer burning questions such as: Does extending the grace period for an interest payment violate the sacred right for interest payments? Is structural subordination captured by Serta provisions that apply to lien subordination? What facts could justify the collapse of a series of distinct transactions into one integrated transaction?
Alas, we may not get answers. STG Logistics filed a chapter 11 petition in New Jersey on January 12, and in any case, a settlement seems likely following this opinion.
This opinion did, however, provide some answers as to how future courts may treat the December 31, 2024 Mitel ruling. Unlike the Serta decision filed the same day, Mitel was issued by a New York state court, so the defendants may have thought it would be particularly convincing. Justice Patel, however, found significant differences in the fact patterns, proving once again that every liability management transaction is unique enough to create judicial uncertainty.
