Fifth Circuit Hears Oral Argument on Incora/Wesco Uptier Dispute; Minority Argues Issuance of New Notes, Stripping of Liens ‘Single Unified Transaction’ That Breached Indenture

A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit today heard oral argument on the Incora/Wesco minority noteholder group’s appeal of a district court decision rejecting its challenges to a 2022 non-pro-rata uptier exchange. The minority noteholders urged the panel to treat the steps of the uptier as a single transaction that required supermajority consent from the start, while the majority pushed for an analysis of each step of the transaction as a separate amendment event.

In January 2025, Bankruptcy Judge Marvin Isgur held the 2026 notes indenture’s two-thirds consent requirement for any amendment that “has the effect” of stripping liens prevented the company from selectively issuing $250 million in new 2026 notes solely to get majority lenders over the two-thirds hurdle. In January 2026, District Judge Randy Crane reversed, finding the new notes were properly issued in a freestanding amendment with simple majority consent.

The company emerged from chapter 11 in January 2025, before Judge Crane reversed Judge Isgur’s decision. In accordance with Judge Isgur’s ruling, the plan allocated approximately 76% of reorganized equity and $420 million in convertible take-back notes to the first lien/majority 2026 noteholder group and 24% to the minority noteholders, subject to adjustment depending on the outcome of the appeals.

Candice Wong of Fried Frank, for the minority group, told the panel (Circuit Judges Stuart Kyle Duncan, Kurt D. Engelhardt and Irma Carrillo Ramirez) today that the third supplemental indenture amendment (which authorized the issuance of the new 2026 notes) actually required supermajority consent because it was part of a “single unified transaction” with the fourth supplemental indenture amendment (which stripped the liens from the minority’s notes).

One of the judges asked Wong what about the two amendments evidenced that they were a single unified transaction. Wong responded that the amendments on their face made clear the third amendment was entered into in contemplation of the fourth amendment and added that the mechanics of the transaction – including the pre-execution of both amendments before closing, a key part of Judge Isgur’s ruling – suggests a single transaction.

Wong also pointed out that the participating noteholders would never have paid $250 million in cash for the same face value amount of new pari passu notes at the same interest rate considering the company’s financial condition. There was no “bona fide transaction” for $250 million in pari passu 2026 notes, Wong insisted, and the third amendment was “illusory” – it was a “mirage” intended solely to “conjur[e]” a two-thirds supermajority for the lien release in the fourth amendment, she said.

Another judge pointed out the “has the effect” language in the indenture refers to “amendment” in the singular, rather than to “amendments” plural or a “transaction.” Paul Clement of Clement & Murphy, for the majority noteholders, seized on this issue, arguing that “has the effect” analysis must be performed on each amendment, not the alleged “unified” transaction – and the third amendment clearly did not, on its face, have the effect of stripping the liens from the minority noteholders.

Wong in turn asserted that under the Fifth Circuit’s 2024 Serta uptier decision, the court must look at whether the substance of both amendments had the effect of releasing the minority’s liens, without deferring to the words used by the majority and the company. In this case, Wong asserted, the transaction steps were merely “performative,” and the whole transaction depended on the stripping of the minority’s liens and elevation of the majority’s claims to senior secured status.

Clement countered by emphasizing that there were no “widows or orphans” involved in the dispute. Any sophisticated investor reading the indenture would have understood immediately that the different consent thresholds for issuing new notes and releasing liens would give the company flexibility to issue new notes with a simple majority to create a supermajority for the latter purpose, according to Clement.

Clement also emphasized the benefits of such flexibility for borrowers generally and the debtors in particular. Liability management transactions allow companies to secure “rescue financing” without filing bankruptcy, Clement said, and it is rational for companies to insist on the flexibility to undertake such transactions in their debt documents.

Clement further suggested several provisions the minority could have insisted on to protect themselves before signing the indenture, including depriving holders of newly issued notes from voting on amendments for a set period of time or requiring the company to issue new notes ratably to all noteholders. The company never agreed to such provisions, Clement pointed out, and there were rational economic reasons for not doing so.

Wong countered that the transaction was so novel that there was no way for the minority to see it coming, citing the Serta panel’s suggestion that aggressive uptiers seem to be a post-Covid phenomenon.

Clement alternatively argued that even if the amendments breached the indenture, the proper remedy would be a worthless unsecured damages claim in the bankruptcy, not a return to the pre-transaction capital structure. The fact that the company was bankrupt does not change that the default nonbankruptcy breach-of-contract remedy – monetary damages – still applies, Clement said.

Wong argued that a worthless, unsecured money damages claim that duplicates the minority’s already existing notes claims would be an inadequate remedy for previously secured noteholders that had their liens “wrested away from them.” The court should reinstate Judge Isgur’s ruling and ensure the minority has a real remedy for the wrong committed by the company, Wong asserted.