Del Monte Foods Minority Lenders Contend Credit Agreement Entitles Them to Share Proceeds of Rollup DIP Transaction They Did Not Participate In

The Del Monte Foods minority lenders suing the company’s DIP lenders contend in a brief today that the minority lenders are entitled to share in the proceeds of the DIP transaction even though they did not participate in it.

The minority lenders’ argument – made in an opposition brief to the DIP lender defendants’ motion to dismiss their suit – centers on section 2.17 of the prepetition credit agreement, the so-called sharing provision. That provision provides, in part, that lenders must share in any “payment or reduction” of the credit agreement debt.

The minority lender plaintiffs – who hold first-out term loans – argue that when an ad hoc group of Del Monte lenders extended $165 million in new-money DIP financing and rolled up $247.5 million of their first-out loans to the facility, the rollup was a payment, or reduction in debt, required to be shared under the provision.

In the motion to dismiss the plaintiffs’ suit, filed two weeks ago, the DIP lenders contend that the DIP rollup is not a “payment” or reduction in debt, but a “cashless exchange,” which does not trigger the sharing provision.

The plaintiffs’ complaint alleges breach of contract and breach of the implied covenant of good faith and fair dealing, but centers on the meaning of section 2.17, the sharing provision. The provision may be familiar to some. It is the same type of provision that took center stage at the Serta Simmons uptier trial last week and that has been invoked in DIP disputes by minority lenders in the American Tire and Anthology cases, discussed in Octus’ 2025 analysis piece HERE.

The American Tire and Anthology disputes were resolved without definitive judgments. That means that Judge Michael Kaplan of the Bankruptcy Court for the District of New Jersey (Del Monte) and Judge Christopher Lopez of the Bankruptcy Court for the Southern District of Texas (Serta) may have the opportunity to reach impactful conclusions on a provision whose meaning is hotly debated.

The minority lender plaintiffs argue that the provision enshrines one of their “sacred” credit agreement rights: “ratable treatment” in the event of “loan repayment.” Their legal theory is that the Del Monte DIP rollup was such a loan repayment, which triggered the provision and the DIP lenders’ concomitant obligation to share proceeds.

The DIP lenders argue in their motion to dismiss that the minority lenders’ interpretation of the sharing provision would be “untenable” because it would mean that a lender could simply “[sit] on the sidelines” for any DIP transaction and still reap the rewards of the financing, even though it did not participate in it.

Adopting the plaintiffs’ interpretation of section 2.17 would “sound the death knell for roll-up loans” and implicate “almost every DIP roll-up loan in history,” the DIP lenders wrote in their motion to dismiss.

Notably, in their opposition today, the minority lenders do not dispute that they were offered the opportunity to participate in the Del Monte DIP on the basis of their first-out holdings. They declined to participate, however, because “there were significant strings attached to Defendants’ offer, which may be the subject of [later] discovery,” the brief states.

The minority lenders also argue that the DIP lenders’ “alarmist claims” about the “death knell” for rollups are “purely speculative, wrong, and simply an attempt to distract the Court.”

As for their substantive arguments, the minority lenders, like the DIP lenders, utilize a dictionary for their position. The plaintiffs characterize the DIP rollup as a “debt exchange,” which would qualify as a “payment” in Black’s Law Dictionary (12th ed. 2024). They quote: A “payment” is the “[p]erformance of an obligation by the delivery of money or some other valuable thing accepted in partial or full discharge of the obligation.”

“The Roll-Up Loans are a ‘payment or reduction’ of the debt owed Defendants under the Term Loan Agreement and must be shared with Plaintiffs,” the brief states. “So too are the funds that Defendants will receive from the Debtors’ asset sales to repay the Roll-Up Loans exchanged for the First Out Term Loans,” the plaintiffs continue.

The plaintiffs also argue that New York state court cases support their position. For example, according to the plaintiffs, AEA Middle Market Debt Funding involved a majority lender group acquiring, among other things, equity in a borrower through a credit bid. In that case, an excluded minority lender group sued, arguing a breach of the sharing provision. The court agreed, according to the plaintiffs’ brief, concluding that the equity had to be shared pro rata among lenders, even though no “cash” was received by the majority in exchange for the loans that they used to credit-bid.

The plaintiffs also argue that “[b]ankruptcy courts and treatises have also recognized that roll-ups ‘pay’ prepetition debt.” They cite to a decision in In re Capmark by Judge Christopher Sontchi where he said that “prepetition secured claims can be paid off through a ‘roll-up,’ which ‘is the payment of a prepetition debt with the proceeds of a post-petition loan.’” They also cite to Judge Craig Goldblatt’s comments in American Tire, where he mused that “he grew up understanding” that a rollup was a deemed DIP draw used to pay down prepetition debt, not a cashless exchange.

The defendant DIP lenders argued in their brief that the plaintiffs are not entitled to share in the DIP rollup benefits because they did not advance new money, but the plaintiffs contend that “[u]nder the plain terms of the contract, it does not matter.” It only matters that “the favored lender” receives a payment, here the rollup loans.

The minority lenders also say that the defendants’ argument that the rollup was a “fee” exempt from the sharing provision “borders on absurd.” They argue that the provision’s fee exception applies to fees such as commitment fees, not rollups. The two other exceptions that the DIP lenders advanced in their brief – that the rollup was an “involuntary payment” or paid “with the express terms” of the credit agreement – similarly fail, the plaintiffs reason.

In addition to their breach of contract and declaratory judgment claims, the plaintiffs also argue that the DIP lenders are liable for breaching the implied covenant of good faith and fair dealing. They argue that count “is not duplicative” of their breach of contract claims. The allegation, according to plaintiffs, is that through the DIP, the defendants “devised an improper scheme to attempt to nullify Plaintiffs’ rights” under section 2.17.

As mentioned, the plaintiffs acknowledge that they were offered the opportunity to participate in the DIP facility, but declined due to “significant strings attached to Defendants’ offer.” The minority lenders argue that the fact they refused to participate in the DIP cannot be considered by Judge Kaplan for purposes of the motion to dismiss because the judge must constrain his analysis to the four corners of the complaint.

In their conclusion, the plaintiffs submit that despite the defendants’ arguments to the contrary, a ruling in the plaintiffs’ favor “will not cause the sky to fall on DIP financings.”

“If sophisticated commercial lenders wish to do so, they can include an exception to ratable sharing for roll-up loans in future contractual agreements,” the brief states.

A hearing on the motion to dismiss has been set for Wednesday, March 18, at 10 a.m. ET.