District Court Surprises With Preview of Ruling Reversing Judge Isgur on Incora/Wesco Uptier Exchange; Says Minority Noteholders, Unlike Serta Challengers, Failed to Secure ‘Sacred Right’ Preventing Transaction

Relevant Document:
Status Conference Order

At a status conference this morning, U.S. District Judge Randy Crane indicated that he will reverse Judge Marvin Isgur’s Jan. 17 decision invalidating part of the Incora/Wesco 2022 secured uptier exchange. According to Judge Crane, the uptier was “perfectly proper and appropriate” under the 2026 indenture, and the “sophisticated” minority noteholders should have pushed for a “sacred right” in the indenture preventing the transaction. The judge said he will further memorialize his decision in a written opinion.

Today’s decision from Judge Crane was just as unexpected as Judge Isgur’s July 2024 oral ruling invalidating the 2026 notes portion of the secured exchange, which was laid out in further detail in the January written opinion. Judge Crane only took over the case from Judge Andrew S. Hanen on June 20 and scheduled oral argument for Oct. 19. However, Judge Crane said today that he reviewed the parties’ appellate briefs, carefully considered the bankruptcy court’s reasoning and was prepared to rule without argument.

In the opinion below, Judge Isgur concluded that the 2026 indenture’s two-thirds consent requirement for any amendment that “had the effect” of stripping liens prevented the company from issuing new notes to get the majority lenders over the two-thirds hurdle. The bankruptcy judge also found that the proper remedy was restoration of the 2026 noteholders’ liens and the voiding of the liens securing the $250 million in new money provided by the majority noteholders in the uptier.

Judge Crane explained today that the U.S. Court of Appeals for the Fifth Circuit’s December 2024 decision invalidating the Serta Simmons uptier controlled the analysis. In Serta, the Fifth Circuit criticized uptier transactions generally and held that the “open market purchase” exception to pro rata treatment in the credit agreement did not apply to Serta’s 2020 uptier.

Judge Crane conceded that the Incora/Wesco uptier is a “perfect example of what the Fifth Circuit doesn’t like lenders doing” but noted that in this case the minority noteholders “didn’t have that sacred right.” If the minority noteholders “wanted to protect against being diluted, they could have included a protection in the sacred rights like they did in Serta,” the judge remarked.

Because there was no sacred right at issue, Judge Crane continued, the minority’s interests could be “diluted” by a bare majority of noteholders, and the company was free to issue the new notes to get the majority group to a two-thirds majority. Once the majority group had a two-thirds majority, the judge concluded, the company and majority noteholders had “carte blanche to do whatever they wanted.”

Judge Crane also had harsh words for Judge Isgur’s reasoning in support of his decision. The bankruptcy judge “mischaracterized” the facts and “didn’t look at them fairly,” Judge Crane said. “I really didn’t understand Judge Isgur’s rationale,” he added, noting that the minority noteholders “are not novice, unsophisticated people” and should probably blame “the lawyers who drafted the documents that made this happen.”

“Everybody’s hopeful,” and “that’s the risk they take,” Judge Crane concluded. “Obviously the minority ended up losing out because what was permitted to happen, did happen.”

Even if Judge Isgur’s conclusion that the transaction violated the 2026 indenture was correct, Judge Crane noted, the remedy – restoration of the 2026 noteholders’ liens and avoidance of the liens securing the $250 million in new money – was incorrect. “I think it was completely wrong” to do that, the district judge remarked.

Judge Crane indicated, however, that he will affirm Judge Isgur’s Feb. 18 opinion rejecting the minority noteholders’ tortious interference claims against the majority noteholders because the “economic interest” defense “wins the day.” Judge Isgur’s conclusion that the economic interest defense applied was “supported by sufficient evidence,” the district judge explained.

The minority 2024/2026 noteholder group is expected to appeal both decisions to the Fifth Circuit. Judge Crane directed counsel for the reorganized debtors to prepare a proposed written opinion for his review; the Oct. 19 hearing will remain on the calendar in case it is necessary to “tie up loose ends,” as Judge Crane put it.

In late December 2024, Judge Isgur confirmed the debtors’ plan of reorganization, which allocated approximately 76% of reorganized equity and $420 million in take-back debt to the first lien/majority 2026 noteholder group and 24% to the minority 2024/2026 noteholders, subject to the outcome of any appeals.

Today’s ruling, if it stands, would appear to hand total control over the reorganized debtors to the majority noteholders.