Expert Views: The Collapsing Doctrine in LME Litigation

Editor’s Note: This latest installment in Octus’ Expert Views series was authored by Justin Ellis, Lauren Dayton and Eric Rolston. The authors are attorneys at MoloLamken who specialize in bankruptcy, distressed debt and contract disputes. The article examines the “collapsing doctrine” under New York law and its role in recent liability management exercise litigation in the Southern District of Texas and New York’s Commercial Division. It identifies important issues for litigants in liability management exercise cases.

In recent years, the “collapsing” (or “integrated transaction”) doctrine has found renewed relevance in liability management exercise, or LME, litigation. Courts applying New York law have invoked this doctrine to collapse multistep transactions with nominally separate agreements into a single, unified transaction. Whether an LME’s steps are collapsed can be decisive as to whether the transaction violates dissenting creditors’ rights.

Recent decisions out of the Southern District of Texas and New York’s Commercial Division approach the doctrine very differently. These decisions illustrate the doctrine’s contours and raise important issues for litigants on both sides of LME litigation.

The Collapsing Doctrine

Under New York law, courts may “collapse” multiple, interrelated agreements that are, in substance, part of the same transaction.^[1] Whether to collapse such agreements is a factual question focused on the contracting parties’ intent to treat the agreements as “mutually dependent contracts, the breach of one undoing the obligations under the other.”^[2] That the parties entered into separate contracts is “influential” but “not conclusive.”^[3] Factors courts consider when deciding to collapse include the agreements’ timing, whether the parties involved are the same, the contracts’ purpose, whether the agreements are mutually dependent, whether the contracts refer to each other, and whether the contracts have integration clauses.[4] Some courts frame the inquiry as whether each transaction would occur without the expectation the set of transactions will be consummated._[5]

The doctrine has often been used in fraudulent conveyance litigation, especially in challenges to leveraged buyouts.^[6] In these cases, creditors argue that both the LBO transaction and subsequent transfers of funds to equityholders formed a single, integrated transaction designed to reduce the amount of funds available to creditors.^[7] Courts that collapse such transactions are more likely to find violations of New York’s fraudulent conveyance statutes.^[8]

As early as 2021, New York courts considered this doctrine in the context of LME litigation without explicitly referencing it. On motions to dismiss in both TriMark (2021) and Boardriders (2022), Justices Cohen and Masley of New York’s Commercial Division found that, as alleged, a series of LME instruments “executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction” should be read together as one instrument.^[9] As a result, the courts allowed the excluded creditors’ breach-of-contract claims to proceed.^[10]

Divergent Views in Wesco, STG Logistics and Hunkemöller

Over the past year, courts have applied the collapsing doctrine to LME litigation in markedly different ways.

Wesco: Rejecting the Collapsing Doctrine

In Wesco, Judge Crane of the Southern District of Texas took a narrow, debtor-friendly view of the doctrine in the context of a multistep uptier LME. The LME involved a series of agreements in which participating lenders provided Wesco with $250 million in new money and exchanged existing 2026 notes for new, super-senior notes.^[11] Prior to the LME, the participating lenders did not own the two-thirds supermajority of the 2026 notes needed to amend the credit agreement. But they owned a majority, which was sufficient to authorize the issuance of new 2026 notes. The participating lenders authorized new debt, allowing them to surpass the two-thirds threshold to permit the exchange and release of collateral, subordinating excluded lenders.

The bankruptcy court considered the noteholders’ arguments that the collapsing doctrine applied to the LME transaction and found that there were genuine disputes of material fact concerning the transactions’ circumstances and the parties’ intent.^[12] After trial, the bankruptcy court sided with the excluded lenders, basing its recommendation on a breach of an indenture provision requiring a two-thirds majority for any amendment that had the “effect of releasing all or substantially all of the Collateral from the Liens created pursuant to the Security Documents.”^[13] The court found that because the amendment, along with the other agreements comprising the LME transaction – which were effective automatically and instantaneously upon the amendment’s execution – had this effect, a two-thirds majority was required “prior to” the initial steps of the LME transaction.^[14]

The district court, however, rejected the bankruptcy court’s recommendation. Judge Crane found that the initial amendment did not itself have the “effect” of releasing the collateral – it instead authorized the new money and exchange transactions. The release of collateral happened only with a later amendment, executed simultaneously with but technically after the first. Because this amendment occurred after the new money and exchange transactions, participating lenders had the two-thirds majority required by the “effect” provision.^[15]

Judge Crane also considered and rejected the excluded lenders’ “collapsing doctrine” argument, finding that the collapsing doctrine did not require reading the contracts as a single agreement. Because the parties “intended the separate steps of the 2022 Transactions to be treated as distinct transactions,” the collapsing doctrine did not apply.^[16] Judge Crane placed weight on the fact that each of the separate agreements “did not by its terms depend on or require any of the subsequent transactions.”^[17] Judge Crane thus rejected the excluded lenders’ argument that the debtor breached the credit agreement because, under the plain language, a supermajority was not required for the initial step. Judge Crane emphasized the need to follow the text of the documents, the immediate, technical impact of each amendment, and the excluded lenders’ sophistication when negotiating the credit documents.^[18]

Wesco’s framing could create insurmountable hurdles for excluded lenders seeking to apply the collapsing doctrine to LMEs. Under Wesco’s standard, as long as the parties structuring an LME do not intend to collapse multistep transactions – and they never will – courts will not treat those separate transactions as a single agreement. And even where parties impose supermajority voting requirements for indenture amendments that have the “effect of” impairing existing creditors’ security interests, Wesco requires, at minimum, very clear language applying this limitation to multistep transactions. The excluded lenders appealed Judge Crane’s decision to the U.S. Court of Appeals for the Fifth Circuit.

STG Logistics: Applying the Collapsing Doctrine

In STG Logistics, Justice Patel of New York’s Commercial Division approached the doctrine differently.^[19] The LME involved three “integrated, mutually dependent agreements”: one amending the contract to allow for the creation of unrestricted subsidiaries, a second dropping down collateral to the newly created subsidiary, and a third effectuating a “double-dip” using the new collateral in the unrestricted subsidiary to make an intercompany loan backed by a parent guarantee. The result was that majority lenders were structurally senior to the excluded lenders.

On a motion to dismiss, Justice Patel found that the plaintiffs sufficiently alleged that the agreements formed an integrated transaction. Relying on First Department precedent, the court held that contracts “‘executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction will be read and interpreted together, it being said that they are, in the eye of the law, one instrument.’”^[20] Justice Patel noted that the defendants concededly “reli[ed] on the interconnection of all three contracts to execute the [challenged] Transaction.”^[21] Thus, unlike in Wesco, Justice Patel framed the relevant intent as whether the parties planned to use several steps to carry out a single purpose, not whether they intended to collapse their contracts.

After collapsing the contracts, Justice Patel then held that the excluded lenders adequately pleaded that the LME (taken together) violated several of the credit agreement’s sacred rights provisions. Even where amendments “did not directly impact” the credit agreement’s prohibition on the transfer of collateral, there were sufficient allegations of a breach of the credit agreement “[g]iven the Court’s reading of the three contracts as unified.”^[22]

Shortly after Justice Patel’s decision, STG Logistics filed for chapter 11 relief in New Jersey. Months later, excluded lenders settled their LME-related claims with the company and participating lenders.

Hunkemöller: Collapsing Transactions Months Apart

In Hunkemöller, the same Justice Patel in the Commercial Division found that plaintiffs sufficiently pleaded that a series of agreements executed months apart should be collapsed. The plaintiffs argued that the agreements were really one single transaction that violated the indenture. The agreements included: one removing a payments-for-consent provision that prohibited consideration in exchange for consent to amend the indenture; a second, a new-money transaction providing €50 million in new super-senior-secured term loan debt; and a third, which effectuated an exchange of notes for notes senior to the excluded lenders.^[23] The second and third agreements were executed two months after the agreement removing the payments-for-consent provision.

Defendants claimed that the contracts could not be collapsed because the temporal gap indicated a lack of conditionality between the transactions.^[24] Plaintiffs countered that it was common sense the parties knew and intended the uptier when removing the consent provision, because, plaintiffs argued, removing that term would not make economic sense for the participating lender otherwise.^[25] Plaintiffs also argued that there were two ways to find the transactions should be collapsed: based on the recent line of LME cases such as TriMark focusing on timing and purpose; or based on fraudulent transfer cases considering equivalent economic value, which are more flexible in considering the parties’ knowledge and the transactions’ mutual dependence.^[26]

The court found for plaintiffs, concluding that the excluded creditors sufficiently pleaded that the removal and the uptier should be collapsed because of the parties’ knowledge and the interdependence of the exchange and earlier amendment. For Justice Patel, while the two-month gap was “relevant,” it was “not dispositive” at the motion to dismiss stage. Viewing the transaction as a whole, plaintiffs sufficiently alleged that the LME, consisting of the removal of the payments-for-consent provision and uptier, breached the indenture’s payments for consent provision.^[27]

Issues for Litigants

The collapsing doctrine is fact-specific, centering on the relevant credit agreements and LME instruments. However, several themes emerge when reviewing recent decisions.

Collapsing may be determinative. As the cases above show, whether an LME violates excluded lenders’ rights can depend on whether the transaction is viewed as separate, discrete transactions or as an integrated whole. Litigants to LME disputes must be prepared to argue in detail whether the different steps of a multistep transaction trigger the collapsing doctrine or not.

Mutual dependence is the focus. In Boardriders, STG Logistics, Hunkemöller and TriMark, the courts focused their analyses on whether the parties intended the transactions to be mutually dependent. Debtors and participating lenders should assess how they can structure their contracts to avoid interdependence. For example, ensuring that the different steps can be executed without each other, using different parties, exchanging different consideration, or even including recitals showing an intent to keep the contracts separate may all be helpful. By contrast, excluded lenders should assemble evidence that, like in STG and Hunkemöller, show the different steps were intended to carry out a single goal of restructuring the company’s debt to their detriment.

Courts are divided on what intent matters. In Wesco, the court focused on whether the parties intended to “collapse multiple separate agreements into a single instrument.” This contrasts with recent Commercial Division cases, which, relying on Rudman, consider intent to treat the transactions as “mutually dependent” so the parties would not have entered some of the contracts unless they entered into all of them. Because New York appellate courts have not yet addressed the collapsing doctrine in the LME context, some ambiguity remains there.

The influence of fraudulent transfer case law. The collapsing doctrine is often applied in fraudulent transfer cases to determine whether the debtor received reasonably equivalent value.^[28] In such cases, courts focus on the parties’ “knowledge and intent,” a flexible analysis.^[29] Excluded lenders may make analogies to fraudulent transfer cases to argue that knowledge and intent should be the main consideration, even where transactions appear structurally discrete. Meanwhile, debtors and participating lenders may argue that LMEs are distinct and emphasize the LMEs’ separate agreements and (where applicable) consideration. In other words, a critical issue will be whether courts focus primarily on the contracts’ plain text (as in Wesco) or are willing to look through to the contracts’ economic substance (as in STG or Hunkemöller).

Incorporating “collapsing” into the documents. In Wesco, the court held that the LME transaction did not breach the indenture provision requiring a supermajority to execute a transaction that had the “effect” of releasing all or substantially all of the collateral. The court interpreted “effect” narrowly, concentrating on the immediate impact of the specific instrument “itself.” Lenders should be mindful of how courts interpret amendment provisions with regard to multistep transactions, and whether more precise wording might embed the collapsing doctrine into the relevant agreements.

Venue plays an important role. Finally, Wesco’s debtor-friendly approach compared with the decisions from Justice Patel in New York’s Commercial Division is a reminder that venue remains crucial in LME litigation.

[1] BWA Corp. v. Alltrans Express U.S.A., Inc., 112 A.D.2d 850, 852 (1985) (citing Nau v. Vulcan Rail & Constr. Co., 286 N.Y. 188, 197 (1941)).
[2] Rudman v. Cowles Commc’ns, Inc., 30 N.Y.2d 1, 13 (1972).
[3] Rudman, 30 N.Y.2d at 13.
[4] BWA Corp., 112 A.D.2d at 852 (citing Nau, 286 N.Y. at 197); JN Contemp. Art LLC v. Phillips Auctioneers LLC, 29 F.4th 118, 127 (2d Cir. 2022); Arciniaga v. Gen. Motors Corp., 460 F.3d 231, 237 (2d Cir. 2006); see also 11 Williston on Contracts §30:26 (4th ed.)
[5] MFS/Sun Life Tr.-High Yield Series v. Van Dusen Airport Servs. Co., 910 F. Supp. 913, 934 (S.D.N.Y. 1995) (citing United States v. Tabor Realty Corp., 803 F.2d 1288, 1302–03 (3d Cir. 1986)).
[6] See, e.g., HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir. 1995).
[7] HBE Leasing, 48 F.3d at 635; see also Voest–Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 212 (3d Cir. 1990).
[8] HBE Leasing, 48 F.3d at 635; see also Orr v. Kinderhill Corp., 991 F.2d 31, 35–36 (2d Cir. 1993).
[9] ICG Glob. Loan Fund 1 DAC v. Boardriders, Inc., No. 655175/2020, 2022 WL 10085886, at *7 (N.Y. Sup. Ct. 2022) (“Boardriders”) (quoting BWA Corp, 112 A.D.2d at 852); Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent, Corp., 150 N.Y.S.3d 894, *8 (N.Y. Sup. Ct. 2021) (“TriMark”) (quoting Fernandez v Cohen, 110 A.D.3d 557, 558 (1st Dept 2013)).
[10] TriMark, 150 N.Y.S.3d at *8-9; Boardriders, 2022 WL 10085886, at *7.
[11] Wesco Aircraft Holdings, Inc v. SSD Invs. Ltd, No. 25-CV-202, 2025 WL 3514358, *3-6 (S.D. Tex. Dec. 8, 2025).
[12] In re Wesco Aircraft Holdings, Inc., No. 23-90611, 2024 WL 156211, at *19 (Bankr. S.D. Tex. Jan. 14, 2024).
[13] In re Wesco Aircraft Holdings, Inc., No. 23-03091, 2025 WL 354816, at *8, *15-16 (Bankr. S.D. Tex. Jan. 17, 2025), report and recommendation adopted in part, rejected in part sub nom. Wesco Aircraft Holdings, Inc v. SSD Invs. Ltd, No. 25-CV-202, 2025 WL 3514358 (S.D. Tex. Dec. 8, 2025) (emphasis added).
[14] Id. at *16-17
[15] Wesco, 2025 WL 3514358, at *8-10.
[16] Id. at *13.
[17] Id. at *5.
[18] Id. at *2, 4, 8.
[19] Axos Fin., Inc. v. Reception Purchaser, LLC, No. 650108/2025, 2026 WL 27202 at *12-13 (Sup. Ct. N.Y. Cnty. Jan. 03, 2026) (“STG Logistics”).
[20] Id. at *12-13.
[21] Id. at *13.
[22] Id. at *14.
[23] Plaintiffs assert the provision was added specifically to prevent LMEs. Cheyne European Strategic Value Credit RAIF et al., v.Hunkemöller Int.’l BV et al., No. 659297/2024 (N.Y. Sup. Ct. May 21, 2025) (“Hunkemöller”), Dkt. 141 at 2, 6‑9.
[24] Hunkemöller, Dkt. 79 at 20-21.; Hunkemöller, Dkt. 195 (July 16, 2026 Hearing Tr.) at 15-16.
[25] Hunkemöller, Dkt. 195 (July 16, 2026 Hearing Tr.) at 23-25.
[26] SeeIn re Adelphia Commc’ns Corp., 512 B.R. 447, 489 (Bankr. S.D.N.Y. 2014); In re TS Emp., Inc., 597 B.R. 494, 526 (Bankr. S.D.N.Y. 2019).
[27] Hunkemöller, Dkt. 196 (July 17, 2026 Hearing Tr.) at 33.
[28] See MFS/Sun Life Tr.-High Yield Series, 910 F. Supp. at 937.
[29] Adelphia, 512 B.R. at 491 (citations omitted).