Litigation Coverage: NY Court Allows STG Drop-Down Suit to Proceed, Distinguishes Mitel in Major Win for LME Challengers

In an opinion issued Jan. 3, New York Supreme Court Justice Anar Rathod Patel denied motions to dismiss minority lenders’ declaratory judgment and breach of contract claims relating to STG Logistics’ October 2024 drop-down, finding the minority lenders sufficiently alleged the multiple steps of the drop-down were “a single integrated transaction” and “implicated their sacred rights” under the pre-transaction credit agreement.

The minority lenders allege the drop-down of STG collateral to new unrestricted subsidiaries, issuance of new super-senior debt to majority lenders secured by those assets and amendments removing lender protections from the fifth amended credit agreement, or FAA, constitute a single integrated transaction that violated their sacred rights without their consent, rendering the post-transaction sixth amended credit agreement, or SAA, null and void. The plaintiffs also alleged the drop-down of collateral was a fraudulent transfer by the company.

On Dec. 9, 2025, Octus reported that STG is considering a chapter 11 filing and has retained Kirkland & Ellis and PJT Partners as advisors. If the company files, the bankruptcy court would likely take over the litigation, as in the Serta Simmons, Incora/Wesco and Robertshaw cases.

At oral argument on Aug. 12, 2025, the parties focused on whether the New York Appellate Division’s December 2024 Mitel decision barred the plaintiffs’ suit. The defendants insisted that under Mitel the plaintiffs’ claims must be dismissed because the SAA did not modify the text of the sacred rights provisions. However, Justice Patel finds Mitel inapplicable because the integrated drop-down transaction made “textual changes” to the credit agreement, “in contrast to the unchanged credit agreement in Mitel.”

Justice Patel allows the minority lenders’ claims to nullify the transaction and for monetary damages to proceed to discovery, while dismissing the minority lenders’ fraudulent transfer claims under New York law on choice of law grounds.

As a threshold matter, Justice Patel finds the plaintiffs adequately pleaded that the multiple drop-down steps were a single integrated transaction rather than distinct transactions. The ​defendants argued the transaction consisted of a “series of independent steps” made through “separate agreements” that did not actually amend any of the sacred rights provisions in the FAA, the judge recounts.

However, the judge finds that the plaintiffs sufficiently allege the individual drop-down steps “had the same purpose, were executed at the same time, and are mutually dependent.” According to Justice Patel, “absent the authority of any one of the three at-issue contracts, the October Transaction would fail,” and therefore she “interprets the three contracts as one instrument as alleged by Plaintiffs” at the pleading stage.

Justice Patel then rejects the defendants’ argument that all of the plaintiffs’ sacred rights claims fail under Mitel because the SAA did not modify the text of the sacred rights provisions in the FAA. The defendants argued that “amendments otherwise permitted under the express terms of the Credit Agreement … cannot support a ‘sacred rights’ claim even if these amendments are alleged to ‘effectively’ impact Plaintiffs,” the judge recounts.

However, according to Justice Patel Mitel is distinguishable because in that case the pre-transaction credit agreement was not modified at all – whereas here the transaction modified several specific provisions of the FAA. The judge adds that the defendants’ “narrow reading” of the FAA’s sacred rights provisions makes those provisions “ambiguous at best,” precluding dismissal at the pleading stage.

Justice Patel then finds that the plaintiffs sufficiently allege the single, integrated drop-down transaction violated several of their sacred rights without consent. First, the judge says amendments allowing the company to indefinitely extend its coupon grace period arguably violate the minority lenders’ sacred right to receive pre-maturity interest payments, even though the text of that sacred right was left untouched by the SAA.

“Plaintiffs lost all contractual remedies to declare an event of default for missed interest payments during the life of the loan because instead of the contractually required quarterly payments in the original loans, the only fixed payment date in the UnSub loans is the 2028 maturity date,” the judge explains. “Although Plaintiffs currently receive interest payments, they do so only at the will of STG.”

The judge then concludes that the plaintiffs have adequately alleged a “violation of their sacred right prohibiting other loan parties from pre-paying existing loans in a non-pro-rata loan exchange, thereby reducing the principal of outstanding loans.” According to the judge, the defendants’ argument “that the non-pro-rata transaction is not a ‘loan cancellation’” but “a permitted ‘discounted buyback’ transaction” using “internally generated funds” cannot be decided on a motion to dismiss because those terms are subject to multiple reasonable interpretations.

The plaintiffs “succeed in alleging contractual ambiguity, and therefore a disputed fact pattern, by alleging that a ‘discounted buyback’ is ‘intended to benefit all lenders by allowing the company to deleverage and retire debt when it had cash to spare,’” according to the judge.

The plaintiffs further sufficiently allege that STG violated their sacred rights by transferring collateral to “two newly created unrestricted subsidiaries,” the judge says. “Although Defendants argue that the textual amendments to the FAA did not directly impact terms permitting the transfer of collateral, they acknowledge the three individual contracts” that effectuated the drop-down “in the aggregate did impact, and allow for, the collateral transfer,” Justice Patel explains.

Justice Patel next concludes the plaintiffs adequately pleaded that the transaction violated their sacred rights by subordinating their interests in collateral to the participating lenders’ new senior secured loans. The plaintiffs, participating lenders and company offer three reasonable interpretations of the term “subordinate” in the sacred rights provisions, the judge finds, rendering the term ambiguous and not subject to definitive interpretation at the pleading stage.

Justice Patel also rejects the defendants’ argument that the plaintiffs’ good faith and fair dealing claim should be dismissed under Mitel. The good faith and fair dealing claim is pleaded in the alternative to the declaratory judgment and breach of contract claims and assume the SAA is valid, the judge points out – meaning it is viable if the plaintiffs fail to secure a declaratory judgment nullifying the SAA.

“Even if the SAA is deemed to be operative, Plaintiffs allege that Defendants acted in bad faith by secretly conspiring to execute the Scheme, which fundamentally undermined the bargained-for lender protections that the parties agreed to in the FAA,” Justice Patel explains. “Plaintiffs’ allegations here do not arise from the same operative facts as those in support of the breach of contract claims, nor do Plaintiffs seek a ‘gap-filler’ intending to re-write the contract or insert language that the lenders, in retrospect, should have included.”

The court distinguishes the differing result in Mitel because in that case “the parties did not specifically negotiate amendments to prohibit the contested transaction,” whereas “here, the crux of Plaintiffs’ allegations are that Defendants’ amendments to the FAA flew in the face of their reasonable expectations of negotiated lender protections in the FAA” (emphasis added).

Justice Patel finds that the instant case is more analogous to Justice Andrea Masley’s 2022 decision in Boardriders, where the implied covenant claims were allowed to proceed. “In Boardriders, the court sustained the breach of implied covenant claim based upon similar allegations that the ‘[t]ransaction was carried out in secret’ while ‘plaintiffs made multiple attempts to gauge whether the Company needed additional capital, which plaintiffs allege they were willing to provide,’” the judge says.

Finally, Justice Patel denies agent Antares’ motion to dismiss the claims against it under the exculpation provisions of the credit agreement. The plaintiffs adequately allege that their claims fall under the “gross negligence” and “willful misconduct” exceptions to the exculpation provisions, the judge says.

The plaintiffs “allege Antares’ ‘gross negligence’ and/or ‘willful misconduct’ through the participation of Antares Capital in the Scheme,” Justice Patel says, unlike the plaintiffs whose claims against the agent were rejected as exculpated in J. Crew.

However, Justice Patel dismisses the plaintiffs’ claims under New York fraudulent conveyance law because the company is headquartered in Illinois, not New York. The plaintiffs argued that New York law applies under the governing law provisions in the credit agreement, the judge notes, but New York’s fraudulent conveyance statute specifically provides that fraudulent transfer claims in New York courts are “governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.”

The specific governing law provision in the New York statute is a “clear rule” that trumps “contractual provisions whose application may be debatable,” Justice Patel concludes.

Justice Patel also rejects the defendants’ argument that the no-action clause in the agreements prevents the plaintiffs, as opposed to Antares, from challenging the drop-down. “Because Plaintiffs sufficiently allege that Antares Capital – to whom the parties had delegated litigation decisions – is implicated in the Scheme and conflicted,” the plaintiffs were under no obligation to demand that Antares bring suit before they filed the action themselves, according to the judge.