STG Logistics and the Limits of Technical LME Arguments at the Motion to Dismiss Stage

On Jan. 3, Justice Anar Rathod Patel issued a written decision denying, in large part, defendants’ motions to dismiss in the STG Logistics litigation, capping off the motion to dismiss stage of one of the most consequential LME lawsuits of 2025. The decision represents a win for minority lenders, for now, allowing virtually all contractual and implied covenant claims to proceed and signaling skepticism toward narrow, highly technical defenses to sacred-rights challenges. At the same time, the ruling leaves significant open questions for later stages, including whether the October transaction will ultimately be treated as a single integrated transaction, how “effect of” language in sacred rights provisions should be applied and how durable implied covenant theories will prove. The decision materially improves minority lenders’ leverage but does not definitively resolve the substantive boundaries of permissible liability management transactions.
 

The opinion decides four motions to dismiss. Here, that means Justice Patel decides whether plaintiffs have standing, whether plaintiffs plead facts that support cognizable causes of action and whether any of the documents at issue are unambiguous and conclusively establish a defense to plaintiffs’ claims. In doing so, she notes which agreements may still govern as well as potential competing interpretive approaches. She does not decide the merits of plaintiffs’ claims. The ultimate validity of the October transaction and related textual and structural questions are for a later stage (or, as explained below, possibly a different forum).
 

STG Logistics became financially stressed in early 2024 as operating performance deteriorated and leverage constrained liquidity, raising concerns about covenant compliance and interest serviceability and prompting engagement with a subset of lenders for additional runway under the credit agreement.

In May 2024, the company and the Required Lenders executed the Fifth Amendment, which provided covenant relief in exchange for enhanced lender protections intended to constrain future non-pro-rata or drop-down-style liability management transactions. Although the plaintiff lenders (Axos Financial and Siemens Financial Services) were not part of the Required Lender group that approved the amendment, the enhanced protections applied on a deal-wide basis and accrued to their benefit as well.

In October 2024, the company and the Required Lenders again acted without the plaintiff lenders and executed the Sixth Amendment, which removed virtually all lender protections from the credit agreement, including those added under the Fifth Amendment, and granted the borrower discretion to defer interest payments until maturity without triggering an event of default.

The Sixth Amendment was implemented as part of a broader liability management transaction in which participating lenders exchanged their existing loans into a double-dip-plus facility at newly formed unrestricted subsidiaries. The transaction achieved structural seniority over existing term loans at the unrestricted subsidiary asset level and provided participating lenders with two pari passu secured claims against the remainco assets through an intercompany loan and pari secured guarantees.

The excluded plaintiff lenders, represented by Selendy Gay, filed suit in January 2025 in New York state court against STG, Antares as administrative agent and the participating lenders, asserting 13 causes of action sounding primarily in declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing.

Defendants moved to dismiss in late March and early April, arguing that the Sixth Amendment did not implicate any sacred rights and could be approved by the Required Lenders alone, and therefore rendered the October transaction permissible under the Sixth Amendment.

The court largely rejected those arguments, denying dismissal of all claims except the statutory fraudulent transfer count and allowing the case to proceed on the plaintiffs’ contractual theories.
 

A central feature of the decision is the court’s willingness to treat the October restructuring as a single transaction rather than as a series of formally separate steps. The court found that plaintiffs’ sufficiently alleged that the Sixth Amendment, the drop-down credit agreement and the intercompany loan agreement were one instrument. They had the same purpose, were executed together and were mutually dependent (and defendants did not dispute their reliance on the interconnectedness of the three contracts to execute the October restructuring). The parties’ intent in executing the agreements is a factual matter that could not be determined at the motion to dismiss stage.

That framing allowed the court to evaluate the substance of the restructuring rather than focusing narrowly on the text of any one agreement, and it prevented defendants from defeating the claims based solely on formal distinctions among the transaction documents.
 

Once the court was willing to analyze the October transaction as a whole, the sacred-rights analysis took on a broader role. By finding that plaintiffs plausibly alleged multiple violations of sacred rights, the court accepted that the Sixth Amendment may not have been validly approved, meaning that the Fifth Amendment could still be the governing document.

That conclusion preserved the Fifth Amendment as the contractual baseline. If the Fifth Amendment governs, then the October transaction, as alleged, fell outside what the agreement permitted, including non-pro-rata exchanges, broad collateral drop-downs and transactions that effectively re-ranked lenders without unanimous consent. On that basis, the court allowed the Fifth Amendment breach of contract claims to proceed together rather than parsing each negative covenant in isolation.

The court did not decide whether the October transaction was prohibited by the Fifth Amendment as a matter of final contractual interpretation. The court found that if the Fifth Amendment governs, plaintiffs’ claims for breach of contract were plausibly alleged at this stage.
 

One particularly notable aspect of the sacred-rights analysis is the court’s treatment of “subordination,” a term not clearly defined in the credit agreement. The alleged subordination did not arise from any express lien subordination, intercreditor agreement or other contractual reordering of priorities.

Instead, the advantage achieved by the double-dip-plus structure flowed from two features: (i) structural seniority at the unrestricted subsidiary level resulting from the collateral drop-down and (ii) duplicative secured claims against the remainco assets created through an intercompany loan and pari secured guarantees. Defendants argued that because no liens securing the original term loans were contractually subordinated, no subordination occurred within the meaning of the sacred-rights provisions.

The court rejected that framing, holding that subordination can reasonably be understood to include structural arrangements that effectively push certain lenders down the priority stack. That conclusion limits the extent to which entity separateness and claim duplication alone can be relied on to avoid sacred-rights scrutiny at the motion to dismiss stage.
 

A central defense theme was that the New York Appellate Division’s decision in Mitel foreclosed plaintiffs’ claims because the Sixth Amendment did not directly amend the text of the sacred-rights provisions. Justice Patel rejected that argument by distinguishing Mitel on the ground that STG involved amendments that changed the text of the governing credit agreement, whereas Mitel involved an “unchanged” agreement.

That characterization is open to question. In Mitel, the challenged transaction included an exit consent that affirmatively stripped negative covenants and other lender protections, even if the sacred-rights provisions themselves were not directly amended. Describing Mitel as involving an unchanged agreement therefore understates the extent to which the credit agreement was altered and lender rights were modified as part of the transaction.

By distinguishing Mitel on that basis, Justice Patel avoided squarely resolving the broader issue that animated the briefing: whether sacred-rights provisions that lack explicit “effect of” language can nevertheless be violated by transactions that achieve the same result without a direct textual amendment.

The STG opinion also highlights a methodological divergence from Wesco / Incora. In Wesco, Judge Isgur expressly declined to rely on integration or transaction-level analysis and instead grounded his decision in the presence or absence of “effect of” language. Justice Patel takes the opposite approach, deemphasizing drafting nuance and allowing integration and context to drive the analysis.

That divergence is particularly notable given subsequent developments in Wesco. In November, the District Court for the Southern District of Texas (Judge Randy Crane) issued a written opinion reversing Judge Isgur’s decision. In that decision, Judge Crane dismisses arguments predicated on the collapsing doctrine in a single paragraph. That ruling was brought to Justice Patel’s attention through a notice of supplemental authority, but it was not cited or discussed in the decision. STG, therefore, proceeds on an analytical track distinct from both Judge Isgur’s original reasoning and Judge Crane’s reversal.
 

The court also allowed the breach of implied covenant of good faith and fair dealing claim to proceed, which is notable given how frequently such claims are dismissed in credit agreement disputes. Even if the Sixth Amendment is deemed to be operative, Justice Patel found the claim to be cognizable because it was pleaded in the alternative to the breach of contract claims and focused on alleged conduct surrounding the implementation of the October transaction, rather than as an attempt to rewrite the express terms of the credit agreement.

In sustaining the claim, the court emphasized plaintiffs’ allegations that the transaction was executed in bad faith by secretly conspiring to defeat lenders’ reasonable expectations arising from the protections embedded in the Fifth Amendment. That reasoning raises an inherent tension. The excluded lenders did not participate in the negotiations that produced the Fifth Amendment protections, even though those protections applied on a deal-wide basis once adopted. The court nonetheless at this stage treated those protections as forming part of the lenders’ reasonable contractual expectations.

Whether that conception of reasonable expectations can be maintained at later stages, particularly where the plaintiffs were not part of the negotiating group that secured the protections at issue, remains an open question and a likely focal point of future motion practice.
 

For creditors, the decision is best viewed as a win for now. It improves minority lenders’ ability to challenge aggressive liability management transactions and increases litigation risk for borrowers, sponsors and majority lenders by reducing the likelihood that such challenges will be dismissed solely on formal or drafting-based grounds at the outset.

The decision does not provide definitive guidance on the ultimate scope of sacred-rights protection. It leaves open whether integration will hold on a full factual record, what “effect of” language means and how it should be applied, and how far concepts like structural subordination will extend. Although the litigation will continue before Justice Patel, the decision will likely be appealed to the First Department (the same court that heard the Mitel appeal). In addition, the possibility of a bankruptcy filing in another jurisdiction could shift the forum and subject these issues to a different judicial approach.