Trinseo, Super HoldCo Lenders Seek Dismissal of Minority OpCo Group’s Suit Challenging Double-Dip, RCF Transactions; Accuse CastleKnight of Disrupting Restructuring for Hold-Up Value

Relevant Document:
Motion for Judgment on the Pleadings

In a motion filed June 9, the Trinseo debtors and Super HoldCo lenders ask Judge Christopher Lopez to dismiss the minority OpCo lender group’s suit challenging the company’s 2023 double-dip liability management exercise and 2025 exchange offer, arguing primarily that the group’s claims are barred by the no-action clause in the OpCo credit agreement and an intercreditor agreement, or ICA, that waived OpCo lenders’ right to challenge the transactions.

The defendants’ motion focuses on minority group leader CastleKnight’s acquisition of OpCo loans after the double-dip, exchange offer and ICA were completed. According to the defendants, CastleKnight “purchased its minority position in the Debtors’ capital structure subject to, and with full notice of, the very contractual provisions and transactions it now seeks to nullify,” solely to “manufacture leverage” and “disrupt an otherwise fully consensual restructuring” for hold-up value.

The defendants suggest this is CastleKnight’s typical modus operandi: The group “is proceeding in bad faith and recycling CastleKnight’s often-used strategy of pursuing baseless claims to dramatically increase estate expenses as means of extracting an undeserved recovery,” the defendants say.

The minority group alleges it was the defendants that used a sham intercompany loan and superpriority revolving credit facility, or RCF, to give themselves control and seize value in an inevitable Trinseo chapter 11. According to the group, the “off-market” ICA was specifically intended to prevent minority OpCo lenders from challenging the subordination of their claims to the new Super HoldCo loans in a future bankruptcy.

The defendants dispute the excluded lender group’s arguments regarding the validity of the transactions, but the motion (called a motion for judgment on the pleadings but governed by the same legal standard as a motion to dismiss) focuses on CastleKnight’s standing to bring any challenge under the credit agreement, ICA and Bankruptcy Code.

First, the defendants maintain the “collective action” clause in the OpCo credit agreement requires that lenders “act collectively” through the agent “when pursuing remedies upon a default.” Because a majority of the OpCo lenders have joined the debtors’ restructuring support agreement and waived any right to challenge the transactions, any claims by individual dissident creditors – including the minority group – must be dismissed, the defendants assert.

New York courts have generally rejected motions to dismiss LME challenges based on no-action clauses – most recently, in the Lions Gate/Starz studio spinoff/bond swap litigation – but the defendants suggest this case is distinguishable because the minority group does not control a majority of the OpCo loans even if the OpCo loans held by lenders that participated in the double-dip are disregarded.

Even if the no-action provision does not bar the minority group’s claims, the defendants continue, the waivers in the ICA have the same effect. The defendants point out that the ICA, which was approved by a majority of the OpCo lenders and the agent, provides that the OpCo lenders waive any rights to “challenge, directly or indirectly, the priority of the OpCo Senior RCF Lender Defendants’ liens.”

“The CastleKnight Group’s request to subordinate the OpCo Senior RCF Lender Defendants’ secured claims beneath the CastleKnight Group’s own claims – undertaken in violation of the OpCo ICA’s express terms – is as transparently opportunistic as it is meritless,” the defendants assert.

The defendants also argue the minority group lacks standing to seek equitable subordination of the Super HoldCo loans below the OpCo loans under the Bankruptcy Code. The defendants maintain that “creditor attempts to invalidate pre-petition transactions establishing a debtor’s capital structure constitute derivative claims that no individual creditor may prosecute.”

The defendants’ equitable subordination standing argument relies heavily on Judge David S. Jones’ 2023 Revlon decision, in which Judge Jones found dissenting lenders lacked standing to assert equitable claims to unwind a drop-down LME. The defendants also cite decisions from Judge Marvin Isgur and Judge Randy Crane rejecting Incora/Wesco minority noteholders’ LME equitable subordination claims as “disguised avoidance actions” only the debtors have standing to bring.

Even if the minority group has standing to bring equitable subordination claims, the defendants add, the complaint fails to allege sufficient inequitable conduct by the Super HoldCo lenders to justify subordination. The complaint “fails to plead ‘inequitable conduct’ much less ‘substantial misconduct tantamount to fraud, misrepresentation, overreaching or spoliation’” to justify equitable subordination, the defendants argue.

The minority group’s assertion that the Super HoldCo lenders undertook the transactions solely “to shape the reorganization process,” even if true, does not rise to the level of misconduct required for equitable subordination, the defendants conclude.